Capital in the Twenty-First Century (80 page)

Inflation does not do away with rent: on the contrary, it probably helps to make the
distribution of capital more unequal.

To avoid any misunderstanding, let me say at once that I am not proposing a return
to the gold standard or zero inflation. Under some conditions, inflation may have
virtues, though smaller virtues than is sometimes imagined. I will come back to this
when I discuss the role of central banks in monetary creation, especially in times
of financial crisis and large sovereign debt. There are ways for people of modest
means to have access to remunerative saving without zero inflation and government
bonds as in the nineteenth century. But it is important to realize that inflation
is today an extremely blunt instrument, and often a counterproductive one, if the
goal is to avoid a return to a society of rentiers and, more generally, to reduce
inequalities of wealth. A progressive tax on capital is a much more appropriate policy
in terms of both democratic transparency and real efficacy.

Consider now the case of sovereign wealth funds, which have grown substantially in
recent years, particularly in the petroleum exporting countries. Unfortunately, there
is much less publicly available data concerning the investment strategies and returns
obtained by sovereign wealth funds than there is for university endowments, and this
is all the more unfortunate in that the financial stakes are much, much larger. The
Norwegian sovereign wealth fund, which alone was worth more than 700 billion euros
in 2013 (twice as much as all US university endowments combined), publishes the most
detailed financial reports. Its investment strategy, at least at the beginning, seems
to have been more standard than that of the university endowments, in part, no doubt,
because it was subject to public scrutiny (and the people of Norway may have been
less willing than the Harvard Corporation to accept massive investments in hedge funds
and unlisted stocks), and the returns obtained were apparently not as good.
³⁹
The fund’s officials recently received authorization to place larger amounts in alternative
investments (especially international real estate), and returns may be higher in the
future. Note, too, that the fund’s management costs are less than 0.1 percent of its
assets (compared with 0.3 percent for Harvard), but since the Norwegian fund is 20
times larger than Harvard’s endowment, this is enough to pay for thorough investment
advice. We also learn that during the period 1970–2010, about 60 percent of the money
Norway earned from petroleum was invested in the fund, while 40 percent a year went
to government expenses. The Norwegian authorities do not tell us what their long-term
objective for the fund is or when the country can begin to consume all or part of
the returns on its investment. They probably do not know themselves: everything depends
on how Norway’s petroleum reserves evolve as well as on the price of a barrel of oil
and the fund’s returns in the decades ahead.

If we look at other sovereign wealth funds, particularly n the Middle East, we unfortunately
find that they are much more opaque than the Norwegian fund. Their financial reports
are frequently rather scanty. It is generally impossible to know precisely what the
investment strategy is, and returns are discussed obliquely at best, with little consistency
from year to year. The most recent reports published by the Abu Dhabi Investment Authority,
which manages the world’s largest sovereign wealth fund (about the same size as Norway’s),
speak of a real return greater than 7 percent a year for 1990–2010 and more than 8
percent for 1980–2010. In view of the returns obtained by university endowments, these
figures seem entirely plausible, but in the absence of detailed annual information,
it is difficult to say more.

It is interesting to note that different funds apparently follow very different investment
strategies, which are related, moreover, to very different ways of communicating with
the public and very different approaches to global politics. Abu Dhabi is outspoken
about its fund’s high returns, but Saudi Arabia’s sovereign wealth fund, which ranks
third after Abu Dhabi and Norway among sovereign wealth funds of petroleum exporting
states and ahead of Kuwait, Qatar, and Russia, has chosen to keep a very low profile.
The small petroleum states of the Persian Gulf, which have only tiny populations to
worry about, are clearly addressing the international financial community as the primary
audience for their reports. The Saudi reports are more sober and provide information
not only about oil reserves but also about national accounts and the government budget.
These are clearly addressed to the people of the Kingdom of Saudi Arabia, whose population
was close to 20 million in 2010—still small compared to the large countries in the
region (Iran, 80 million; Egypt, 85 million; Iraq, 35 million) but far larger than
the microstates of the Gulf.
⁴⁰
And that is not the only difference: Saudi funds seem to be invested much less aggressively.
According to official documents, the average return on the Saudi sovereign wealth
fund was no more than 2–3 percent, mainly because much of the money was invested in
US Treasury bonds. Saudi financial reports do not come close to providing enough information
to know how the portfolio has evolved, but the information they do provide is much
more detailed than that provided by the Emirates, and on this specific point they
seem to be accurate.

