The invasion of the sovereign-wealth funds
Jan 17th 2008
From The Economist print edition

The biggest worry about rich Arab and Asian states buying up Wall Street is the potential backlash

BEN BERNANKE once spoke of dropping money from helicopters, if necessary, to save an economy in distress. The chairman of the Federal Reserve probably did not envisage that choppers bearing the insignia of oil-rich Gulf states and cash-rich Asian countries would hover over Wall Street. Yet just such a squadron has flown to the rescue of capitalism's finest.

On January 15th the governments of Singapore, Kuwait and South Korea provided much of a $21 billion lifeline to Citigroup and Merrill Lynch, two banks that have lost fortunes in America's credit crisis. It was not the first time either had tapped the surplus savings of developing countries, known as sovereign-wealth funds, that have proliferated in recent years thanks to bumper oil prices and surging Asian exports. Since the subprime-mortgage fiasco unfolded last year, such funds have gambled almost $69 billion on recapitalising the rich world's biggest investment banks (far more than usually goes the other way in an emerging-markets crisis). With as much as $2.9 trillion to invest (see article), the funds' horizons go beyond finance to telecoms and technology companies, casino operators, even aerospace. But it is in banking where they have arrived most spectacularly. They have deftly played the role of saviour just when Western banks have been exposed as the Achilles heel of the global financial system.

Moneymen or mischief-makers
At first sight this is proof that capitalism works. Money is flowing from countries with excess savings to those that need it. Rather than blowing their reserves on gargantuan schemes, Arab and Asian governments are investing it, relatively professionally. But there are still two sets of concerns. The first has to do with the shortcomings of sovereign-wealth funds. The second, bigger, problem is the backlash they will surely provoke from protectionists and nationalists. Already, Nicolas Sarkozy, the French president, has promised to protect innocent French managers from the “extremely aggressive” sovereign funds (even though none has shown much interest in his country).

Although sovereign-wealth funds hold a bare 2% of the assets traded throughout the world, they are growing fast, and are at least as big as the global hedge-fund industry. But, unlike hedge funds, sovereign-wealth funds are not necessarily driven by the pressures of profit and loss. With a few exceptions (like Norway's), most do not even bother to reveal what their goals are—let alone their investments.

For the bosses at the companies they invest in, that may be a godsend: how nice to be bailed out by a discreet “long-termist” investor who lets you keep your job, rather than be forked out in the Augean clean-up hedge-fund types might demand. A quick glance back at “long-termist” nationalised industries shows what a mess that leads too. And it is not just a matter of efficiency. The motives of the sovereign moneymen could be sinister: stifling competition; protecting national champions; engaging, even, in geopolitical troublemaking. Despite their disruptive market power, their managers have little accountability to regulators, shareholders or voters. Such conditions are almost bound to produce rogue traders.

So far there is no evidence of such “mischievous” behaviour, as the German government calls it (curiously, from another country yet to attract the sovereign-wealth crowd). And weighing the risk of such eventualities against the rewards of hard cash, on the table, right now, makes it clearly daft to raise too much of a stink. America is either in recession or near one; Mr Bernanke has all but promised more aggressive rate cuts, but confidence in the banking system is low. There is a wise old proverb about beggars and choosers.

The relatively friendly welcome sovereign funds have found in America may be temporary. Before the credit crunch American politicians objected to Arabs owning ports and Chinese owning oil firms. On January 15th Hillary Clinton said: “We need to have a lot more control over what they [sovereign-wealth funds] do and how they do it.” Once an emergency has passed, foreign money can often be less welcome. One of Singapore's funds, Temasek, has learned that lesson to its cost in Indonesia.

In politics, appeals to fear usually sell better than those to reason. But the hypocrisy of erecting barriers to foreign investment while demanding open access to developing markets is self-evident. Host countries should not set up special regimes for sovereign wealth. Although every country has concerns about national security and financial stability, most already have safeguards for bank ownership and defence.

