Huggins, Mahroum & Thompson: The Middle East Competitiveness Report – Regional and Territoral Analysis

From the Introduction:

This report explores the extent to which Middle Eastern regions have generated relatively high or low levels of competitiveness. Whilst many Middle Eastern regions may owe some of their competitiveness to the natural advantages of oil reserves, for others their competitiveness has been achieved through other means. Their small size and high degree of autonomy means that many of the regions are effectively independent states. Middle Eastern nations and their regions have been characterized by some as ‘rentier states’ (Brach, 2009), whereby a rent-seeking culture characterized by traits such as a large welfare deadweight loss, a perception of the market as rewarding the rich and well-connected, and a focus on rent capture rather than innovation (Krueger, 1974), is likely to hold back regional competitiveness. As Rodrik et al. (2004) find, institutions are often more important than geography and trade integration for economic development, and it is quite conceivable that the unique political economy of Middle Eastern regions will have profound effects on both their overall competitiveness and also the sources of this competitiveness.

 

Available for download here.

Boston: Anticipatory Governance – how well is New Zealand safeguarding the future?

From the introduction:

Good governance has many attributes. Among these are anticipating tomorrow’s problems, protecting the longterm public interest, and endeavouring to ‘future-proof’ the state (Boston et al., 2014). Sound anticipatory governance, in other words, is a critical ingredient. It is fundamental to advancing better government. But what exactly does it mean? Here are some suggestions.

Arteta, Kose, Stocker & Taskin: Negative Interest Rate Policies – Sources and Implications (World Bank)

Abstract

Against the background of continued growth disappointments, depressed inflation expectations, and declining real equilibrium interest rates, a number of central banks have implemented negative interest rate policies (NIRP) to provide additional monetary policy stimulus over the past few years. This paper studies the sources and implications of NIRP. It reports four main results. First, monetary transmission channels under NIRP are conceptually analogous to those under conventional monetary policy but NIRP present complications that could limit policy effectiveness. Second, since the introduction of NIRP, many of the key financial variables have evolved broadly as implied by the standard transmission channels. Third, NIRP could pose risks to financial stability, particularly if policy rates are substantially below zero or if NIRP are employed for a protracted period of time. Potential adverse consequences include the erosion of profitability of banks and other financial intermediaries, and excessive risk taking. However, there has so far been no significant evidence that financial stability has been compromised because of NIRP. Fourth, spillover implications of NIRP for emerging market and developing economies are mostly similar to those of other unconventional monetary policy measures. In sum, NIRP have a place in a policy maker’s toolkit but, given their domestic and global implications, these policies need to be handled with care to secure their benefits while mitigating risks.

 

Available for download here.

Krane: Climate Risk and the Fossil Fuel Industry – Two Feet High and Rising

From the Introduction:

Burning coal, oil and natural gas is responsible for two-thirds of the world’s emissions of greenhouse gases. These same fuels also represent the economic mainstay of resource-rich countries and the world’s largest firms. Any steps humanity takes to reduce climate-warming emissions will damage commercial opportunities. Relief for the climate means danger for the fossil fuel business. Given the stakes, it bears asking: What, exactly, are the risks? How are they manifested and distributed? Luminaries such as the US president and the governor of the Bank of England have called for leaving large portions of oil, gas, and coal reserves in the ground. International Energy Agency director Fatih Birol has said that two-thirds of known fossil fuel reserves can never be burned if humanity is to prevent average global temperatures from rising by more than 2°C.  Pope Francis, the leader of the world’s 1.2 billion Catholics, has called for “swift and unified global action” on climate change. For fossil fuel businesses, such statements represent existential threats. By Citicorp’s estimate, large-scale resource abandonment translates into an eye-watering $100 trillion in foregone fossil fuel revenues by 2050.

 

Available for download here.

