Periodically we’ll be interviewing Senior CEME Fellows to check in on their latest research, big questions they’ve been pondering and everything they’re keeping an eye on in the world. Today we spoke with Co-Head of SovereigNET and President of EM Strategies, Eliot Kalter.
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Interviewer: What are the questions that keep you up at night around your current research/focus of interest?
EK: I remember sitting in the Yale Club with Chuck Bralver, former Executive Director of Fletcher School’s Institute for Business in the Global Context (IBGC) to discuss the importance of including the study of Sovereign Wealth Funds (SWF) within CEME. While at the International Monetary Fund, I observed first-hand the role of SWFs in the management of Emerging Market (EM) Countries’ international reserves as reserve levels grew beyond that needed for the purposes of their Central Banks. I felt that this role of SWFs was critical for both countries’ financial and economic stabilization as well as for the wealth of future generations.
This work has blossomed into what is now called the Fletcher Network of Sovereign Wealth and Global Capital, or SovereigNET, co-headed by Pat Schena, Tom Holt and myself. We take this effort quite seriously and are in frequent communication bilaterally and in conference calls, at times included the global network of SovereigNET affiliates and our Council of Advisors. The sponsorship we receive from K&L Gates and State Street is critical to our effort.
The current research and focus of SovereigNET reflects well some of my interests. Pat Schena and I recently co-authored a paper with State Street on Institutional Investors’ “Quest for Performance.” SWFs and pension funds together have assets under management of over $40 trillion. The shifts in their asset allocation and the factors driving these massive flows have tremendous implications for country stability and growth. One implication of shifting institutional investor asset allocation is the availability of capital for the unmet global infrastructure needs. Estimates of critically needed (and unmet) infrastructure investment are measured in the trillions. Shortfalls in infrastructure investment have direct implications for economic growth and the ability of countries to reduce the endemic poverty that exists globally. SovereigNET co-hosted last year a conference with K&L Gates on the unmet infrastructure needs of EM countries. We will follow-up with another conference this October with a focus on the role of institutional investors in meeting global infrastructure needs. We will cover what drives investment in infrastructure and what impediments exist, and then look from the perspective of governments and countries, the recipients, and ask what they are doing to attract investment and what are they doing to reduce impediments. One subset of this work is addressing the importance of “sustainable investments”: what makes an investment sustainable; what drives these investments; and, can these investments achieve competitive returns?
A separate focus of my interest is the balance between the need for Sovereigns to invest in infrastructure domestically and the need for the Sovereign to invest externally to eventually become an alternative generator of revenues, say, when a countries natural resources (the source of Sovereign wealth) are depleted. More than half of the assets of SWFs are sourced through the export of oil, copper and other natural resources. These resources will eventually become depleted; in addition, there is great price volatility. The wealth of future generations, perhaps the availability of sufficient pensions for aging populations, is dependent on these decisions to be made based on information, analysis, and rational trade-offs.
Interviewer: What do you see in the developments and events around the world today that make your work relevant and timely?
EK: Well, all the issues discussed so far have implications for an interest that I feel quite passionate about. Tremendous social tensions are being created and will continue to get worse caused by the growing income and wealth disparities between poor and wealthy, the 1% and 99. Globalization is creating greater disparities in industrial countries; when it comes to the developing world, disparities are narrowing but too slowly. One can expect greater tensions in industrial countries with workers real incomes declining as they compete for jobs with workers in developing countries, while in the developing countries there is a narrowing, but not quickly enough to meet rising expectations. This has been evident not only through the tensions associated with the Arab Spring but also in Turkey and the more recently in Brazil. This can connect to the work of SovereigNET in asking how to prioritize investments goals.
Also, the majority of new sovereign wealth funds are in countries that do not have good democracy records. Increased wealth in many of these countries can result in the wealth flowing to only a few. It seems that great wealth could be channeled to alleviate the needs for infrastructure, the needs for pensions, and the needs for reducing income inequality. One important aspect of SWFs that we are discussing at SovereigNET is the potential transformative role that SWFs can play. The transmission of good governance from SWFs to their direct investments abroad in EM countries can be highlighted. Less discussed but of great interest is the role of good governance that SWFs can play internally. While it is true that it is difficult for a SWF to be more transparent and have greater accountability than their stakeholder (the Government that set the SWF mandate), a role that SWFs could increasingly play is to bring the good governance practices they find abroad to their stakeholder. The internal transmission of international best practices is an area of interest for SovereigNET.
Interviewer: Where do you see the greatest opportunities for impact for students who affiliate or work with IBGC?
EK: We’ve been a little surprised that students have not beaten down the door to work with us since we have funding through of our sponsorships. We have an affiliate program at SovereigNET; globally we have 16 PHD and recent PHD students doing interesting research that is featured on our website. This program is slated to expand. The amount of research that we’re doing at SovereigNET could be increased with more participation from Fletcher students. There would be a very direct link with students doing research in a number of areas under the auspices of SovereigNET where there could be positive synergy. That being said, we are quite pleased with the mentoring opportunities that we have already had, bridging a number of students to their post-Fletcher jobs.
Right now we have proposals in to give advice on helping Mongolia set up a sovereign wealth fund. Iraq and Libya may also have interest in advice from SovereigNET, ranging from asset management, appropriate investment mandates, governance issues, and the relationship between Sovereign funds and their stakeholders. The conference we are planning will require significant research inputs. There are many different avenues for involvement and we look forward to bringing these opportunities to Fletcher students.
Interviewer: What is the most interesting book you have read recently?
EK: I am a bad book reader; rather I probably look at dozens of information sources a day. Science is a great hobby of mine; I just read an article about the recent ability (attempt) to recreate the evolution of the universe in a very powerful computer. Apparently, they had great success in coming close to recreating the configuration of our known universe. Now that boggles the mind!