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The Gulf
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.
Learn more
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Voting quotas at Bretton Woods Institutions continue reflecting the 1944 power
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