Posts Tagged 'Adam Dixon'

Weekend Reading: New Research

Ashby Monk

In the spring I wrote a background paper for the Asian Development Bank with Adam Dixon on how sovereign funds could help countries manage their resource revenues. I’ve finally gotten around to loading it up on SSRN. Apologies for the delay. Anyway, our paper is entitled “The Design and Governance of Sovereign Wealth Funds: Principles & Practices for Resource Revenue Management.” It was actually a lot of fun to write, as Adam and I really dug into the design features that (we think) make sovereign funds effective. Here are some blurbs:

“There is no such thing as a cut and paste blueprint for a best-practice SWF the world over. The highly idiosyncratic nature of each country’s specific circumstances means that every country needs a practical design that will work within the constraints of the given environment. So, while a plethora of potential SWF sponsors have been making pilgrimages to Oslo to learn how to set up a “successful sovereign fund” in the image of the Government Pension Fund – Global, there is nothing to suggest the Norwegian SWF will match up with other countries’ local characteristics. In fact, the politicized nature of the investment decision-making process in the GPF-G is probably inappropriate for most developing countries even if it works extremely well in the Norwegian case (see Clark and Monk 2012). As Frankel (2010, 31) points out, “Norway’s legal system puts few restrictions on what policy-makers can do, and the fund is managed with political objectives that go unnoticed when held up as an example for developing countries to emulate.” In other words, the institutions and norms in developed economies are different from those in emerging and developing economies. So, while there is much to be learned from other countries’ experiences with SWFs, what works in Norway won’t necessarily work in Nigeria, and what works in Alaska won’t necessarily work in Angola. Moreover, there is nothing to suggest that developed economies are the only countries capable of setting up effective SWFs. To the contrary, Botswana, Timor-Leste and Trinidad & Tobago have all established successful commodity funds in the developing world. It all depends on matching the organization with the environment. As such, in conceptualizing a specific SWF design, drawing some guiding principles and practices from ‘exemplars’ is perhaps more useful than specific policy prescriptions derived from success stories.

Successful design principles embrace, at the most fundamental level, the local economic geography by seeking to harness the local benefits and overcome the local constraints to create a best-practice investor that can operate in global financial markets. Indeed, at the global level, the fund has to be capable of responding to the challenges faced by all investors operating in global financial markets. This means managing risk and uncertainty across a variety of spectrums in a dynamic environment. As such, the SWF design spectrum will converge towards ‘best practice’ at the level of the fund that operates globally, while the local inputs can vary widely.”

Anyway, I hope the paper is of use. Enjoy your weekend!

Weekend Reading: New Research

Ashby Monk

I’ve just released a new background paper for the Center for Global Development with Dr. Adam Dixon entitled “What Role for Sovereign Wealth Funds in Africa’s Development?” It was a fun paper to work on with a pretty lofty objective: Developing a policy framework for how developing economies can use SWFs to help overcome the resource curse. Here’s the abstract:

“The discovery of natural resources in a developing country is not generally the good news it appears to be. In fact, resource-rich developing countries face the significant challenge of using their natural wealth to improve the living standards of average citizens, rather than wasting it through weak institutions and corruption – a phenomenon often referred to as the “resource curse.” Civil wars and political turmoil tend to exacerbate the problem. One increasingly popular option for dealing with the resource curse is the commodity-based sovereign wealth fund (SWF). Angola, Ghana, Mozambique, South Africa, Uganda and Nigeria are set to join other African countries, such as Botswana and Mauritania, in turning to these special-purpose financial vehicles to help ensure proper management of resource revenues. By sequestering some of their resource revenues in a SWF, these countries hope to smooth resource price volatility, make long-term fiscal policy, manage currency appreciation, facilitate intergenerational savings, and, perhaps most importantly, minimize corruption and tame the political temptation to misuse the newfound wealth. However, as Nigeria’s experience with the Excess Crude Account illustrates, it is not enough just to set money aside. The success of SWFs is ultimately a function of good governance and clear mandates. This paper illustrates the key ingredients required for an SWF to succeed at facilitating development in the African context.”

We hope you find it useful — any and all feedback is welcome! I’ll leave you with our simplified policy framework for SWFs in the developing world: the SWF Cascade!

Guest blog: Be Thankful for Europe

Adam Dixon

With yesterday’s downgrade of Italian sovereign debt by S&P, we can be sure that the chorus of euro skeptics will be further emboldened in their criticism of the European project, mainly in terms of the monetary union but also in the larger sense.