Until East and West even out the surpluses and deficits in their economies, sovereign-wealth funds will not go away. Ideally, the high-savings countries of the Middle East and Asia would liberalise their economies, allowing their own citizens to invest for themselves, rather than paying bureaucrats to do it for them. But do not expect miracles. In the meantime, what should be done to keep the rod of protectionism off their—and the world's—backs?

Shed light or take heat
For a start, more transparency would go a long way towards easing concerns: an annual report that discloses the fund's motives and main holdings would be a start. Investments through third parties, such as hedge funds, help too, providing an additional layer of protection against the misdeeds of rogues. Ideally, the funds would eventually take fewer stakes in individual companies, which expose them to the inevitable risks of stockpicking and political pressure. Investing across indices provides more diversification anyway.

At a time when Western governments have at last learned to let the private sector run banks (however lousily it is sometimes done), it is far from ideal that state-owned funds from emerging economies should be buying stakes in them, even minority ones. On the other hand, such cross-border bargain-hunting gives developing countries a bigger direct stake in capitalism's future. The chief danger will not lie with them. The problem is likely to be in the rich world—and a rising nervousness about foreign money.

February 15, 2008
Signs in Kenya of a Land Redrawn by Ethnicity

By JEFFREY GETTLEMAN
OTHAYA, Kenya — Sarah Wangoi has spent her entire life — all 70 years of it — in the Rift Valley. But last month, she was chased off her farm by a mob that called her a foreigner. She now sleeps on the cold floor of a stranger’s house, seeking refuge in an area of Kenya where her ethnic group, the Kikuyu, is strong. It is, supposedly, her homeland.

“I am safe now,” said Ms. Wangoi, though the mob still chases her in her dreams.

Across the country, William Ojiambo sat in a field where the ground was too hard to plow. He, too, sought refuge with his ethnic group, the Luo. He used to live in an ethnically mixed town called Nakuru but was recently evicted by a gang from another ethnic group that burned everything he owned.

“We came here with nothing, like cabbages thrown in the back of a truck,” Mr. Ojiambo said.

Kenya used to be considered one of the most promising countries in Africa. Now it is in the throes of ethnically segregating itself. Ever since a deeply flawed election in December kicked off a wave of ethnic and political violence, hundreds of thousands of people have been violently driven from their homes and many are now resettling in ethnically homogenous zones.

Luos have gone back to Luo land, Kikuyus to Kikuyu land, Kambas to Kamba land and Kisiis to Kisii land. Even some of the packed slums in the capital, Nairobi, have split along ethnic lines.

The bloodletting across the country that has killed more than 1,000 people since the election seems to have subsided in the past week. But the trucks piled high with mattresses, furniture, blankets and children keep chugging across the countryside, an endless convoy of frightened people who in their desperation are redrawing the map of Kenya.

The United Nations and Western powers are pushing for a political compromise, and President Bush said he would send Secretary of State Condoleezza Rice to “deliver a message” to Kenya’s leaders.

On Thursday, officials here said that Kenyan government and opposition leaders had agreed in principle to join together in a coalition government but that they remained bitterly divided over the specifics, especially how much power the opposition would have. Two officials close to the negotiations said the government had rejected the opposition’s offer to split power between the president, who would remain head of state and the military’s commander in chief, and a newly created prime minister position.

Whatever deal is struck will have to address the growing de facto segregation, since a resettlement of the country may further entrench the political and ethnic divisions that have recently erupted. Shattered trust is much harder to rebuild than smashed huts, and many people say they will never go back to where they fled.

“How can we, when it was our friends who did this to us?” said Joseph Ndungu, a shopkeeper in the Rift Valley, who said that men he used to play soccer with burned down his shop.

The government is lending a hand in the country’s separation, at least for the moment. Police officers are escorting people back to their ancestral homes, as the government calls them, which seems to be thinly veiled language for ethnic separation.

Alfred Mutua, a government spokesman, said this was only temporary until it was safe for people to live together again.

