In Transition

This post written by Prof. Gordon L. Clark, Co-Director of Oxford SWF Project

As Ashby Monk noted, the website, blog, and twitter account are migrating. What began as an academic initiative underwritten by our project at Oxford University and funded by the Leverhulme Trust has come of age. The site has reached the age of independence, and has sought a new home so as to find its way in the world at large!

The original funding for the initiative came from the Leverhulme Trust, which is a private UK philanthropy that funds on a competitive basis social science research over a wide range of topics. Originally, we sought to capitalise on our research on the governance and management of pension institutions, drawing upon the work of our collaborators such as Roger Urwin from Towers Watson and Adam Dixon (now at Bristol University). We’re very grateful indeed to the Leverhulme Trust for their funding. Without a doubt, their support made it possible for us to roam the world talking to sovereign wealth fund institutions, their sponsors, and managers etc. As you know, we’ve written a number of papers on this research, which, hopefully, will see the light of day in a book with Princeton University Press.

As academics, we have sought to bridge the divide between scholarship and practice emphasising the former over the latter while keeping an eye open for insights that might be gleaned from the world of institutions and investment decision-making. In this respect, our project has been entirely conventional in that we have sought to present in the systematic fashion some of the crucial building blocks underpinning the sovereign wealth fund phenomenon. On the other side of the equation, however, we have sought to learn as much as possible from these institutions while being an independent voice about the place of these institutions in a rapidly evolving global political economy.

We began the project in a world that had barely grasped the significance of the unfolding global financial crisis. We were riveted by the failure of investment institutions in the United States and the prospect that sovereign wealth funds might rescue the US financial system from its own internal irrationalities. As we know, small steps in that direction came to a halt. Few of us realised the transformative consequences of the crisis; but sovereign wealth funds saw quite quickly that bailouts could easily become good money chasing bad. Profligacy has had no reward.

With the euro crisis now filling the headlines, dominating prognoses of the near and far futures of the developed economies of the West, and surprising us at every turn in what has become a political soap opera about the prospects of whole countries, it is worth considering the lessons we have learned about the role and significance of sovereign wealth funds in the global financial system.

One lesson is obvious: whatever national pretensions, claims in favour of political interests over financial interests have been exposed as vacuous and self-serving. This lesson was learned by Asian countries through the financial crisis of the late 1990s. Our case study of the Singapore GIC underlines the significance of these issues. No country is large enough to shrug-off the flux and flow of global financial markets. Financial stability goes hand-in-hand with a long-term commitment to fiscal responsibility.

A second lesson is, perhaps, less obvious. The political elites of many advanced Western economies believed that they could simply ride-out financial turbulence. It now appears that there is a significant premium on the capacity of nation-states to respond to financial markets in anticipation of the possible costs associated with market momentum. When nation-states lag behind market momentum, they promote the escalation of short-term interests over long-term commitments, and nation-states become hostage to the disorderly world of market sentiment. Lacking their own sovereign wealth funds, and reliant upon private banking institutions with their own agendas, Western democracies appear to have been caught short in terms of their financial leverage. As such, solutions are political rather than financial, based upon a belief that regulation can somehow dampen the flux and flow of global financial markets.

Would the euro crisis have happened if leading Euro countries had had their own sovereign wealth funds? It’s hard to know. But it certainly appears the case that the European Central Bank has not been able to play the role many had thought it might—ultimately, central banks are very different institutions than sovereign wealth funds. To reference our own work on the issue, sovereign wealth funds have a distinctive form and functions that distinguish it from banking institutions. The solution sought by Germany and France to the euro crisis seeks, over the long term, to neutralise the interests of global financial markets in European countries’ balance sheets. In effect, they would like to hold at bay financial markets, deeming them the enemy located elsewhere.

Countries that established sovereign wealth funds so as to provide a modicum of stability in the global financial system did so because they believed that fiscal rectitude is a necessary but not sufficient condition for financial stability. This, then, is the third lesson from our project. Countries cannot afford to turn their backs upon global financial markets. Some way or another, an institutional response is needed as well as public policy initiatives.

Ashby Monk’s website, blog, and twitter will remain an important voice for these types of issues. It’s not just because he has provided a venue and a facility for these issues. It is also because these issues are of momentous importance. As such, I think we are all very grateful for his initiative in bringing these issues to the fore with timely, insightful, and incisive commentary. I hope you will join with me in congratulating him on seeing the site come of age!

1 Response to “In Transition”

  1. 1 Angela Cummine December 10, 2011 at 3:32 am

    To echo Gordon, thank you and best wishes Ashby. The blog has been enormously valuable.

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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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