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Econographics June 13, 2022

Quasi-state financial institutions and the Bretton Woods: A case for collaboration?

By Amin Mohseni-Cheraghlou

Over the past seven decades, the International Monetary Fund (IMF) and the World Bank have played central roles in the global economic and financial architecture, with varying degrees of success. These Bretton Woods Institutions (BWIs) are still the most relevant norm-setters, knowledge-producers, convenors, and influencers in the international development, finance, and trade landscape. However, the emergence of new regional entities in the global economic and financial landscape has introduced new challenges. The BWIs are no longer the sole flag-bearers of economic development and financial stability in the world. For one, dozens of regional Multilateral Development Banks and Financial Institutions (MDBs and MFIs) have come to existence in the past seven decades with regional mandates and objectives very similar to those of BWIs. Multiple Sovereign Wealth Funds (SWFs) and Pension Funds have also emerged and gained strength in the world economy. With assets in the tens of trillions of dollars, these institutions play an increasingly important role in international development finance and financial stability.

Sovereign Wealth Funds

There are more than 130 sovereign wealth funds (SWFs) around the world with assets totaling more than $9.65 trillion. More than half of these assets is concentrated in Persian Gulf and Chinese (including Hong Kong) SWFs—31 and 24 percent respectively (Figure 1).

SWFs serve various macro-economic objectives of their respective countries ranging from stabilization (Turkmenistan’s Stabilization Fund and Chile’s Social and Economic Stabilization Fund) to economic development (Fund for Reconstruction and Development of Uzbekistan), foreign exchange management (China Investment Corporation) and saving for future generations (Australia’s NSW Generations Fund and Norway’s Government Pension Fund Global). Most SWFs, especially the larger ones, are established as surplus or saving funds in resource-rich economies such as Chile, Norway, and Persian Gulf countries. However, one can point to China Investment Corporation and Singapore’s Temasek Holdings as two of the largest SWFs that are not based on revenues generated from the export of oil, gas, copper, or other natural resources.

Since the mid-2000s, SWFs have played an increasingly important role in global development finance and financial stability, two roles that have been traditionally designated for the BWIs. According to data from SWF Institute, since 2011, SWFs have engaged in more than $500 billion in transactions related to the infrastructure sector of countries other than their own. More than 70 percent of these transactions took place between advanced economies. Moreover, investment by Chinese SWFs into the construction spree in developing economies around the world points to the growing importance of such structures to global development finance. For example, between 2018 and 2020 the value of Chinese investments and construction projects in the SSA region was about $54 billion, $20 billion more than the World Bank’s total disbursed amount to the region during the same period. The value of Chinese investment and construction in the MENA region between 2011 and 2021 is estimated to be around $211 billion, 83 percent of which targeted the energy, transport, and real estate sectors of this region. The same is true for many of the Persian Gulf SWFs which have invested heavily in infrastructure and real estate projects in advanced and developing economies. Abu Dhabi Investment Authority’s investment in India’s GVK Airport Developers Limited in November of 2019 is just one example of close to 100 such transaction of Persian Gulf SWFs in the infrastructure sectors around the world.   

The great financial crisis (GFC) of 2007-9 was a watershed moment for Persian Gulf and Chinese SWFs to showcase their growing relevance in the global financial structure and put their liquid financial firepower on display. For example, in 2007 and at the early days of great financial crisis, these SWFs invested about $27 billion in troubled U.S. financial institutions, accounting for more than two-thirds of all foreign SWF investments in U.S. financial institutions at that time. To put this in perspective, in fall 2008, the IMF extended about $43 billion in loans to several developing countries, including a $2.1 billion package to Iceland after the collapse of its banking system.

Pension Funds

Recent decades have witnessed the strong emergence of pension funds as institutional investors. As of end of 2020, global pension assets exceeded $56 trillion, almost double the amount in 2010. With its pension assets worth $35.5 trillion, or more than 63 percent of the world’s total, the United States leads all other economies in the world and with a large gap (Table 1).

The average real investment rate of return of these funds in 2020 was 4.1 percent in OECD economies and 3.2 percent in 32 other jurisdictions around the world. While, bonds and equities were the two main asset classes driving these returns, pension funds are increasingly investing in less liquid asset classes with longer return time-horizons such as infrastructure and real estate. For example, Hong Kong, Switzerland, Croatia, and Romania are a few of the recent jurisdictions that have relaxed their pension fund investment limits in long-term public good projects in infrastructure and real estate sectors.  Such policies are in line with pension funds’ long-term investment horizons while also increasing the overall welfare in societies. This could be a gamechanger in filling the massive global infrastructure financing gap, estimated at $15 trillion by 2040. To this end, The World Pension Council (WPC) and OECD first convened a meeting in 2012 to focus on how to promote pension funds’ exposure to infrastructure investment. Since then, there have been increased calls to make infrastructure an asset class for investment and the World Bank has managed to establish the Global Infrastructure Facility (GIF) to promote more public and private investment in the infrastructure sector. With their financial firepower in tens of trillions of dollars and their long-term investment horizons, SWFs and Pension Funds are particularly well-positioned to bridge the global infrastructure financing gap in the coming decades.

The rise of SWFs and Pension Funds highlights the slow but steady emergence of various alternatives to BWIs. Regional Multilateral Development Banks and Financial Institutions, SWFs, pension funds, and state-led multilateral development finance programs such as China’s Belt and Road Initiative (BRI) and the United States’ Build Back Better World Initiative (B3W) are entering areas that were traditionally designated to BWIs. This has contributed to the declining relevance and effectiveness of BWIs in a constantly evolving global economy and financial landscape.

Twenty-first century economic and financial multilateralism is no longer only about states. Alongside sovereigns, quasi-state actors such as SWFs and Pension Funds as well as other non-state actors, such as multinational corporations (MNCs), have important complementary roles to play in the global economic and financial governance of the 21st century. For example, without meaningful involvement of MNCs in policy discussions around climate change, BWIs and their member states will most likely fail to make any significant strides on global climate targets. Hence, to achieve their global objectives in a more efficient and effective manner, the IMF and World Bank must define independent venues of collaborations with quasi-state and non-state actors. This will certainly go against the traditional definition and workings of international organizations. But for the IMF and World Bank to remain at the forefront of the governance of the global economy for the remainder of the twenty-first century, they must welcome such non-traditional reforms.

Amin Mohseni-Cheraghlou is a consultant with the GeoEconomics Center and an assistant professor of Economics at the American University in Washington, DC.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Image: Aerial panoramic view of The City of London cityscape skyline with metropole financial institutions district modern skyscrapers after sunset on night with illuminated buildings and cloudy sky in London, UK