Weekend Reading

Ashby Monk

With Hurricaine Irene bearing down on the United States (and on five of my close family members), I wanted to make sure everyone is stocked up on obscure academic research. You know, just in case. Actually, in all seriousness, I’d like to send good vibes to those readers on the East Coast this weekend. Stay safe.

Here’s your weekend reading:

First, Benjamin A. Templin has a new paper entitled “Social Security Reform: Sovereign Wealth Funds as a Model for Increasing Trust Fund Returns.” It’s an interesting paper. Here’s a blurb:

“The last ten years has seen a significant shift in the way countries manage public pension and social insurance reserve funds. Rather than invest solely in government bonds, funds now employee modern portfolio techniques to diversify assets and earns a higher rate of return. Even after considering the losses incurred during the 2007-2009 financial crisis, funds that have managed to remain apolitical have competitive returns and sometimes outperform the market…Curiously, the U.S. has not followed suit even though the long-term benefits of a diversified portfolio are well-known. The reason for this economically irrational behavior is likely rooted in the beliefs underlying the country’s neoliberal political economy on the role of government as an owner of private enterprise. Institutional studies suggest that the rules constraining government investment are not likely to change rapidly given the constraints of path dependence theory. However, the U.S. has seen incremental change in terms of attitudes towards government ownership. Many states run venture capital funds and government employee pension funds have been successful as apolitical state investment entities. Moreover, attitudes towards foreign SWFs have shifted from fear and anxiety over politically motivated investments to a greater acceptance of the sovereign investors as a wealth-maximizing entity. Crisis also drives change. The Social Security Trust Fund is now expected to be depleted by 2036. Diversifying the Trust Fund could eliminate as much as 30 percent of Social Security’s funding deficit and do so without raising taxes or reducing benefits…Foreign sovereign wealth funds that were created for the purpose of funding national pension systems provide a model for the U.S. to form an independent entity that is apolitical yet able to be held accountable for its actions. As politicians grasp for solutions to Social Security’s funding problems that minimize tax increases and benefit cuts, they should consider adopting the successful models of Canada, New Zealand and Australia.

I like this topic. In fact, I like it so much I recently did an entire research project on it (see here for our initial results).

Second, Di Wang and Quan Li have a new paper entitled “When Clashes Spur Rules: Domestic Politics of Sovereign Wealth Funds Institutionalization.” Here’s an abstract:

“Truman’s score shows a remarkable variation in whether Sovereign Wealth Funds (SWFs) institutionalize their investment. Some have explicit policies on fiscal treatment and investment behavior; others remain obscure. What explains these variations? This article argues that SWF host countries with multiple veto players are more institutionalized, i.e., have specified more “rules of game” for the SWFs because there are more conflicts of interests, and information asymmetries are more acute. This veto player approach to explaining variation in institutionalization of SWF investment is tested using Truman’s scoreboard data. The statistical analysis shows a strong correlation between the number of veto players and the institutionalization of SWF investment.”

Stay dry, East Coasters!

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About

This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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