On capital: transforming sovereign wealth funds into community funds

In my last blog I discussed the exciting potential of profit-sharing and employee ownership schemes to spread the distribution of wealth and make workplaces more equitable and more participatory environments. For this second instalment I would like to make the case for collectively owned ‘community-funds’: large pools of wealth managed in the public-interest and used as vehicles to distribute the gains of capital more widely than is currently the case.

Currently, the dominant form of state asset pooling is the Sovereign Wealth Fund, in which various types of economic surplus (budgetary, natural resource revenues, forex reserves) are gathered in an SWF and invested to generate returns for the state. The diversity of the assets this wealth is invested into reflect the variety of the market itself – anything from stocks, bonds, real estate, precious metals, hedge/private equity funds, and infrastructure projects.

While existing in rudimentary form for over a hundred years, SWFs have only really taken off since the 2000s, popping up primarily in the not particularly democratic or transparent natural resource rich states of Asia and the Middle East (Norway, the largest of them all, is an exception). There are now almost 80 of them worldwide, with total asset worth approaching $7 trillion.

But while the market capitalisations and rates of return of these investment behemoths continue to scale new heights, their economic successes have not been shared with citizens in any systematic way. To call this a shame is a huge understatement – the massive wealth held by these institutions could bring us closer to the equitable distribution of capital that the market alone been unable to achieve.

At present, SWFs are seen as supplements to traditional instruments of state financing – primarily taxation. They might be used to relieve shortfalls in a state’s fiscal position (such as unaccounted pension liabilities or healthcare costs), to manage economic and currency volatility during periods of uncertainty, to limit the reckless immediate spending of government income, and to save and invest for future generations.

While these uses of SWF income have a clear social value, they represent the usual top-down, technocratic approach to societal welfare that neglects individual autonomy and empowerment. In a context of skyrocketing wealth inequality and concentrated capital ownership that characterises much of the developed (not to mention the developing) world, reformed SWFs could enable heavily indebted governments to enrich and empower their citizens without the need for higher tax rates and expensive redistribution programmes.

By sharing fund wealth directly with citizens, governments could improve access to capital (enabling people to start businesses, educate themselves, protect themselves during unemployment, and work less hours) whilst leaving them free to make their own economic decisions.

The Case for Community Funds

The work of Nobel laureate James Meade serves as a valuable theoretical precedent. Concerned with technology’s tendency to eat away at demand for labour and increase returns to capital, which combined with unequal wealth ownership produces severe economic inequality (precisely what Thomas Piketty diagnosed with his r > g equation), Meade proposed the establishment of ‘community funds’ which would invest accumulated budget surpluses on the competitive stock exchange to finance a social dividend. This dividend, nothing less than the mass divvying up of the returns earned through productive investment, would ensure that the shift of economic rewards from labour to capital would benefit the population as a whole, rather than a small minority. Political theorist Angela Cummine, an important recent advocate of community funds, explores how existing SWFs could be communalised by reforming their managerial, investment, and distributive practices.  

The Meade model is not so distant from the current SWF practice of open-market investment in equities, bonds and real estate – the difference lies in the dividend. And neither is the latter particularly far-fetched: Cummine has also written about the Alaska Permanent Fund (APF), a state fund capitalised by the annual acquisition of 25% of the state’s oil revenues that distributes a yearly ‘Permanent Fund Dividend’ to each and every one of its citizens. The money comes directly out of the APF’s investment returns (rather than out of the fund itself).

While the dividend is not huge (linked to returns on investment, it peaked at $2000 in 2008), the initiative is rated very positively by Alaskans, who see it as an effective way of reducing poverty, providing a safety net, promoting worker freedom, and generating a shared sense of reward and responsibility for the state’s natural resource wealth. Interestingly, Alaska also ranks among the most equal American states (in a highly unequal country).

Talk of an annual dividend brings to mind the idea of the ‘basic income’ that is a regular feature in contemporary political debates. And while in one sense a regular cash sum granted unconditionally to every citizen fulfils the definition of a basic income, a dividend financed through returns on state investment would be sharing the gains of capital ownership rather than those of unequally compensated labour (which would be the case with a basic income funded by income tax). Furthermore, it is easiest to save and generate wealth when one has surplus income– a surplus that a regular dividend would enable many more to put aside.

