Speech by Dr. Mohammad Sabah AlSalem AlSabah to the "International Working Group of Sovereign Wealth Funds"
Sunday, April 5, 2009
Arab Fund for Economic Development – Kuwait
Ladies and gentlemen, I would like to welcome you to Kuwait during such beautiful weather, I'm not sure if there is any correlation but you presence coincided with a 3% jump in our stock market today, so please always come back to Kuwait!
I insisted that I give my remarks after lunch because I don't want Bader al-Saad denying me lunch if he doesn't like my remarks! So thank you for agreeing to my condition.
I thought that I would link my remarks to the kind of job I do. I am a Foreign Minister, and as you can expect I'm very interested to see how the international community reacts to the global financial crises and the impact of that financial crises on Kuwait. Kuwait as you know, and I think the presence of Bader al-Saad can testify to this, is quite an active player in the international market and you as representatives of sovereign wealth funds recognize that Kuwait has the oldest sovereign wealth fund that was established in 1953 and we have been quite responsible, discrete and a long term partner with those who join to invests with us.
So it's very important for us in Kuwait to engage the outcome of the G20 and how it impacts us, because I think that the world has changed significantly from the "pre-crash world". A friend of mine told me, "Well, this is just another financial bubble". It is not the first bubble and certainly not going to be the last bubble and history has shown that bubbles come and go and nothing changes. As a matter of fact, if you Google "financial bubbles", you will get more than 15 million hits on the internet. Maybe the best book that has been written on this subject, as far as I am concerned, is by one of my teachers Charles P. Kindleberger of the Massachusetts Institute of Technology. The book called Manias, Panics, and Crashes, in which he traces the history of financial bubbles from the Tulip Mania in Holland in 1636 through the South Sea Bubble in England in 1720. Incidentally in the South Sea Bubble, Isaac Newton lost half of his fortune because he bet that the laws for gravity do not apply to stocks of the South Sea company to just go up, up and up.
Anyway, that was about bubbles coming and going. So what is so different about the current bubble? This is where I disagree with my friend. I think there has been a fundamental shift in the financial landscape and the economic architecture of the world as a result of the financial crisis.
When Bader said that I would like you to make some comments to such a high powered and professional group, I was hesitant because I said, "I am a Foreign Minister. How can I explain economic issues to people who are living in the financial world?" He said, "Just give them the large picture, don’t go into details". That’s what I am going to try to confine myself to. I'm reminded actually about a financial advisor who was invited to a developing country. The president of that small developing country asked this financial super strategist, "We need $100 million in ten months, how can we generate that amount?" The advisor said, "That’s very simple. You deposit $10 million a month, and in ten months you will get a $100 million. That’s very easy". So the president asked, "but how can I get $10 million?" The financial strategist said, "Well, that’s details". So I will leave the details with you, and I will elaborate my views concerning the general picture of the present situation.
We need to decode what happened in the final committee at the G20 meeting that took place two days ago. There where a lot of languages that can be interpreted in different ways. However, I believe the architecture and the fundamentals of economic philosophy has shifted from what it was in just a few months ago to what it is today. The idea of free enterprise that has been the central stage of this so called Washington Consensus and the Bretton Woods institutes like the IMF, WB, WTO, have been shaken to its roots. The G20's meeting dealt, I believe, with three major issues. Whether they have an agreement on those issues is still debatable, but first and foremost is:
A. The issue of the role of government spending. I think that it's becoming apparent that we can't get out of this mess if there is not a huge stimulus package. The economists have been debating on how much and for how long the stimulus package should be implemented for. People like the chief economist of the IMF Oliver Blanchard spoke of a 2 – 3% of GDP being allocated to stimulus packages for the next three years, while another Nobel Laureate Paul Krugman said, "We need at least 4% of GDP, just enough to prevent you from slipping into global depression"
Therefore, in this environment, you as managers of sovereign funds have to adjust yourself to an environment in which there is going to be a huge government presence in the form of government expenditures, and the level of public debt is going to hit records that it has never hit before. You have to prepare yourself so that down the road someone has to pay back the debt. There might be a tax structure in the future that could have an impact on your decision as to where to invest in today's world. This is actually where there is a lot of debate, whether a large deficit financed now will have an impact, and this is in the literature known as the Ricardian equivalence, whereby you run a deficit now but are required to pay it back. Therefore people will not invest now; rather, people would save to repay the debt.
We are now in a world where there is a lot of terminology we have to get used to, you know there is paradox thrift, liquidity trap, the CDO and CDF, etc. , etc. whatever they are called! These are details I'll leave out. It is becoming like the Madoff world, it's like we are in a movie with all these strange names. This is the kind of world we have to get used to from now on. So, the first issue is about the level and the duration of the stimulus package and the tax structure that is going to be implemented in the future to repay back the debt. That is number one.
