Right from day one of the World Economic Forum annual meeting 2008 at Davos, Switzerland, the shadow of the global financial crisis threatened to dominate the proceedings. It was a concern expressed at the very outset by the likes of Tony Blair, who drew attention to the other critical issues which merited serious debate this year: climate change, the Middle East crisis and suchlike. But it was hard to turn the attention of global business and thought leaders away from the turmoil in financial markets, particularly those in the US and Europe.
Casting a long shadow on the summit was an overarching concern over whether the global economy was witnessing a confidence-shaking financial crisis that would threaten a worldwide recession. Several interesting takeaways have emerged as a subtext of this question, at least one of which needs to be analysed in greater detail.
As it became clear during the course of the summit that there was, perhaps, an inevitable economic power shift underway as a fallout of financial events in America and Europe?with China, India and other economies emerging as those to be increasingly watched in the coming days?another issue which dominated discussions was the rising importance of sovereign wealth funds. Indeed, if the theme of Davos 2008 was ?The Power of Collaborative Innovation?, then the role of these funds was testimony to this power in attempting a collective solution to the problems of a global economy struggling to battle a slowdown and stave off a recession.
Are sovereign wealth funds the new ?power brokers? amid a changing global economic landscape? The jury on that is still out, it seems. But even as there emerge voices pressing for greater transparency and accountability for such funds, there can be no denying their role in cushioning the landings in these days of turbulence. To put matters in perspective, such funds are currently estimated to control a staggering $8 trillion worth of funds, a figure which will probably touch $20 trillion in five years. That?s a lot of money, as Ibrahim S Dabdoub, CEO of the National Bank of Kuwait, conceded? ?even for Kuwait?! The likes of Dabdoub accept that the emergence of funds controlling such large sums of money does signal a fundamental shift in global financial wealth away from the traditional US and European markets. And yet, he is clear that Gulf funds aren?t looking to be political actors in the world theatre of finance, but are merely seeking to diversify these countries? sources of income away from oil exports.
Those like India?s KV Kamath, a co-chair at this year?s summit, say that the role of such funds in helping a turbulent economy soft-land has not been fully acknowledged or appreciated. But the debate, he admits, will continue while the world searches for a workable balance between their financial power and better regulation of these funds. And then, there were those who advocated caution, warning that their role should not be exaggerated, and neither should they become the targets of action without any concrete evidence of wrongdoing. ?They should be challenged for their deeds,? cautions Angel Gurria, OECD secretary-general, ? not for their ownership.? India?s finance minister Palaniappan Chidambaram, on his part, has made it amply clear that India could not have a sovereign fund of its own as it had a fiscal deficit. But he agrees there is need for transparency on the sources of such funds, and says the government is discussing this issue internally.
By all accounts, sovereign funds are here to stay, and the world will debate their role over the next year and more. Are they merely investors? Are they powers or power brokers? Does their emergence have geopolitical implications? Will they determine which institutions survive and which fail? Either way, these funds will be the new important players in the world financial firmament. How the global financial crisis plays out and how well regulation follows the movements of these funds could determine the direction of the global economy.