Why would Saudi Arabia choose to invest in US Treasury bonds when it is possible to
get far better returns elsewhere? The question is worth asking, especially since US
university endowments stopped investing in their own government’s debt decades ago
and roam the world in search of the best return, investing in hedge funds, unlisted
shares, and commodities-based derivatives. To be sure, US Treasuries offer an enviable
guarantee of stability in an unstable world, and it is possible that the Saudi public
has little taste for alternative investments. But the political and military aspects
of the choice must also be taken into account: even though it is never stated explicitly,
it is not illogical for Saudia Arabia to lend at low interest to the country that
protects it militarily. To my knowledge, no one has ever attempted to calculate precisely
the return on such an investment, but it seems clear that it is rather high. If the
United States, backed by other Western powers, had not driven the Iraqi army out of
Kuwait in 1991, Iraq would probably have threatened Saudi Arabia’s oil fields next,
and it is possible that other countries in the region, such as Iran, would have joined
the fray to redistribute the region’s petroleum rents. The dynamics of the global
distribution of capital are at once economic, political, and military. This was already
the case in the colonial era, when the great powers of the day, Britain and France
foremost among them, were quick to roll out the cannon to protect their investments.
Clearly, the same will be true in the twenty-first century, in a tense new global
political configuration whose contours are difficult to predict in advance.

How much richer can the sovereign wealth funds become in the decades ahead? According
to available (and notoriously imperfect) estimates, sovereign wealth funds in 2013
had total investments worth a little over
$
5.3 trillion, of which about
$
3.2 trillion belongs to the funds of petroleum exporting states (including, in addition
to those mentioned above, the smaller funds of Dubai, Libya, Kazakhstan, Algeria,
Iran, Azerbaijan, Brunei, Oman, and many others), and approximately
$
2.1 trillion to funds of nonpetroleum states (primarily China, Hong Kong, Singapore,
and many smaller funds).
⁴¹
For reference, note that this is almost exactly the same total wealth as that represented
by the
Forbes
billionaires (around
$
5.4 trillion in 2013). In other words, billionaires today own roughly 1.5 percent
of the world’s total private wealth, and sovereign wealth funds own another 1.5 percent.
It is perhaps reassuring to note that this leaves 97 percent of global capital for
the rest.
⁴²
One can also do projections for the sovereign wealth funds just as I did for billionaires,
from which it follows that they will not achieve decisive importance—10–20 percent
of global capital—before the second half of the twenty-first century, and we are still
a long way from having to pay our monthly rent to the emir of Qatar (or the taxpayers
of Norway). Nevertheless, it would still be a mistake to ignore the issue. In the
first place, there is no reason why we should not worry about the rents our children
and grandchildren may have to pay, and we need not wait until things come to a head
to think about what to do. Second, a substantial part of global capital is in relatively
illiquid form (including real estate and business capital that cannot be traded on
financial markets), so that the share of truly liquid capital owned by sovereign wealth
funds (and to a lesser extent billionaires)—capital that can be used, say, to take
over a bankrupt company, buy a football team, or invest in a decaying neighborhood
when strapped governments lack the means to do so—is actually much higher.
⁴³
In fact, the issue of investments originating in the petroleum exporting countries
has become increasingly salient in the wealthy countries, especially France, and as
noted, these are perhaps the countries least psychologically prepared for the comeback
of capital.

