Arab Sovereignty and Sovereign Wealth Funds

BEIRUT -- The full impact of the current global economic crisis on the Arab world is likely to be very bad, because the major income sources of the region are all dropping simultaneously. 

Oil and gas income is down by over two-thirds. Income from funds invested abroad and at home is down by at least one-third. Unemployment will rise everywhere, and remittances sent home by workers from non-oil-producing Arab states will drop steadily in the coming few years.

One aspect of the Arab economies that is widely discussed abroad yet is almost totally absent from the domestic public debate is the pool of trillions of dollars in the so-called Sovereign Wealth Funds (SWFs). This blackout situation has been slightly ameliorated with the publication this week of a 25-page paper by Carnegie Endowment for International Peace Beirut Center Visiting Scholar Sven Behrendt, entitled When Money Talks: Arab Sovereign Wealth Funds in the Global Public Policy Discourse.

It starts with useful descriptive information on the number, size and nature of the SWFs, which are the funds managed by a handful of oil- and gas-exporting Arab countries that accumulated large surpluses when the price of oil tripled in the last few years. It also calmly reviews important political dimensions of the discussions about SWFs, especially related to how major Western financial and political centers view these funds. This important discussion needs to be expanded beyond the often hysterical treatment in the Western media that sees these funds either as dangerous alien predators that seek to control the Western economic nerve-centers, or as God-sent saviors that will rescue these same Western economic nerve-centers from collapse.

The prevailing best estimate of Arab SWFs' total value is around $1.5 trillion as of last summer (held by the UAE, Saudi Arabia, Kuwait and Qatar), which is thought to have dropped by around 20 percent in the past half year. Behrendt correctly notes the relatively modest size of these funds in relation to much larger pools of money managed by leading Western financial institutions, such as $21 trillion by investment companies and $15-16 trillion each by insurance companies and pension funds.

He also notes both the positive and negative views of this Arab money in the West, and calls for more mature interaction between Arab investors and Western political decision-makers and regulators who seem to need each other more than ever. His most important suggestion is for Arab public opinion, civil society and the media to take more interest in these funds, "and to demand a more transparent accounting of how their nations' funds are being invested. In particular, the Arab public could legitimately ask what social and economic goals are being served by the investments and to what degree they are serving broader regional objectives."

The nature, use and fate of these SWFs matters directly and primarily to the citizens of those energy-exporting countries that possess them. But recent decades have suggested that the development of these countries -- including their investment abroad, in some cases -- is closely linked to conditions in energy-poor Arab countries around them. On issues of labor movement, trade, food production and supplies, real estate and other investments, tourism, some aspects of security, and a few other fields, the wealthy and poorer Arab states are increasingly linked to one another.

The few Arab countries that control over a trillion dollars in their SWFs face some challenging decisions about how to invest those funds in the most effective and prudent manner. Their own and neighboring Arab economies are not mature enough to absorb such large amounts, and investing in the West has resulted in political pushback and, this year, some sharp financial losses. 

This would seem to be the moment for Arab SWF managers and their political leaders to take advantage of the -- probably momentary -- leverage they enjoy globally and regionally, to help re-write the prevailing rules of international financial investment flows. Three areas seem ripe for serious reappraisal.

First, the ultimate owners of these funds -- the citizens of the energy-producing states -- should be provided with more information on how the funds are accumulated and invested, rather than leaving this task in the hands of small groups of specialists. 

Second, inter-Arab investments in truly strategic industries like food production, water technologies, and solar energy should be considered much more seriously, now that basic infrastructure is in place in most Arab countries -- which was not the case when the first oil boom hit in the early 1970s. 

Third, Arab investors should use this unique moment to negotiate better and more reciprocally equitable terms of global financial flows with the leading Western powers.

This is a moment when some Arabs should be thinking more in terms of enhancing the wealth of their sovereignty, rather than merely bemoaning the erratic performance of their sovereign wealth.

Rami G. Khouri is Editor-at-large of The Daily Star, and Director of the Issam Fares Institute for Public Policy and International Affairs at the American University of Beirut, in Beirut, Lebanon.