CONSTRUCTION AND CORRUPTION BOOM IN SOUTH AFRICA:PAGE 8

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MAY 2008

SOVEREIGN WEALTH FUNDS TO THE RESCUE Are they saviours, predators or dupes?

The US recession,record oil prices and a costly war on terror have added to the sense of unease generated by the present,unprecedented credit crisis.Sovereign wealth funds from emerging countries are now appearing as indispensable investors of last resort

Speculate to accumulate JEAN-CHARLESBLAIS – ‘Untitled’ (1985)

The International Monetary Fund and the World Trade Organisation promised that more trade would help to eradicate poverty and hunger. Foodcrops? Self-sufficiency in food? They had a better idea. Local farms would be closed down or encouraged to concentrate on exports. This would make the most, not of natural conditions which might be good for growing tomatoes in Mexico or pineapples in the Philippines, but of the fact that production costs are lower in Mexico and the Philippines than they are in Florida or California. Farmers in Mali would rely on more highly mechanised, more productive producers in the Beauce or the Midwest for grain supplies. The farmers would pack up, move into town and get jobs in some western firm that had relocated to take advantage of cheaper labour than it could find at home. The countries on the East African seaboard would lighten their load of foreign debt by selling their fishing rights to the factory ships of wealthier countries. The Guineans would import tinned fish from Denmark or Portugal. Never mind the additional pollution generated by transporting all these goods. A life of bliss was guaranteed and so were the profits of the middlemen – wholesalers, shippers, insurers, advertisers. The World Bank, prime promoter of this “development” model, now tells us that there may be food riots in 33 countries. And the WTO fears a resurgence of protectionism: some food-exporting countries – India, Vietnam, Egypt, Kazakhstan – have decided to reduce exports in order to feed their own people. What a nerve! The North is easily upset by other people’s selfishness. The Chinese eat too much meat, that’s why the Egyptians are short of wheat. Some states have followed the World Bank and IMF advice and turned over their food crops. They can no longer keep their produce for themselves. Well, they will pay, that’s the law of the market. According to UN Food and Agriculture Organisation figures,

their bill for grain imports has risen by a massive 56% in one year. Naturally the World Food Programme (WFP), which feeds 73 million people in 78 countries every year, is asking for a further $500m. Someone must have decided this was excessive, as it got only half that amount. But the sum it sought was only what the war in Iraq costs every couple of hours, and a tiny fraction of what the sub-prime mortgage crisis will cost the banking sector, which has been bailed out by the state. To look at it another way, the WFP asked on behalf of millions of starving people for 13.5% of the sum earned last year by John Paulson, the astute hedge fund manager who realised that thousands of Americans are in negative equity and face ruin. No one knows how much the incipient famine will yield or who will reap the profits, but nothing is ever lost in a modern economy. History repeats itself, one speculation after another. The Federal Reserve’s monetary policy encourages debt, first the internet bubble, now the real estate bubble. In 2006 the IMF was still saying there was “every indication the mechanisms for granting loans on the US property market were still relatively effective”. Market effective. Perhaps the two words should be welded together once and for all. The real estate bubble has burst. So the speculators are resurrecting an old eldorado: the grain markets. Purchasing contracts to deliver wheat or rice at a future date and counting on selling them at a higher price. And what ensures prices will keep on rising? Famine. So what does the IMF do? The IMF, which has “the best economists in the world” according to its managing director, explains that “one way to solve the problem of famine is to increase international trade”. The poet Leo Ferréé once said that “all you need to sell despair is the right formula”. It looks as though they’ve found it. SERGE HALIMI TRANSLATED BY BARBARA WILSON

