IPS | 14 April 2008
GLOBALISATION: New Curbs on Investment From the South
Analysis by Julio Godoy
BERLIN, Apr 14 (IPS) — Germany’s decision to introduce controls on investments from the South in strategic domestic sectors is yet another indicator of growing protectionism in European and other industrialised countries against the neo-liberal globalisation they once masterminded.
The German government announced Apr. 9 that it was introducing controls on investments by Sovereign Wealth Funds (SWF), investment funds managed by oil-rich Arab states and other rapidly developing countries such as China, Singapore and India. A SWF is a state-owned fund that invests capital comprising financial assets such as stocks, bonds, property or other financial instruments.
The German ministry for labour can now stop any major venture in local firms, especially in public services, if such investments threaten local jobs or if they are sought in strategic sectors such as electricity generation, a government spokesperson said at a press conference in Berlin.
Automatic controls will kick in if non-EU investors want more than 25 percent stake, the spokesperson added. The government can refuse any investment in what it considers strategic sectors, or when the venture is seen to threaten national security.
If the SWF does not report its stake, the government can force it to resell its shares.
The decision follows fears that the SWFs will take control of strategic sectors, much in the way that companies from Germany, France, the U.S. and Britain took over public sectors such as water and electricity generation in developing countries.
In France, the possibility that the China Investment Corporation, a state investment fund, and other Arab funds, could take up to 10 percent of the private oil company Total, has launched a debate on the need to establish controls against such ventures.
The company’s chief executive officer Christophe de Margerie has tried to defend the investments. "We were the ones who went searching for Chinese investment," de Margerie told the Paris newspaper Libération. He emphasised that Total had asked the Chinese fund not to invest beyond three percent of the company’s capital.
De Margerie said that during the 1980s the funds Adia, owned by the United Arab Emirates, controlled up to nine percent of Total’s capital, but then "nobody was paying attention."
Until the global financial crisis broke out in the U.S. in the summer of 2007, provoked by the collapse of the real estate market and the highly speculative financial instruments associated with the sub-prime mortgages, few were paying attention to the SWFs. Recent high-profile investments made by the SWFs, especially in U.S. banks in need of fresh liquidity, have put them in the spotlight.
"Today it has become fashionable to question the SWFs," de Margerie said. But "these funds are not trying to control our companies and societies. They say so, and I believe them."
But not everybody believes this. Christian Chavagneux, editor of the French monthly Alternatives Economiques says massive investments by the SWFs can endanger a company if the funds disinvest as suddenly and as massively as they poured money into the firm.
"Last November, the Singaporean fund Temasek did sell a tenth of its shares of the Bank of China, thus sending the market price of the bank’s shares down the pipes," Chavagneux told IPS. "You can imagine what can happen if a similar disinvestment takes place suddenly in one of the battered banks in the U.S. or Germany."
Chavagneux said "we can also imagine that the states controlling these sovereign funds could be tempted to use their financial leverage as a foreign policy weapon, or to use Western companies as a learning field for their young leaders.
"Of course," he added, "these are all speculations."
Similar speculation is about in many of the industrialised world’s capitals, and has moved the Paris-based Organisation for Economic Co-operation and Development (OECD) to issue a warning urging SWFs to observe "high standards of transparency and governance" in order to avoid further protectionist measures in the industrialised world.
The OECD represents the 30 most industrialised countries, from the U.S., most EU members, to Australia, Japan and South Korea, but also Mexico.
In an oblique warning, OECD director general Angel Gurría wrote to the ministries of finance of the group of seven most industrialised countries (G7) Apr. 9 that "observance of high standards of transparency and governance (by SWFs) will help recipient countries implement their commitments and recommendations for preserving open markets while safeguarding national security."
The letter says that the OECD countries will "remain committed to keeping their investment frontiers open to Sovereign Wealth Funds as long as these funds invest for commercial, not political ends."
OECD members have agreed to base their investment policies on SWFs on existing instruments which call for fair treatment of investors. But these investment instruments also recognise the right of member countries to take action to protect their national security.
In another statement Apr. 9, the OECD pointed out that "investments by SWFs can raise concerns as to whether their objectives are commercial or driven by political, defence or foreign policy considerations."
Although more than 20 countries have these funds, Simon Johnson, economic counsellor and director of the International Monetary Fund’s Research Department, says they "remain quite concentrated, with the top five funds accounting for about 70 percent of total assets."
But the concern in the OECD countries arises from the main funds’ home countries: seven of the ten largest funds belong to Algeria, China, Kuwait, Libya, Qatar, Saudi Arabia and the United Arab Emirates.
According to some estimates, global SWF investments added to about 48 billion dollars in 2007, a 165 percent increase over 2006. The SWFs’ total assets were around 3,300 billion dollars in 2007, an 18 percent increase over the previous year.
When other assets owned by the SWFs’ home countries are included, such as pension funds and their share of their own public services, their total assets skyrocketed in 2007 to 14,500 billion dollars.
The U.S. gross domestic product in 2007 was 12,000 billion dollars.