THE DUBAI CIRQUE DE SOLEIL, MASDAR INVESTS IN CLEAN ENERGY THAKSIN BUYS (AND SELLS) MANCHESTER CITY, and KHAZANAH AND TEMASEK BECOME GLOBAL FORCES: GLOBAL CAPITAL MARKETS, SOVEREIGN FUNDS AND ECONOMIC REALIGNMENT in 2
THE DUBAI CIRQUE DU SOLEIL: The government of Dubai wants to make Dubai the centre of the world’s entertainment industry. Cirque due Soleil has gone from being a fusion of Chinese acrobatic dance, street entertainment and Montreal creative cultural fusion to being a multi-billion global product. The investment of the Dubai government in the Cirque is one of the Canadian business stories of the year and is filled with implications for the way the global economy operates.
THAKSIN ACQUIRES MANCHESTER CITY: One doesn’t have to be a world football fan to know the commercial value of the positional good called an English Premier Division football team. Abramovich’s purchase of Chelsea was the arrival of new Russian capital into the major centres of the world. After Prime Minister Thaksin Shinawatra left power in Thailand, having failed to manage the mix of globalization and privatization that comes from selling domestic telecommunications capacities to foreign (in this case Singaporean) investors, he becomes one of the twenty-two owners of this unique positional good, in this case Manchester City.
MASDAR’s CLEAN TECH FUND: In the new planning for a post-oil economy, there is a tremendous advantage if one does not have to meet quarterly expectations. In this new characteristic of the global economy, the Masdar Clean Tech Fund in Abu Dhabi is well-positioned for long term growth.
KHAZANAH AND TEMASEK BECOME GLOBAL PLAYERS: The Malaysian and Singapore sovereign wealth funds are examples of new players with increasing global exposure and global interest. A quick look at the Khazanah and Temasek portfolios shows that they are part of the globalization of investment expertise, and are new partners and players in the global economy. Khazanah’s investment’s in Chinese waste-to-energy technologies this summer is another template for deal making and a good case study for this discussion.
There is a great deal of activity and growth in the global economy in the fall of 2008, from these kinds of case studies. But there is also a real nervousness about how the global economy as we know it comes out of a perfect storm. Several negative factors have come into play and we seem to lack a political consensus about how to deal with them. This reflects the confusion in the way they are discussed in the world’s Business Schools. What is going on and how do we analyze them more successfully? As public-policy makers, as investment decision-makers, as citizens of the planet. That is what this course is about.
Let’s start with the perfect storm:
(i) CDOs, the new derivatives and the tyranny of mathematical models:
badly understood financial instruments re-sold without adequate calculation of inherent risks in disguised “new models”, the derivatives and mathematical model problem one more time but with higher stakes in a more fragile economy with the collateralized debt obligations (CDOs) at the heart of the mortgage and banking crises;
(ii) The power of petro-capital in global capital formation: There is considerable uncertainty over the role of petro-capital in global capital formation. This overlaps with the new role of sovereign wealth funds, but speaks also to the insecurities of a world economy that has taken a long time to move from its carbon dependency and to a more financially stable and predictable source of energy. The political uncertainty over its role and function of petro-capital in the global economy is once again with us. The volatility of oil prices is the only constant as interruptions of supply can come from the Georgian route of the Baku-Tbilisi-Ceyhan pipeline, and even more importantly, the disinvestment from Russian oil and gas resulting from the Russian behaviour over the TNK-BP deal ;
(iii) The rise of sovereign wealth funds has everyone dusting off their economic theory text books: The rise of new sources of economic power in private equity funds in Europe and sovereign funds in China, the Emirates, Singapore and now possibly Saudi Arabia and the reemergence of new players from India, Brazil and Russia affects the investment market for acquisitions and mergers. How will their pattern of investment differ, if at all, from that of Goldman Sachs or the Royal Bank of Scotland?
(iv) Klepto-capital makes rational economic their and the natural efficiency of markets much more theoretical: The increasingly disruptive effects of klepto-capital, whether it is drug cartel money in Latin America, Afghanistan or southeast Asia, the flow of currencies from para-state organizations in Russia and eastern Europe, or petro-capital transformed into private wealth in, to pick the extreme case, Equatorial Guinea.
The convergence of all these phenomena mean that as political economy meets international finance, we are seeing a world which in unrecognizable through the lenses that marked the early days of globalization.
Optimists, in which camp I count myself, say this is the growing pains of globalization. Pessimists see some structural flaws in the way international capital is organized. Until the optimists prevail, there will be continuing uncertainty in the global economy, and difficulty channeling capital to growth opportunities.
The answers written on the op-ed pages of the world’s newspapers tend to be of three kinds: (i) from academics who want to defend a particular intellectual perspective on the world (the importance of more tools for analysis of risk is a favorite); (ii) from institutional investors with a position to defend (hedge funds have not destabilized the system); and (iii) from a geopolitics based on nervousness about the rise of new centres of economic power and their accountability.
In this course, we are closer to the third position, once again seeing a return to Schumpeterian political economy with its emphasis on the preconditions for innovation in rapidly changing markets and the economic psychology of Keynesians who understood that there is an art to consumer confidence. The intellectual skills requires to navigate twenty first century capital markets are both analytical skills of political economy and a broad understanding of the economic history of innovation in capitalist economies and how that is applicable to the global economy we are currently designing through the day-to-day market decisions and the search for a new global financial architecture.
