This week I propose to conclude for the time being, my portrayal of lessons that can be learnt from worldwide experiences with SWFs over the past six decades. Along with the five lessons which have already been presented in the two previous columns, there are several others, equally important, but which can be much more succinctly expressed.
The first of these other lessons (in the sequence, therefore, Lesson 6) is that there are no known perfect SWFs. Every SWF that I have been able to research, has been the subject of serious criticisms. Weaknesses abound, although some of these are considered far more serious than others. I am confident this circumstance will apply to Guyana’s SWF when it is established. The lesson is that the authorities should not feel threatened by this outcome. They should remain open, receptive, and even positively responsive, to constructive criticisms.
Lesson 7 follows directly on this observation. Experience has shown unmistakably that there can be no one-size-fits-all SWF. An acceptable SWF for Guyana cannot, as it were, be purchased off-the-shelf, although there are salespersons (consultants), who are ready to provide readymade templates. In truth, both the design rules and the analytic economic foundations for crafting an acceptable SWF for Guyana, would have to be a country specific construction. In connection with this specific feature, it is worth repeating that despite the leading role extractive industries have played in Guyana’s development, there have been no previous efforts to establish SWF-type organisations. In this sense therefore, the country is embarking on a venture into the unknown.
Lesson 8 is simply that, perhaps the hardest choice the country has to exercise is in the design of its SWF, in arriving at the correct balance between the roles of rules in its operation, versus the scope for discretionary behaviour. There is a general presumption in the literature, (which I do not share) that rules-based SWFs insulate them from the supposedly grave danger of political direction. This danger is over-stated, if it does not recognize that self-styled experts and officials who are not elected or selected by representative bodies pose the greatest risk for subverting the popular will. While I strongly believe that history supports my view, this column is not the place to pursue this polemic.
Lesson 9 is that there is much truth to the view that some economists hold that SWFs are mis-specified. That is, if the goal of Guyana’s SWF is to enhance the country’s capacity to deal with any shocks and disruptions which flow from volatile and uncertain flows of oil and gas revenues, then it may very well be argued that it is better not to save for the proverbial rainy day, but spend more presently to diversify the economy and thereby protect against future shocks and disruptions. In rational economic terms therefore, rather than create a fund to rebuild the economy after the shocks have wreaked havoc on it, one should invest in building the economy to withstand these shocks!
The importance of this lesson is reinforced by the fact that several studies which I have seen seem to reveal little empirical evidence to show how SWFs have achieved their objectives. This includes even the objective of smoothing out liquidity and government expenditures between times of strongly fluctuating oil and natural gas prices.
In the next, concluding section of this presentation, I draw attention to the fact that not only in regard to the issues raised in Lesson 9, there is deep-seated economic scepticism among several economists about the assumed virtues of SWFs which the Guyanese authorities have so readily embraced.
Concluding Lesson 10
Lesson 10 is that since typically oil and gas-based SWFs are state owned, their operations in private capital and financial markets have provoked much disquiet among government regulators. This has been mainly triggered by the controversial roles SWFs have played in the effects of the global financial collapse and the onset of the Great Recession in 2007. Of course, it was the large SWFs with holdings of several hundred billion US dollars that became the principal focus of concern.
In his Introduction to SWFs (2012) Charles Wilson sums up these apprehensions very well. He makes the observation that such concerns have “led critics to worry that foreign nations were gaining too much control over domestic financial institutions, and that these nations could use that control for political reasons”. Even nations as economically powerful as the United States and several European countries have raised concerns, moving to pass foreign investment and national security legislation, following the significant flows of SWF investments into their countries in the 2007-08 period.
I do not believe that Guyana’s SWF is ever likely to have financial holdings large enough to have more than a marginal impact on global financial markets.
My recommendation, however, is that Guyana’s SWF should treat Caricom’s financial, capital and investment space as a strategic component in a geographically balanced global assets portfolio. With the intimate knowledge the Fund managers (if well chosen) are likely to have of Caricom’s market there is an opportunity to meet both the Fund’s objectives and contribute towards regional capital market integration.
In this regard the SWF is not being recommended as a regional safety net. The recommendation is that it seeks to be an engine driving profitable investments in the Region. In this sense I advance the view, therefore, that this might well be the lesson above all lessons which can be learnt from a review of global experiences. Here, concerns about government-owned Fund holdings in regional private financial markets can learn from the experiences of the global realities in 2007-08. The response to the 2007-08 situation has been, better regulation and improved governance.
I shall have more to say on these issues as the discussion continues. Next week I turn to the second policy thrust of the Guyana authorities, which is governance and regulation. I shall begin with consideration of the Extractive Industries Transparency Initiative (EITI).