Yes, Italy has an unsustainable debt burden; growth has been anemic for the better part of a decade; the political system seems unable to adequately address the problem; and the list goes on. Coupled with the problems in Greece and elsewhere in the periphery, talk of breakup of the eurozone has never been higher and more real.

Proponents claim that deficit countries would then be able to devalue, which would reduce aggregate prices and wages, thus increasing competitiveness in these countries. You know the argument.

For all the macroeconomic arguments about letting a few countries out to effectively “do their own thing”, it is important to ask whether this will undermine the political will for sustaining free trade and limiting financial protectionism. So, what is the greater cost: keeping struggling periphery economies in, or cutting them loose only to see free trade undermined?

Indeed, anything that undermines the European project is actually quite unsettling. For one, the European project has been a major force in pushing forward free trade globally and in the removal of barriers to capital flows — i.e. creating a more hospitable space for investors at home and from abroad.

Since the end of the Second World War the international system has never been about letting countries “go it alone”. It has been about bringing countries closer together. The United States helped rebuild Europe; European countries have sought to bring themselves closer politically and economically; the world opened to China and the former Soviet States; and the list goes on. In doing so much prosperity was gained. No one really wants to reverse this trend.

For long-term investors, a resilient global economy that is open to trade and the free flow of capital is important. Hence, talk of a eurozone breakup or even the exit of a few countries is actually quite disconcerting. If enough countries start to lose faith in free trade and the free flow of capital, then long-term investors have a real problem. Greek default and even Italian default would seem like minor events.

Again, reducing debt in Europe’s periphery and igniting growth is going to be difficult and costly, whichever way it occurs. If they are left to “go it alone”, then there is little opportunity to reinforce principles of free trade in goods, services and capital in the process.

Guest Blog: Sovereignty in the Long Term

Adam Dixon

We like to think of SWFs as truly long-term investors, perhaps even super long-term investors. They don’t have liabilities like pension funds or insurance companies; they can largely ignore the day-to-day, the month-to-month, and conceivably some of the year-to-year fluctuations of the market; and, their sheer size gives them the ability to invest in ways that others, aside from maybe the largest pension funds, can’t.

Put simply, for those interested in the ways financial markets can contribute something to addressing long-term existential issues such as climate change, the potential for super long-term investors is quite seductive. They’ve got the firepower to realize long-term objectives others won’t, or are too focused on the short term to do so.

But, can SWFs really be counted on to be super long-term investors? One would hope so. And for many SWFs the answer is probably a resounding yes. Unfortunately, a look at geopolitical history may temper such optimism.

With the Arab Spring and the fall of Colonel Gaddafi in Libya we are reminded about how fragile ‘sovereignty’, in whatever form it takes, can be. Just think about the massive geopolitical transformations of the 20th century. Dictators came and went; liberal democracies were brought to the verge of collapse; European colonialism left a patchwork of artificial nation-states; and there was the rise and fall of the Soviet Union.

The recent history of the 21st century is not as bloody, but geopolitical transformation and the subsequent reconfiguration of sovereign authority continues. Take, for example, the recent split between North Sudan and South Sudan. Suffice it to say, uncertainty as to the stability of sovereign authority may significantly shrink time horizons, at least in some places.

This does not mean that SWFs won’t take long-term investment positions. (Was Gaddafi expecting to lose his authority 18 months ago?) In fact, SWFs are likely to be used as a means of protecting the structure of sovereignty in a country, whatever that may look like. But if major political change occurs such that the structure of domestic sovereignty is radically transformed, what are the implications for the SWF?

It is too early to say what the new government in Libya will do with the country’s resource wealth. One would imagine that the fund will be used to help rebuild while maintaining its international diversification. Yet, the new government and the people of Libya, assuming stability returns, may want something radically different done with their sovereign wealth.

Guest blog: Asset Allocation for Geoengineering?

Adam Dixon

I feel compelled to write about long-term investment strategies after reading Ashby’s blog from last Friday about positioning SWFs’ portfolios for the looming effects of climate change. Specifically, I thought I’d offer SWFs and long-term investors a potential scenario that needs to be on their radar: geoengineering! That’s right, technologies that attack the problem but not the cause are no longer in the realm of science fiction (i.e., reducing solar radiation without reducing CO2).