Canada has to assess how the new trends: the rise of sovereign funds and petro-capital, the competing centres of capital formation with different systems of financial accountability, the credit crisis caused by the failure of financial markets to measure risk in a manner that captured the fallacious assumptions of “technical” (i.e. computer-driven) financial instruments. Like CGI (computer-generated imaging) in films, they should be servants of the plot, not an end in themselves. All the market-disrupting technological innovations (derivatives in the 1990s, CDOs in the 2000s) were examples of the technology not serving the goals of value creation.
The global economy in which we start this term’s analysis is one which is sorting out the misuse of financial instruments, the failure to create a capital market immunized from the impact of petro-capital, and the geopolitics of sovereign funds. The fluctuation of oil-prices is a constant which will lead to more complex decision-making. Let’s start with some trends which are going to impact throughout the next few months and then see what strategies are accessible to investors and financial decision-makers operating within the Canadian dollar-zone. It also is hoped that the implications of this analysis apply elsewhere in B-Schools where the appropriate decision-making models for the 21st Century are being shaped.
It is impossible to act effectively within the new political economy unless one has some sense of how these changes affect decision-makers. Arnab Das of Dresdner Kleinwort’s July 2008 Financial Times essay on SWF (sovereign wealth funds) is an excellent starting point for a discussion on the range of future strategies in creating value in the global economy. The analysis of the strategic decision of sovereign wealth funds creates a need for a different framework of political economy and international finance. The Monitor Company’s report on the role and strategies of sovereign wealth funds makes an excellent starting point for analysis. Let us add four case studies:
(1) Nakheel buys into the Cirque du Soleil : The Cirque has become a major content producer for Los Vegas . It is a multi-billion dollar Canadian asset, whose expansion capital now comes from sovereign wealth funds based on Gulf Arab oil.
(2) Temasek helps Thaksin take control of Shin Corporation, Thailand’s largest mobile telecommunications company: The economic nationalism engendered from the reaction to Thaksin and the Shin decision resulted in a change in Thailand’s government and an ongoing crisis in terms of economic integration in Southeast Asia.
(3) Norway’s sovereign wealth fund owns 1% of Europe’s assets: The role of Norway’s steady, ethically-driven investment strategy has a profound implication on the development of European business.
(4) China investment in Blackstone a mixed success story: This investment was part of a learning curve for Chinese investors, an excellent exit for Blackstone’s highly innovative founders and part of the integration of China into the global economy.
(5) How do capital markets create stability for energy pricing and investing? J.P. Morgan’s President Jamie Dimon’s proposal at Aspen that governments create a more stable capital market environment by taxing oil and gas to simulate the effects of rising oil prices and facilitate structural adjustment.
Let us start with three basic observations:
(1) We are living in the twilight of the petro-state. All the world’s economic activities are being targeted towards fossil fuel substitution. But right now, the capital markets reflect the significant power of oil (Abu Dhabi, Norway and organized sovereign wealth, China, Singapore) are a significant part of capital formation in the world. The formation of capital from resource wealth will be replaced by other aspects of global capital markets: the formation of wealth from environmental conservation, from industrial ecology and conversion to agricultural productivity, real estate denominated transactions). Right now, Abu Dhabi has wealth from oil which it can convert into venture capital that diversifies the UAE portfolio, as in the role of Masdar.
The next generation of capital formation will come from new financial techniques:
(a) Real estate value of common lands – e.g. what is the beach property of Namibia worth? Who owns it?
(b) How much is it worth to pay Indonesia, Brazil or Papua and New Guinea not to harvest rain forests: how much will the Indonesia Rainforest Conservation Sovereign Fund be worth in 2008? How will it be capitalized? What new bond and financial instruments will be required?
(c) How do we create incentives for the creation of agriculturally productive land from shrub and desert? What is the ownership structure of the Sahel? Will we have a Mali High Protein Yield per Acre sovereign fund in the year 2008? How will it be collateralized?
(d) In the two decade long twilight of the petro-state, what will happen to the revenues coming from Sao Tome e Principe’s oil wealth? How could it be turned into a Gulf of Guinea pension fund? Who will the depositors be? What principles of accountability will there be for the actions of the fund or will it be spent the way Saudi and Russian petro euros are currently spent?
(2) Cross-border investment instruments will transform many regional economies. Let us take the example of Ogaden, the probably illegally transferred desert land “given” to the Ethiopians by the British at the end of the Second World War. Now that it has oil, what are the investment models which could result in mutual benefits from economic development?
(3) The power of the capital markets inevitably triggers economic nationalist responses. The Temasek-Shin case in Thailand is just the canary in the coal mine. However, most of our economic theories treat economic nationalism as an inherently negative phenomenon, which means that theoretically we should let the Saudis and Chinese purchase anything they want in a highly liquid international marketplace. Public policies will be designing market-sensitive economic nationalist instruments. In this sense, the CDP model in Quebec and instruments like Norsk Hydro in Norway become if not prototypes, new templates from which we can design economic strategies in the emerging global economy.
In a world where Thaksin leaves and buys a good English football team, and then sells it to an Abu Dhabi investment group, and where Dubai uses an innovative entertainment product from Montreal to establish its leadership over Los Vegas as a global entertainment destination, we are dealing with different instruments and means of value creation. We are in a period of adjustment now to new patterns of growth and the instruments which worked in a different economic period have now proven to be toxic. Collateralized debt obligations (CDOs), the so-called credit crunch, were clever little instruments for people with access to computerized trading to gain an advantage in a world of expansion. The winners made 14.9% returns, the losers 14.3% returns. Now we are in a different world requiring very different business strengths: one of the fundamental new skills is an understanding of how global political economy and international capital markets combine to create new strategies and new sources of competitive advantage in the emerging really global economy.