January 15, 2008
The New State Capitalism
Two articles today highlighting the "New State Capitalism."
From the Financial Times: The Unsettling Zeitgeist of State Capitalism
How can it be that Merrill Lynch, Citigroup, Morgan Stanleyand other big banks have been turning to foreign governments for financial lifelines with so little public controversy? Perhaps it is because the dangerous broader context of what is happening - the rise of "state capitalism" - is not sufficiently recognised. Indeed, the reality may be that the era of free markets unleashed by Margaret Thatcher and reinforced by Ronald Reagan in the 1980s is fading away. In place of deregulation and privatisation are government efforts to reassert control over their economies and to use this to enhance their global influence. It is an ill wind that blows.
From the WSJ: Davos Event Reflects Shifts in Power
When the elite of global business gather in Davos, Switzerland, for their annual retreat next week, the mood will be dramatically darker than just a year ago.
Since the World Economic Forum last met in Davos, fallout from the global credit crunch has transformed the outlook for the U.S. and global economies for the worse. Power and wealth have shifted from West to East, from major oil companies to petro-governments, and from U.S. banks and hedge funds to the state-controlled investment funds of the Middle East and Asia.
January 14, 2008
Berlin Moves to Block Soveriegn Wealth Funds
To counter the potential of foreign companies influencing the German state today's WSJ reports that Berlin is moving to pass a law which would allow the German state to intervene when foreign-state investors seek to take control of a German company.
Chancellor Angela Merkel wants a law that Germany could invoke in cases where it believes foreign-state investors are trying to buy German companies for what it considers mischievous reasons, such as to gain political influence. German law now allows the government to veto foreign investors only in the defense and cryptography sectors. Berlin wants to expand takeover defenses to cover any foreign investment that could threaten "public order or security," criteria that German officials contend are strict but critics call nebulous.
Ms. Merkel says she is aiming only at exceptional cases. Critics worry she is drafting a law so broad that it could block any investment by foreign sovereign-wealth funds or state-owned companies. The draft law doesn't limit intervention to only specific sectors. It also covers EU-based companies in which foreign governments control significant stakes. A spokesman for Ms. Merkel said only that the proposal is a work in progress.
The size of sovereign-wealth funds is one reason for Western angst. Private-sector economists estimate these funds control about $2.5 trillion of assets globally and are growing fast. German politicians worry that foreign states could effectively renationalize sectors Germany has privatized, such as energy utilities.
As mentioned in a previous post the rise of political actors in capital markets is a growing phenomenon both domestically and internationally. Will other EU nations follow Germany on this?
December 30, 2007
Terror Free Funds?
Barron's has a quick note regarding the possibility of an international exchange traded fund which excludes companies doing business with "terrorist states."
Legislators in various states have been pushing to limit state pension investments in companies that invest in or do business in countries suspected of sponsoring terrorist groups.
Over the last 2 years labor unions have become more aggressive in using the capital from their pension funds & related investments to influence corporate policy. It appears this phenomenon is not confined to the industrial relations arena as state governments begin to realize the new power they hold (via pension & other funds) to influence foreign policy, corporate behavior and even domestic policy. This also parallels the rise of Sovereign Wealth Funds which are funds controlled by states (countries such as China) that now contain a significant amount of capital.
Whether it is Labor Unions, States or Countries these developments present a serious challenge to the way capitalist economies have worked in the past. What we have here is the potential that billions of dollars in capital will no longer be seeking the highest return but instead will be seeking to influence political & economic outcomes.