“Kenyans have the right to reside anywhere in the country,” he said.

But the mass migrations and resettlements that have been set in motion may be hard to reverse.

Take Joseph Mwanzia Maingi, a retired teacher who was just driven out of Narok, a town in the Rift Valley, by a gang of local men with bows and arrows. He fled to his father’s farm in an area that is a stronghold of the Kamba ethnic group, his people. He is now building a house. And not looking back.

“I don’t see any peace agreement that can guarantee our security there,” said Mr. Maingi, speaking of Narok, where he had lived happily for 40 years.

The ethnic segregation is pulling students and teachers out of schools and leaving thousands of jobs vacant across the economy. If it continues, said David Anderson, an African studies professor at Oxford University, “it’ll be an utter disaster.”

“You’ll never be able to reconstitute the state in a meaningful way,” he said. “You’ll have undone 50 years of work.”

The roots of the problem go deeper than the disputed election, in which the incumbent president, Mwai Kibaki, was declared the winner over the top opposition leader, Raila Odinga, despite widespread evidence of vote rigging.

At the heart is a tangle of long-festering political, economic and land issues. Part of the trouble is the winner-take-all system in Kenya, which happens in much of Africa, where leaders often favor members of their own ethnic group and in the process alienate large swaths of the population. Many people in Kenya saw this coming even before independence in 1963.

“We were worried about the smaller tribes getting dominated by the bigger ones,” said Joseph Martin Shikuku, a 75-year-old opposition figure. “And you know what? That’s exactly what happened.”

Mr. Shikuku was one of the founders of an independence-era political movement that embraced a philosophy called majimboism that has been around in Kenya since the 1950s. Majimboism means federalism or regionalism in Kiswahili, and it was intended to protect local rights, especially those connected to land. But in the extreme, majimboism is code for certain areas of the country to be reserved for specific ethnic groups, fueling the kind of ethnic cleansing that has swept the country since the election.

Majimboism has always had a strong following in the Rift Valley, the epicenter of the recent violence, where many locals have long believed that their land was stolen by outsiders.

“Majimboism was submerged but it never really died,” Mr. Anderson said. In some ways, the election in December was a referendum on majimboism. It pitted today’s majimboists, represented by Mr. Odinga, who campaigned for regionalism, against Mr. Kibaki, who stood for the status quo of a highly centralized government that has delivered considerable economic growth but has repeatedly displayed the problems of too much power concentrated in too few hands — corruption, aloofness, favoritism and its flip side, marginalization.

Because Mr. Kibaki is a Kikuyu, the largest and most powerful ethnic group in Kenya, and Mr. Odinga is a Luo, a group that feels it has never gotten its fair share, the political and ethnic tensions aggravated by this election have often blurred — with disastrous results.

Other African countries have struggled with ways of defusing ethnic rivalries. Ethiopia set up a system in the mid-1990s called ethnic federalism, which carved the country into ethnic-based regions, each with broad power — at least on paper — including the right to secede. But Ethiopia’s leaders soon concluded that too much regional autonomy would tear the country apart, and Ethiopia is now more or less centrally controlled by members of a small ethnic group.

Tanzania took the opposite approach. It de-emphasized ethnicity. It encouraged people to speak Kiswahili, and not their mother tongues, as a way to build Tanzanian-ness. The government sent children to high schools in different areas to expose them to different communities. Tanzanian election law even makes it illegal to campaign for office based on ethnic group.

In Kenya, such campaigning has been dangerous. Human rights organizations have accused several politicians this election season of using hate speech to incite their supporters. Land became the explosive issue, and after the election, opposition supporters rampaged against people who they perceived had not only voted for the president but had also taken their land long before then. To members of the Kalenjin ethnic group, this meant Kikuyus, even if they had lived next door for generations.