INSIDE THIS ISSUE

An alternative perspective on the debate over Tibet page 3

US presidential hopefuls stay quiet over their Iraq plans page 4

High inflation and food shortages hit the new Egypt page 5

Grain crisis leaves a precarious balance across the world page 6

The traditional left-right split in German politics is shaken page 10

Are the Turks giving up on EU membership page 11

Israeli historians take a fresh look at the country’s past page 12

What happened to the pieds noirs after Algerian independence? page 14

BY IBRAHIM WARDE

“Do we want the communists to own the banks or the terrorists?” asked Jim Cramer, star analyst of the CNBC financial news network. Then he answered: “I’ll take any of it, I guess, because we’re so desperate” (1). The near simultaneous entry of a number of Asian and Middle Eastern sovereign wealth funds in the capital of ailing financial institutions has brought a variety of reactions. Banks have generally emphasised the advantages of having “massive, passive and patient” investors on board (2), but the media and politicians have reacted with a mixture of worry and resignation. The reconfiguration of the banking landscape was sudden and unexpected. The year 2007 started in euphoria: balance sheets of financial institutions were strong and the beneficiaries of easy debt – such as hedge funds or private equity funds – were getting ready for yet another banner year. Problems in the subprime sector first appeared in the spring, but they seemed to be contained. They were rationalised as harbingers of a soft landing – indeed of a necessary if not salutary correction in the real estate market. The crisis affected a few specialised institutions and posed no threat to large financial institutions. With the summer came a number of alarming signs. The financial world discovered that its muchtouted and ultra-sophisticated risk models were actually quite fanciful; financial products that were well-rated by rating agencies found few takers; and even the most prestigious names in finance seemed unable to value a significant part of their assets (3). The new rules of deregulated finance were also rife with unanticipated consequences. The new accounting norms (known as mark-to-market) had been designed to ensure stability and transparency, yet they added to the volatility and opacity of the system. A crisis of liquidity combined with a crisis of confidence ensued, threatening giant financial institutions. Sovereign wealth funds alone seemed willing and able to contain the disaster. On 27 November ADIA (Abu Dhabi Investment Authority) paid $7.5bn for 4.9% of Citigroup, the world’s largest bank. Two weeks later GIC (Government of Singapore Investment Corporation) invested $10bn in UBS, the world’s 10th largest bank. On 19 December China Investment Corporation acquired 9.9% of the investment bank Morgan Stanley at a cost of $10bn. Simultaneous announcements of unanticipated losses and unusual financings have become

Ibrahim Warde is adjunct professor at the Fletcher School of Law and Diplomacy,Tufts University (Medford,Massachusetts) and author of The Price of Fear:The Truth Behind the Financial War on Terror,IB Tauris and University of California Press,2007

commonplace. Sometimes institutions that appeared saved from disaster had to go back, cap in hand, in search of more funds. When Merrill Lynch announced on 24 December that Singapore’s Temasek fund had invested $4.4bn in its capital, its liquidity problems appeared resolved. But on 15 January other investors, including sovereign funds from Kuwait and South Korea, made a further investment of $6.6bn. That same day, Citigroup announced that, following another round of fundraising totalling $12.5bn, Singapore’s GIC and the Kuwait Investment Authority (KIA) had become shareholders. Over just a few weeks sovereign funds had invested more than $60bn in the western financial system (4). The world of finance had been turned on its head. In the age of globalisation, just as the triumph of markets was being widely celebrated, governmental funds – almost always from so-called emerging countries – undertook to rescue the West’s largest financial institutions. These institutions, which had largely created the new financial order, thought they had tamed risk thanks to highly complex “financial engineering” techniques. In reality these products, which had allowed them to make huge profits, had become, to quote legendary investor (and the world’s richest man) Warren Buffett, “weapons of mass destruction” (5). Systemic risk – the collapse of the banking sector – seemed around the corner and with it the spectre of 1930s-style depression. For these reasons, and in a context of widespread panic, central banks, regulators and governments strayed from their principles, rules and ideologies. On 17 February the UK chancellor Alistair Darling announced the nationalisation of Northern Rock. On 16 March the Federal Reserve provided a loan to JPMorgan Chase to finance its takeover of Bear Stearns, the fifth largest investment bank in the United States. And although the Federal Reserve acknowledged that its low interest rate policy during 2001-2006 had fed the real estate bubble, it chose to ignore its anti-inflation goals and engaged in a massive reduction of interest rates. The US Congress voted in favour of Keynesian measures, while an administration committed to “free market solutions” multiplied relief packages in favour of distressed debtors and their lenders. With the economic slowdown and the risk of collapse of the banking sector, emergency measures were necessary – and they included inviting sovereign wealth funds inside the walls of the “financial fortress”. Before the subprime crisis, most of these funds were not exactly welcome. The “gated finance” system was based on de facto exclusion. As in those gated cities where a small number of privileged

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