However, I am unsure of whether countries with SWFs would be willing to take part in Zoellick's scheme. After all, aren't SWFs manifestations of various LDCs' efforts to wean themselves off the Bretton Woods institutions? It would seem odd that they would suddenly entrust their funds to the World Bank, to say the least, given their desire for much-vaunted "policy space" or sovereignty in managing their own financial affairs. Then again, you may not find Zoellick's idea too far-fetched:
The rising economies of China, India, Brazil, and others have strengthened and rebalanced the international economy, providing new poles of growth. They are new “stakeholders” in globalization. The Bank Group will also be alert to ways we can assist these clients if the credit storm and liquidity drought sweeps their way.
We also have a larger strategic goal: We should make it possible for the growth economies of Africa to become a complementary pole of growth over the next 10 to 15 years.
We are devising a “One Percent Solution” for Equity Investment in Africa to be a step towards the goal. Where some see sovereign funds as a source of concern, we see opportunity. Today, sovereign wealth funds hold an estimated $3 trillion in assets. If the World Bank Group can create the equity investment platforms and benchmarks to attract these investors, the allocation of even one percent of their assets would draw $30 billion to African growth, development, and opportunity. This one percent could be the start of something much bigger, across more types of funds and countries, because the investment of wealth into equity for development offers opportunity, not something to fear.
Doubters may shake their heads. [head-shaking, head-shaking]. But consider the uncertainties of China’s and India’s prospects in 1993. Five years later, the world looked to China only to maintain currency stability amidst East Asia’s turmoil. Today, China and India are engines, still facing complex and difficult problems, but driving motors of growth. Goals that one day seem impossible, the next day can seem inevitable.
What of Africa? Between 1995 and 2005, 17 countries of sub-Saharan Africa, representing 36 percent of the population, grew on average 5.5 percent without the impulse of great natural resources; eight oil producing nations, representing another 29 percent of the people, grew on average 7.4 percent over that decade.
These countries want to build on the social development foundation of the MDGs. They want to grow. They need low-cost, reliable energy; infrastructure; regional integration with access to global markets; and stronger private sectors.
They offer investment opportunities.
A lesson of the recycling of petrodollars in the 1970s is that equity investments are more sustainable than debt. Several emerging market funds have already started to invest long-term in Africa.
One of the ironies of today’s global economy is that although short-term liquidity has dried up, long-term liquidity remains ample. Witness the sovereign wealth funds, another prominent feature of the new globalization and the growing influence of developing economies.
Some sovereign funds are built on demand for oil and other commodities. Others, especially in East Asia, arose out of the trauma of 1997-98: to “self-insure” against calamities in capital markets, governments built reserve cushions based on exchange rate policies, trade surpluses, and prudent fiscal management.
Sovereign funds are already serving as a brace for the recapitalization of financial institutions; I expect in coming months that they will continue to sustain globalization – and broaden its inclusiveness – through further equity investments as the deleveraging of the financial system runs its course and better information clarifies the best buys.
Yes, the sovereign funds need transparency and should be guided by best practices to avoid politicization. But I believe we should celebrate a possibility that government-sponsored funds will invest equity in development.
The World Bank Group, especially through the IFC, can help connect long-term global liquidity with the African investment opportunity. IFC has invested some $8 billion in sub-Saharan Africa since inception, about $160 million in equity last year alone. IFC is setting up two new $100 million funds for infrastructure and microequity. We believe the equity prospects are expanding fast. IFC is now working on an open architecture platform for funds, drawing on IFC’s access, knowledge, and capital, but also welcoming joint ventures with governments and their funds.
We can help other investors over the initial hurdles of investing in new equity opportunities in Africa. We can help countries resolve legal impediments and improve the regulatory and pricing regimes for infrastructure investments. MIGA can offer political risk insurance.
Then sovereign wealth funds can join us, even invest with us, not as another source of development assistance, but rather as long-term investors. Our position makes us a “preferred partner.”
Just as the Bank’s Group’s GEMLOC project is helping accelerate development of domestic, local-currency debt markets in developing countries as a separate asset class, measured against a new index of performance, so we can encourage investors’ allocations to African equity as a viable “frontier” asset class. These assets will add benefits in portfolio performance and diversification, both geographically and by type of investment.
By helping construct new indices for African investments, the Bank Group will also attract investors that need benchmarks for performance.
Then we or others can develop index funds for Africa. Over time, these vehicles can draw in a broader range of investors, including pension funds.
This “One Percent Solution” is a pathway to include Africa in the full gains of globalization. It is a strategy to strengthen the globalized system, add sources of growth, and promote the sustainability of globalization.