Another advantage of a community fund investing in stocks and other assets on the competitive market is that it allows the state (and by extension the citizenry) to profit from growth in the domestic (as well as global) private economy without having to employ the unwieldy tool of nationalisation and the inefficiency issues that might entail. Like a private investor, a community fund would be driven by the search for a high rate of return whilst simultaneously providing capital where it is most needed. The fund could hire and competitively compensate top commercial fund managers so as to employ the best expertise. As IPPR explain, the fund ‘would act as a silent ‘rentier’ and ‘not seek to interfere in the day-to-day management of private firms’.

But unlike private investors, the fund would spread generated wealth beyond the pockets of a restricted asset owning class. And while it would invest with high returns in mind, as a public institution a community fund would be more likely to integrate social imperatives with its investment decisions - such as investing in businesses that are environmentally sustainable, technologically innovative, champions of labour rights (perhaps even employee owned firms, to link back to my last post), beneficial to the local economy, that have no links to violent conflict, and so on.

Author of the widely read ‘Entrepreneurial State’ Mariana Mazzucato is keen on seeing the state take on the role of a public venture capitalist, one that takes risks beyond the scope of the short-sighted private sector and shares the proceeds of successful ventures more equitably than would the latter. She cites the example of Tesla, which received a $465 million US government loan and went on to be wildly successful. But the government did not insist upon an equity stake in the firm, and so did not benefit from the dramatic increase in the price of Tesla shares (from $19 to over $200).

Creating the Community Fund

Having made the case for the transformation of sovereign wealth funds used primarily to bolster state finances into community funds that would democratise access to the wealth generated by capital, what would be the best path to such entities in practice? For countries already endowed with large SWFs, such as Norway, China, the UAE and Saudi Arabia, offering citizens a slice of investment returns would require redesigning existing institutions, not raising new funds. But how would a country like the UK, possessing no SWF to speak of, create a fund with a level of capitalisation large enough to make a real difference in the societal distribution of wealth?

In his July 2014 Juncture article, Gerald Holtham reminisces about the missed opportunities to create a UK fund, such as previous North Sea oil tax revenues, the proceeds of previous privatisations of state enterprises and utilities, and most recently the £350 billion spent on quantitative easing that has done much to inflate banks’ balance sheets but little to stimulate the real economy.

Nevertheless, there remain numerous proposals as to how a wealth fund could be initially capitalised, some specific to the UK, others relevant to any country wishing to get a fund off the ground. While a short blog post is not the place to explore each in depth, a brief overview of the possibilities should serve to inspire imaginations:

• Capitalising the fund using savings from consecutive budget surpluses, as conceived by Meade. In an era of budget deficits and fiscal consolidation, this one seems optimistic at best. Meade was also a keen proponent of taxing unearned wealth, so inheritance taxes are another plausible possibility.

• Reserving a proportion of public revenues from the sale of natural resources and the rights to explore those resources (as in Alaska). A shale gas fund has been touted for the UK, by George Osborne amongst others.

• Bringing together the UK’s 39,000 separate public-sector pension funds into a giant pension wealth fund, as is already done in Holland & Canada. Amalgamating local authority pension funds would result in a £180 billion asset pool, according to Boris Johnson.

• IPPR propose tapping into the UK’s inflated financial sector by hypothecating revenue from specific financial transactions. The already existing UK banking sector levy could be used towards this end, as could another small levy applied to mergers and acquisitions. Remuneration packages considered excessively high could also be skimmed. More widely, a share of the revenue raised during future sales of public assets (such as electromagnetic spectrum) could be committed to the fund.

• A group of Labour MPs have proposed turning Britain’s £8.6 billion crown estate into a fund (also cited by Cummine) for productive state investment by freeing it up to invest in up-and-coming property markets, promising businesses and UK infrastructure. In 2012 the estate generated a surplus of £253 million with an 11.9% annual return.

• Political economist Dani Rodrik proposes raising the necessary funds by issuing government bonds in international financial markets.

In short, large government wealth funds have proved their feasibility and become a concrete part of the economic and political landscape. Let us begin putting them to better use.

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