I don’t claim to be an expert on the subject, but those that are have assured me that the costs of particular geoengineering technologies, such as putting sulphur aerosols in the atmosphere, is not prohibitively expensive. In fact, the costs are actually so low that an individual country could do it, or even a wealthy individual.

For the last six months or so I’ve been working on a project with two climate modellers and another social science colleague of mine at the University of Bristol, School of Geographical Sciences in looking at the relationship between climate and economic growth to understand potential country preferences for different geoengineering scenarios.

There is one serious caveat: The ethical and political implications of this are huge. The risk of changing the global distribution of heat and precipitation are high (notwithstanding other environmental damage like acid rain). So while geoengineering can provide a means of reducing global mean temperature, the consequences of doing so for some (or all of us) may be catastrophic. This suggests that efforts to do so will be highly politically contentious (and probably should be).

Yet, if other efforts to reduce atmospheric CO2 fail and global mean temperatures increase to dangerous levels, geoengineering could find sufficient support. If geoengineering solutions were employed prior to climate change becoming a major threat to human and economic wellbeing (i.e. within the next 50 years or so) this would have implications for a long-term asset allocation that expects inevitable climate change.

Long story short: if you’re in the business of scenario planning and risk planning, you might want to put geoengineering in the mix.

Guest Blog: Greek SWF — Not such a bad idea

Adam Dixon

Yes, Greece is in a difficult situation. Some see default on the horizon. Some see an exit from the euro. Some see German taxpayers providing a yet larger lifeline. Whatever the scenario, all agree that the Greek economy needs to grow faster and the government needs to do something with its balance sheet.

While the announcement the other day about setting up a Greek SWF may seem fanciful, it is actually a rather compelling idea. The assets of the state are apparently quite substantial. A couple of weeks ago the IMF’s Antonio Borges indicated that the government’s Real Estate Development Company had a portfolio worth €280bn. The government also has large holdings of the national telecommunications firm OTE, the Piraeus and Thessaloniki Port Authorities, the Athens Airport, and the postal savings system. Suffice it to say, the government has more tools at its disposable than simply raising taxes (or collecting them better) and making people work longer, both of which are inevitable.

Yet, don’t count on a fire sale, and don’t expect the Greek public to acquiesce so readily to privatization. Hence, a Greek SWF doesn’t sound like such a bad idea. But, setting up a SWF isn’t simply about limiting a public backlash and protecting “sovereign wealth”. It is about accounting and price discovery.

If asset privatization occurs at a measured pace, the government has a more accurate means of valuing the assets that it continues to hold. With a transparent SWF, the market would then have a better picture of the government’s ability to pay. But, this is just a drop in the bucket. Ultimately, the market wants to see real growth and more manageable liabilities.

Guest Blog: A note on oil price spikes

Adam Dixon

Let’s rewind to early summer 2008. The extent of the financial crisis had not quite reached fever pitch, although the signs of worse things to come were surely there. The global economy hadn’t quite lost steam. If you recall crude prices were still exorbitantly high, and the media was still awash with voices proclaiming crude would breach the $200 per barrel mark in the near future. Well, as you know, they were wrong, very wrong!

Now, to be fair, higher oil prices from a long-term perspective are justifiable for a number of reasons, namely rapidly expanding emerging markets. And yes, all the cheap stuff is quickly running out. You are familiar with the story. And when you see the recent price spike over the last several months, it’s pretty easy to be convinced that markets are entering a ‘new normal’ and that prices will continue their upward march. So will they? Unfortunately, this is really not the forum for that kind of discussion.

What rapid spikes in commodity prices remind us about, however, is the importance of stabilization funds. These funds, which are invested in relatively liquid assets, are a necessary component of budgetary planning for resource-rich countries. They provide governments a reliable source of income when resource revenues disappoint.

However, the scope for long-term (and potentially high risk) investment is, however, all but impossible with stabilization funds. And because commodity prices are volatile, stabilization funds must be relatively large. As a result, this leaves a limited amount of funds left over, at least in the short run, to invest in more compelling and strategic ways — such as in economic development projects, whose risk is actually quite high.

But, this is where the budget comes in, and this is why getting the stabilization fund right is so important. Government budgets are important to economic development, because government budgets are generally the sources of capital that underwrite so much of the necessary infrastructure and human capital investment that supports long-term economic growth. Easier said than done.

Source: US Energy Information Agency


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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