Over the past seven decades, the International Monetary Fund (IMF) and the World Bank have played a central role in the global economic and financial architecture, with varying degrees of success. These Bretton Woods Institutions (BWIs) continue to be the most relevant setters, knowledge producers, organizers 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 only standard bearers of economic development and financial stability in the world. On the one hand, dozens of regional multilateral development banks and financial institutions (MDBs and MFIs) have emerged over the past seven decades with regional mandates and objectives very similar to those of the BWIs. Several sovereign wealth funds (SWFs) and pension funds have also emerged and strengthened in the global economy. With assets in the tens of trillions, these institutions are playing an increasingly important role in financing international development and financial stability.
There are over 130 sovereign wealth funds (SWFs) worldwide with assets totaling over $9.65 trillion. More than half of these assets are concentrated in sovereign wealth funds from the Persian Gulf and China (including Hong Kong), i.e. 31 and 24% respectively (Chart 1).
Sovereign wealth funds serve various macroeconomic objectives of their respective countries, ranging from stabilization (Turkmenistan Stabilization Fund and Chile Social and Economic Stabilization Fund) to economic development (Fund for the Reconstruction and Development of Uzbekistan), foreign exchange management (China Investment Corporation) and savings for future generations (the NSW Generations Fund of Australia and the Government Pension Fund Global of Norway). Most sovereign wealth funds, especially the larger ones, are established as surplus funds or savings funds in resource-rich economies such as Chile, Norway and Persian Gulf countries. However, China Investment Corporation and Singapore’s Temasek Holdings can be cited as two of the largest sovereign wealth funds that are not based on revenue generated from the export of oil, gas, copper or other natural resources.
Since the mid-2000s, SWFs have played an increasingly important role in financing global development and financial stability, two roles traditionally assigned to BWIs. According to data from the SWF Institute, since 2011, sovereign wealth funds have engaged in more than $500 billion in infrastructure-related deals from countries other than their own. More than 70% of these transactions took place between advanced economies. Moreover, investments by Chinese sovereign wealth funds in the construction frenzy in developing economies around the world show the growing importance of these structures for financing global development. For example, between 2018 and 2020, the value of Chinese investments and construction projects in the SSA region was around $54 billion, which is $20 billion more than the total amount disbursed by the World Bank. in the region during the same period. The value of Chinese investment and construction in the MENA region between 2011 and 2021 is estimated at around $211 billion, 83% of which targeted the region’s energy, transport and real estate sectors. The same goes for many Persian Gulf sovereign wealth funds that have invested heavily in infrastructure and real estate projects in advanced and developing economies. The investment by the Abu Dhabi Investment Authority in the Indian company GVK Airport Developers Limited in November 2019 is just one example of almost 100 transactions of this type of sovereign wealth funds from the Persian Gulf in the sectors of infrastructure around the world.
The Great Financial Crisis (GFC) of 2007-2009 was a watershed moment for the Persian Gulf and Chinese sovereign wealth funds to show their growing importance in the global financial structure and show off their liquid financial firepower. For example, in 2007 and the onset of the Great Financial Crisis, these sovereign wealth funds invested approximately $27 billion in troubled US financial institutions, which at the time represented more than two-thirds of all foreign investment by funds. sovereigns in US financial institutions. To put that into perspective, in the fall of 2008 the IMF extended about $43 billion in loans to several developing countries, including $2.1 billion to Iceland after its banking system collapsed.
The last decades have seen the strong emergence of pension funds as institutional investors. By the end of 2020, global pension assets exceeded $56 trillion, nearly double the amount in 2010. With its pension assets worth $35.5 trillion, more than 63% of the total globally, the United States leads all other economies in the world and by a significant gap (Table 1).
The average real rate of return on investments of these funds in 2020 was 4.1% in OECD economies and 3.2% 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 horizons, such as infrastructure and real estate. For example, Hong Kong, Switzerland, Croatia and Romania are some of the recent jurisdictions that have relaxed limits on pension fund investment in long-term public good projects in the infrastructure and energy sectors. ‘immovable. These policies are consistent with the long-term investment horizons of pension funds while increasing the overall welfare of societies. This could be a game-changer by closing the huge global infrastructure financing gap, estimated at $15 trillion by 2040. To this end, the World Pensions Council (WPC) and the OECD have organized a first meeting in 2012 to focus on how to promote pension fund exposure. investments in infrastructure. Since then, there have been growing calls to make infrastructure an asset class for investment and the World Bank has succeeded in establishing the Global Infrastructure Fund (GIF) to promote more public and private investments in the infrastructure sector. With their financial muscle of tens of trillions of dollars and their long-term investment horizons, sovereign wealth funds and pension funds are uniquely positioned to close the global infrastructure financing gap in the decades to come.
The rise of sovereign wealth funds and pension funds highlights the slow but steady emergence of various alternatives to BWIs. Regional multilateral development banks and financial institutions, sovereign wealth funds, pension funds, and state-led multilateral development finance programs, such as China’s Belt and Road Initiative (BRI) and the US Initiative Build Back Better World (B3W) are breaking into areas that were traditionally for BWIs. This has contributed to BWIs losing relevance and effectiveness in an ever-changing global economy and financial landscape.
The economic and financial multilateralism of the 21st century no longer only concerns States. Alongside sovereigns, quasi-state actors such as sovereign wealth funds and pension funds as well as other non-state actors, such as multinational enterprises (MNEs), have important complementary roles to play in economic governance and world financial 21st century. For example, without meaningful involvement of multinational corporations in policy discussions on climate change, the BWIs and their member states will most likely fail to make meaningful progress on global climate goals. Therefore, to achieve their global goals more efficiently and effectively, the IMF and World Bank need to establish independent venues for collaboration with quasi-state and non-state actors. This certainly goes against the traditional definition and functioning of international organizations. But for the IMF and World Bank to remain at the forefront of governance of the global economy for the rest of the 21st century, they must welcome these untraditional reforms.
Amin Mohseni-Cheraghlou is a consultant at the GeoEconomics Center and assistant professor of economics at the American University in Washington, DC.
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