The small town of Londiani in the Rift Valley is just one example. Kikuyu traders settled here decades ago. In early February, residents said that hundreds of Kalenjin raiders poured down from the nearby scruffy hills. Even the Good Start nursery school was burned to the ground. The next morning, children with flakes of ash in their hair picked through the rubble, salvaging what they could — a mosquito coil here, a dented lantern there. With no fire engines in town and with running water scarce, all people of Londiani could do was run outside and watch the school burn.

Kikuyus have since taken their revenge, organizing into gangs armed with iron bars and table legs and hunting down Luos and Kalenjins in Kikuyu-dominated areas like Nakuru. “We are achieving our own perverse version of majimboism,” wrote one of Kenya’s leading columnists, Macharia Gaitho.

Many Kenyans blame William Ruto, a charismatic, smooth-talking opposition leader and a Kalenjin elder, for starting the violence in the Rift Valley. Kenyan government officials say that they are compiling evidence that Mr. Ruto instructed his supporters to kill and that he may soon be charged with murder.

Mr. Ruto, 41, denies any involvement.

“They will not touch me,” he said. “My hands are very clean.”

Still, hundreds of thousands of Kikuyus have fled the Rift Valley, followed by members of other communities displaced by revenge killings. The United Nations estimates that at least 600,000 people have been uprooted. About half have gone to camps in churches, police stations, stables and prisons. The living conditions are often horrible.

“Now they’re eating rats,” read a headline in a Kenyan newspaper.

In Othaya, in the hilly green center of Kikuyu-dominated Central Province, residents mobilized to absorb their relatives from the Rift Valley — and any other Kikuyus who escaped with them.

“I was expecting five or six people,” said Miriam Wanjiku, one of the hosts. “Then a whole bus showed up.”

Ms. Wanjiku found houses and abandoned stores for dozens of people to sleep in. She helped able-bodied men — many were wounded — get jobs at the local tea plantations that roll across the hills like one giant, verdant hedge. The children were put in school.

But there was little for the elderly to do. Ms. Wangoi spends her day on a couch, staring at the floor.

“They were sliced like meat,” she said, when asked what happened to her neighbors.

Ms. Wanjiku listened closely, looking distressed.

“I think she needs counseling,” she said.

Reuben Kyama contributed reporting from Nairobi, Kenya.

February 15, 2008
OP-ED COLUMNIST
Fresh Start Conservatism

By DAVID BROOKS
In the 19th century, industrialization swept the world. Many European nations expanded their welfare states but kept their education systems exclusive. The U.S. tried the opposite approach. American leaders expanded education and created the highest quality work force on the planet.

That quality work force was the single biggest reason the U.S. emerged as the economic superpower of the 20th century. Generation after generation, American workers were better educated, more industrious and more innovative than the ones that came before.

That progress stopped about 30 years ago. The percentage of young Americans completing college has been stagnant for a generation. As well-educated boomers retire over the next decades, the quality of the American work force is likely to decline. Mitt Romney captured the consequences in his withdrawal statement: “I am convinced that unless America changes course, we will become the France of the 21st century — still a great nation, but no longer the leader of the world.”

Americans feel the slippage every day.

If I were advising the Republican nominee, this is one of the places I’d ask him to plant his flag. I’d ask him to call for a new human capital revolution, so that the U.S. could recapture the spirit of reforms like the Morrill Act of the 19th century, the high school movement of the early 20th century and the G.I. Bill after World War II.

Doing that would mean taking on the populists of the left and right, the ones who imagine the problem is globalization and unfair trade when in fact the real problem is that the talents of American workers are not keeping up with technological change.

Doing that would also mean stealing ideas from both the left and right. Liberals have spent more time thinking about human capital than conservatives, who have tended to imagine that if you build a free market, a quality labor force would magically appear.

Doing that would also mean transcending economic policy categories. If there is one thing we have learned over the bitter experience of the past 30 years, it is that per-pupil expenditures and days in the classroom are not sufficient to produce superb information-economy workers. They emerge from intact families, quality neighborhoods and healthy moral cultures.

Finally, doing that would mean laying down lifelong policies. Human capital development is like nutrition — you have to do it every day.