Last but not least, the key difference between the sovereign wealth funds and the
billionaires is that the funds, or at any rate those of the petroleum exporting countries,
grow not only by reinvesting their returns but also by investing part of the proceeds
of oil sales. Although the future amounts of such proceeds are highly uncertain, owing
to uncertainties about the amount of oil still in the ground, the demand for oil,
and the price per barrel, it is quite plausible to assume that this income from petroleum
sales will largely outweigh the returns on existing investments. The annual rent derived
from the exploitation of natural resources, defined as the difference between receipts
from sales and the cost of production, has been about 5 percent of global GDP since
the mid-2000s (half of which is petroleum rent and the rest rent on other natural
resources, mainly gas, coal, minerals, and wood), compared with about 2 percent in
the 1990s and less than 1 percent in the early 1970s.
⁴⁴
According to some forecasting models, the price of petroleum, currently around
$
100 a barrel (compared with
$
25 in the early 2000s) could rise as high as
$
200 a barrel by 2020–2030. If a sufficiently large fraction of the corresponding rent
is invested in sovereign wealth funds every year (a fraction that should be considerably
larger than it is today), one can imagine a scenario in which the sovereign wealth
funds would own 10–20 percent or more of global capital by 2030–2040. No law of economics
rules this out. Everything depends on supply and demand, on whether or not new oil
deposits and/or sources of energy are discovered, and on how rapidly people learn
to live without petroleum. In any event, it is almost inevitable that the sovereign
wealth funds of the petroleum exporting countries will continue to grow and that their
share of global assets in 2030–2040 will be at least two to three times greater than
it is today—a significant increase.

If this happens, it is likely that the Western countries would find it increasingly
difficult to accept the idea of being owned in substantial part by the sovereign wealth
funds of the oil states, and sooner or later this would trigger political reactions,
such as restrictions on the purchase of real estate and industrial and financial assets
by sovereign wealth funds or even partial or total expropriations. Such a reaction
would neither be terribly smart politically nor especially effective economically,
but it is the kind of response that is within the power of national governments, even
of smaller states. Note, moreover, that the petroleum exporting countries themselves
have already begun to limit their foreign investments and have begun investing heavily
in their own countries to build museums, hotels, universities, and even ski slopes,
at times on a scale that seems devoid of economic and financial rationality. It may
be that this behavior reflects awareness of the fact that it is harder to expropriate
an investment made at home than one made abroad. There is no guarantee, however, that
the process will always be peaceful: no one knows the precise location of the psychological
and political boundaries that must not be crossed when it comes to the ownership of
one country by another.

The sovereign wealth funds of non-petroleum-exporting countries raise a different
kind of problem. Why would a country with no particular natural resources to speak
of decide to own another country? One possibility is of course neocolonial ambitions,
a pure will to power, as in the era of European colonialism. But the difference is
that in those days the European countries enjoyed a technological advantage that ensured
their domination. China and other emerging nonpetroleum countries are growing very
rapidly, to be sure, but the evidence suggests that this rapid growth will end once
they catch up with the leaders in terms of productivity and standard of living. The
diffusion of knowledge and productive technologies is a fundamentally equalizing process:
once the less advanced countries catch up with the more advanced, they cease to grow
more rapidly.

In the central scenario for the evolution of the global capital/income ratio that
I discussed in
Chapter 5
, I assumed that the savings rate would stabilize at around 10 percent of national
income as this international convergence process neared its end. In that case, the
accumulation of capital would attain comparable proportions everywhere. A very large
share of the world’s capital stock would of course be accumulated in Asia, and especially
China, in keeping with the region’s future share of global output. But according to
the central scenario, the capital/income ratio would be the same on all continents,
so that there would be no major imbalance between savings and investment in any region.
Africa would be the only exception: in the central scenario depicted in
Figures 12.4
and
12.5
, the capital/income ratio is expected to be lower in Africa than in other continents
throughout the twenty-first century (essentially because Africa is catching up economically
much more slowly and its demographic transition is also delayed).
⁴⁵
If capital can flow freely across borders, one would expect to see a flow of investments
in Africa from other countries, especially China and other Asian nations. For the
reasons discussed above, this could give rise to serious tensions, signs of which
are already visible.