The prominence of sovereign wealth funds (SWF) like Singapore's Temasek and the Abu Dhabi Investment Authority (ADIA) will only increase in the coming years. It is estimated that the top fifteen SWF control approximately USD 3.4 trillion in assets, with the top five accounting for USD 2.1 trillion.
Singapore's Temasek and the Government of Singapore Investment Corporation (GIC) are in the top fifteen with assets estimated at USD 370 billion. Singapore, like China, is the only nation to have amassed such wealth without the obvious benefit of a natural resource like petroleum.
The post World War Two era saw the establishment of the Bretton-Woods system. The World Bank and the International Monetary Fund (IMF) were created to maintain economic order and discipline.
The IMF's standard medicine for weak developing economies may not have been ideal but it kept crises contained and manageable. The Latin American debt crisis of the 1980s, the various 'Structural Adjustment Programmes' and managing diverse foreign exchange rate regimes were all 'successes' for the IMF.
Arguably, the Bretton Woods regime worked well, until recently.
There was no IMF working with the US in forging a response to the global debt crisis. Similarly, the European Union (EU) attempts to solve the Greek debt problems do not involve the IMF.
Certainly pride plays a part in the US and EU behaviour. After all, the IMF was established to keep errant developing nations in check; yesterday's banana republics with triple digit inflation rates and horrendous fiscal and trade deficits.
Great Powers like the US and UK don't play by the rules. They make the rules.
In 2010, it's difficult for the Western nations to implement international trading rules. When nations such as the US and UK have the financial strength of a 1980s Brazil or Turkey few listen.
Inflation ravaged the currencies of many countries in the 1980s
Yesterday's tail is wagging the dog. The tail resides in Rio de Janeiro or Shanghai. Decisions to lend cash to Western nations are made by the authorities in Abu Dhabi and Beijing.
In the absence of a functioning global economic rule setting regime does one just sit back and wait for the next crisis to appear? US financial reform efforts, although bogged down in party politics, address only domestic US systemic issues. There are other large pools of capital, including hedge funds and SWFs, which add another dimension to the international financial system.
Surely, regulatory overkill is not the right way forward. Neither is ignoring the issue. International cooperation is required to ensure the new evolving financial system is manageable.
A good place to start is by strengthening voluntary codes of conduct and disclosure requirements applicable to SWFs.
SWFs exert an inordinate impact on the global financial system. If the China Investment Corporation reviews purchases of US treasury debt the implications are manifold. ADIA and Temasek helped stabilize the financial system by committing equity, perhaps prematurely, to several weakened global banks (UBS and Citicorp) during the early stages of the crisis.
A step has been made by the Sovereign Wealth Fund Institute developed Linaburg-Maduell Transparency Index. The Index awards points for adherence to ten basic principles of transparency. Among the principles are:
- Fund manages its own web site;
- Fund provides main office location address and contact information such as telephone and fax;
- Fund provides history including reason for creation, origins of wealth, and government ownership structure;
Any fund complying with the above three basic rules starts with three points! The index demonstrates how far the world has to go in achieving real disclosure by SWFs.
For Singapore's Temasek to be ranked third by the Linaburg-Maduell Transparency Index is good PR but overrates success. Given Singapore's commitment to transparency and good governance, the Republic should act as a catalyst for greater openness by SWFs. Voluntary disclosure by GIC and Temasek beyond that required by the index will boldly challenge other SWFs.
Singapore's future is intertwined with the health of the global economy. Global financial instability impacts Singapore more than most nations. Any means by which potential negative external shocks may be reduced should be vigorously explored by Temasek and GIC.