B. The second issue is the overwhelming presence of 'big brother' from now on. The issue of free markets and letting the market decide on its own is no more. I think Professor Hyman Minsky wrote a long time ago about the need for regulating financial markets because they are inherently unstable . He was ridiculed then, but now he is vindicated. Even "Mr. free – enterprise" or "Mr. free – economy" Alan Greenspan has now acknowledged that bigger deregulation was one of the significant elements of expediting the collapse of the sub-mortgage loan market.
I think the G20 recognized this and they have called for the establishment of what they call the 'Financial Stability Board' and again, what I understood from this new structure is that they want to unite regulator and regulators in joint tasks with the IMF in order to design an early warning system in the financial markets. This is recognition that regulation with a capital 'R' is going to be with us for a long time to come and that’s another fundamental shift in the structure and the architecture and the landscape of the environment that we used to operate in the past.
C. The third and last issue that the G20 tried to address but I think they did not go far enough in addressing is reforming the Bretton Woods system, and its institutions', the IMF, the World Bank and the WTO. There are economists like, another Nobel Laureate Joe Stiglitz, and Jeff Sachs, who have called for fundamental revamping of the World Bank and the IMF and doing away with the so-called Washington Consensus; the G20 did not.
They limited themselves in three areas. If I'm not mistaken, they significantly increased the rescue fund the IMF is handling from $250 billion to $750 billion, an increase of $500 billion. $250 billion would come from Japan, the European Community and China and the other $250 billion would be raised from different countries, like OPEC countries, and other countries from around the world. The second issue that was raised at the G20 was that they have increased the allocation of SDR's by $250 billion as well.
The last thing is that they made a pledge that they would not follow the 'beggar thy neighbor' policy, that they would not follow protectionist policies and that countries should open up for trade and not to follow the 'Buy American products' slogan that was presented in the stimulus package in the US and they made a pledge they would not enter into protectionists policies; be it in trade or even in exchange rates. This leads to issues that I was little bit disappointed were not discussed on a much deeper level. This is an issue about 8 years ago was raised by the father of modern economics, the British economists John Maynard Keynes, in the creation of the Bretton Woods when he called for the creation of an alternative currency to the sterling, and he actually called it the 'Bancor'. At that time, he was ridiculed and the sterling continued to be the major reserve currency. Of course, over the years the sterling gave way to the dollar. We have seen over the last two weeks there was a call by a prominent central banker from China calling for a revisit to this idea of an alternative reserve currency. The concern was that some of the ideas that were coming from the United States, like printing an extra trillion dollars for the stimulus plan, might have an impact on the value of the dollar. That made a lot of countries, with significant parts of their reserves in dollars, to be concerned about the long term impact of such 'helicopter money' on the value of the dollar. So there was a call for revisiting the idea of an alternative currency, I don't know if it was deeply discussed at the G20. That's one issue I'd deeply love to find out when I meet with some of my colleagues who attended the meeting.
The second issue is something that was raised over thirty years ago by Yale economist, James Tobin, in which he proposed a tax on currency transactions, called the 'Tobin Tax'. It's a very small tax on international transactions and that would generate enough resources and these resources would be handled by the IMF, again, to stabilize currency markets and also stabilize less-developed economies. Similarly, this idea has been discussed briefly but has not been thoroughly explored at the G20 as an alternative source of financing. This 'Tobin Tax' can achieve two things; first, it can generate revenue for the IMF. But most importantly it discourages speculation in the currency market which has been a feature of the 80's and triggered significant negative impact on economies, especially those of South East Asia. These are the sort of macro details which I leave for you handle! But I would just like to say something very quickly about what we are doing here in Kuwait. Are we just a bystander that is just observing these calamities without taking any action? No. Kuwait has to be quite active.
On the national front, His Highness the Emir has created a fund called the 'Decent Living Fund' in which we contributed $100 million as an emergency fund to help less developed countries to address the issue of rising food prices. Also, His Highness contributed $300 million to fight hunger in Africa. The third thing His Highness did, which was only a couple of months ago, is that he called for the establishment of a fund with a capital of $2 billion in which Kuwait contributed $500 million. This fund is to tackle the issues of poverty in the Arab world, not by giving people money but teaching them how to fish rather than giving them the fish itself. This is the micro-credit bank that His Highness called for establishing. These are all initiatives His Highness proposed in the last few months and this is to tackle the less advantaged people who would be most affected in a crises. But also, we have been quite active in designing programs to safeguard our financial institutions from this financial shock. Last week, Thank God, our able, and in my opinion brilliant Governor of the Central Bank, proposed a scheme by which the Central Bank would provide a safety net to prevent financial institutions and banks, especially, from collapsing. Again, we see the reaction today in the stock market which has voted overwhelmingly in a positive sense for this stabilization program which we introduced late last week. Again, this is a very quick and overall picture of what concerns Kuwait, and what concerns people like me responsible for Foreign Affairs. This is just to give you an idea that the issues you are dealing with very much have an impact on security and stability of countries and regions. Again, I welcome you to Kuwait and I thank you very much.