When Adam Smith wrote “An Inquiry into the Nature and Causes of the Wealth of Nations” in 1776, the industrial revolution had entered its second decade and the relationship between nations and their wealth was still relatively straightforward.
Wealthy nations built empires. Empire-building nations became wealthy. National wealth was put to use within national borders, or at least within the borders of their respective empires, to further the causes of industrialization and yet more wealth creation.
Wealth creation remains a fundamental concern of nations to this day. That said though, it seems increasingly to be more a question of what to do with the wealth rather than how to create it. For sovereign wealth funds are all the rage now.
Sovereign wealth funds are the vehicle whereby nations invest their accumulated wealth in all manners of things, such as banks, supermarkets, seaports, power companies and even investment funds throughout the world. It is not that these managers of national wealth are all that much of a new phenomenon in themselves. They may not have been around in Adam Smith’s time, but they have been a feature of the global financial landscape for much of the postwar 20th century.
Oil-rich countries have typically relied on sovereign wealth funds for quite some time now to make their riches beget more riches around the world. They are attracting attention today because they are bigger, there are more of them and therefore they are becoming a more prominent force in global financial markets.
More to the point, the fact that is causing the most stir is that China has entered the picture. The China Investment Fund, created just a few months ago, was set up to manage China’s rapidly accumulating foreign-exchange reserves.
China is large. It may now claim to be a market economy but its political structure is still one of single-party rule under the rigid Communist Party. The world is understandably concerned about the effects of such a nation’s emergence as a potential stakeholder and shareholder engaged in all kinds of economic activity.
Are capitalist states about to witness the seizure of their strategic assets by state capitalism?
Yet the really fascinating thing about this whole turn of events is not necessarily the China issue. More fundamentally, it makes you wonder what globalization is really supposed to be all about.
It was supposed to be about nation state borders becoming increasingly irrelevant. It was supposed to be about the world becoming flat. It was supposed to be about the world becoming a village. Or so people argued.
And to crown all this argument, were not people starting make the point that we were now entering the world of fund capitalism as opposed to nation-state capitalism? Were not investment funds on the way to running economies rather than governments? Were not the vultures supposed to be circling around, about to descend on nationally treasured industries, while national governments looked helplessly on?
Well it now seems that the nations themselves are taking on the vulture role. Or so potential host nations fear. This is a very strange state of affairs.
What would Adam Smith make of it all, one wonders.
Would he tell us not to worry because the invisible hand of the market will guide even sovereign wealth funds toward optimum investment decisions that benefit the whole?
That would be reassuring. But would it also be true? We can only wait and see.
At least we now know that the wealth of nations has acquired a new lease on life in the global jungle. Fingers crossed that the reborn beast is not predatory.
Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.