The first group of policies would foster two-parent families. If all American families looked like the intact middle-class ones, we wouldn’t have nationally low education outcomes. Married men earn 10 percent to 40 percent more than single men with similar skills, and their children are much more likely to graduate from high school. But among the lower-middle class, there is a poisonous spiral of economic stress and cultural decay.

A new working class tax credit applied against the payroll tax would reduce some of the stress. So would a larger child tax credit and increases in the Earned Income Tax Credit. The federal budget should bestow less on seniors and more on young families.

The second group of policies would involve early-childhood education. There could be nurse-home visits for children in chaotic homes so that they have some authority in their lives. Preschool should be radically expanded and accountability programs put in place.

Third, the next president has to loosen the grip of the teachers’ unions. Certification rules have to be radically reformed to attract qualified college graduates. Merit pay has to become the norm. Reforming superintendents need the freedom to copy the models — like KIPP Academies — that actually work.

Fourth, Democrats like to talk about college affordability, but that’s the least important explanation for why so many students don’t complete college. The real reasons are that students are academically unprepared and emotionally disengaged. National service should be a rite of passage for 20-somethings, and these volunteers could mentor students through high school and college years.

Fifth, portable health insurance and retraining accounts would give adult workers security. Income taxes are not going to be coming down, but they need to stay where they are. As Edward Prescott has shown, higher taxes mean less work, and less work means less worker development.

The agenda could go on, but the point is this: Democrats believe in fine-tuning the economy. They believe in intervening in a thousand little ways to address problems. Republicans believe these thousands of little Band-Aids hinder movement and distort productivity. But Republicans do believe, or at least should, that positive government can help prepare people for the rigors of competition, so they can have an open field and fair chance.

That’s the conservatism of the fresh start.

Language School
Posted by Catherine MacRae Hockmuth at 1/31/2008 1:00 PM
The Defense Department yesterday launched a national pilot project to train civilian volunteers in languages critical to national security and other national goals. Surprisingly, their target list of languages doesn't include Farsi or Arabic. The volunteers would be on-call to provide language service to local, state and federal departments and agencies in emergencies or to fill critical shortfalls.

The National Language Service Corps plans to recruit and enroll 1,000 volunteers for the pilot program and train them in 10 languages. The languages identified for the pilot are: Hausa, Hindi, Indonesian, Mandarin Chinese, Russian, Somali, Swahili and Vietnamese. Two additional languages will be identified once the team developing the operational concept completes three activation exercises.

“This is an excellent opportunity for Americans with unique language skills to serve their country, when and where they are needed the most,” said Under Secretary of Defense for Personnel and Readiness David Chu. The program is being coordinated by the director of the National Security Education Program.

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AJBlank wrote:
A run-through of the site http://www.nationallanguageservicecorps.org/ shows it's (to be polite) not-ready-for-prime-time. You would have at least thought that the FAQ page would have a few basic answers filled in.

Putin has engineered his continued relevancy quite completely. Minister without Portfolio is not enough, so this new president will arrive with training wheels attached.

Understood and stipulated.

Political experts now search his past to figure his motives. Can we believe him when he says he's pursuing a transformation process at a pace appropriate to a country ruled for centuries in an authoritarian manner?

Based on what we saw in the 1990s under Yeltsin, I'd say he's got a decent case. To that end, one can claim Putin is simply allowing his social and political structures sufficient time to adapt to a global economic landscape that's not easily navigated by the naive or less-than-determined-to-succeed.

Key to me is that he respected the need to give up the presidency. He didn't break the rule set. He's getting around it somewhat, but that's very Russian—the land of the work-around.

More interesting is what kind of guy Medvedev will end up being. He's given some hints, and he'll definitely have to bide his time and make any moves with great slowness and care, but unless Putin totally hogs the stage, Medvedev will inevitably emerge as an alternative power source in the system. And if Putin wanted to do that, I think he simply would have broken the rule set and remained president.

So we shall see…