Angelis, Tordrup & Kanavos: Is the Funding of Public National Health Systems Sustainable over the Long Term? Evidence from Eight OECD Countries

Abstract

This study examines what impact macroeconomic and health-related factors have on the financial sustainability of health care systems; provides insights on additional financial resources required in order for demand for health care to be met; and reflects on needed reforms by health care systems in the near future. Publicly available data are used to identify the key variables influencing health spending. Statistical analysis is used to provide estimates of future required levels of health spending. Average macroeconomic performance, high debt levels, the need to contain fiscal deficits combined with adverse demographic developments, high outlays on health technologies and competing public sector needs, suggest that a funding gap between required and committed levels of health spending will exist in the next few years. This funding shortfall can be significant and in cumulative terms may range between 39 per cent and 61 per cent of 2012 health expenditure levels over the 2013–2017 period. Health care decision makers will need to place emphasis on outcomes-based reimbursement, set priorities based on efficiency rules, and implement organisational innovations in order to ensure affordability and sustainability. In the opposite case, contraction of services offered and exclusions from coverage are not unlikely.

 

Article available here ($).

Rose: Sovereign Funds and External Asset Manager Fees – The Governance Connection

Abstract:

Sovereign wealth funds (SWFs) vary widely in how they use external managers, but nearly all SWFs make significant use of external managers, particularly for alternative asset classes that are difficult to access or demand labor-intensive investment strategies, such as private equity, venture capital, and hedge fund strategies. Many SWFs — and those interested in the performance of SWFs, including government officials and citizens — are now asking whether the returns, net of fees, are worth the fees charged by these external managers. However, while external asset managers — and hedge fund and private equity managers in particular — have been criticized for their high fees  (and, in 2015 in particular, high fees often coupled with poor performance), this very short paper argues that the governance and management of asset owners themselves may contribute to the problem.

 

Available for download here.

Rose: Public Fund Governance and Private Fund Fees

Abstract:

In a continuing low-interest rate environment that stifles fixed income returns, pension funds are under increasing pressure to produce strong returns from other asset classes, including alternative assets like interests in hedge funds, private equity funds, and venture capital funds. As private funds themselves struggle for returns in a hyper-competitive market, pension funds have realized, according to one official, that “the most sure-fire way to enhance returns is to reduce fees.” As a result, public pension funds have begun to press private funds to provide more transparency of their fees.

What may be most surprising to observers of this heightened focus on fees is that such requests have to be made at all. Shouldn’t pension funds already know how much they are paying in fees to private funds? In fairness to pension funds, private funds have numerous ways of concealing fees. For example, a private equity fund might hide fees through related-party transactions.

It is therefore tempting to see high and hidden private fund fees as simply a deception by private funds on unsuspecting pension funds. While not attempting to justify private funds’ actions, this article, prepared for the 2016 Private Fund Conference at UCLA School of Law, offers a different perspective: high private fund fees are, in part, a result of poor governance by state legislators and pension funds themselves.

 

Full paper available for download here.

Rose: Reframing Fiduciary Duties in Public Funds

Abstract: This article challenges the commonly evoked fiduciary obligation to strictly maximize fund value by asking a foundational question: who are the proper beneficiaries of public fund trustees’ fiduciary duties? The article makes a pivotal claim: public funds, including public pension funds and sovereign wealth funds, owe their duties to the government and current and future citizens collectively, and not to individual benefits claimants. This analysis is driven by the fact that in practice individual claimants function more like senior creditors than the residual claimants that are the typical recipients of fiduciary duties. This reframing of fiduciary duties in public funds has dramatic consequences for the investment policies of the funds. Most importantly, a shift in the locus of fiduciary duties to the government and current and future generations requires fund managers to more fully consider the externalities accompanying their investments, which should serve to help them fully and accurately price their investments. Private investors might ignore certain effects, such as uncompensated harms from pollution or depleted natural resources, because the government absorbs the costs of such externalities. A strict fiduciary duty to act in the interests of the fund would obligate a private investor to ignore such externalities, so long as they do not negatively affect the returns of the fund’s investments. The government that absorbs the cost of these externalities, however, should view investments differently, with a view to minimizing negative externalities, particularly those that are significantly more expensive to remediate than to prevent. As a result of this analysis, it follows that public funds should benefit from less constrained fiduciary standards that would encourage more investment in sustainable enterprises and long-term projects.

Full paper available for download here.

 

Rose: Sovereign Fund Selling, Market Volatility and Systemic Risk: Connections and Regulatory Possibilities

Abstract:  Sovereign wealth funds (SWF) have largely proven to be the gentle giants of the financial markets; they tend to be relatively patient, passive shareholders. In contrast to other activist hedge funds, when SWFs do engage with companies, they tend to work behind the scenes to maximize value for the long term.

And yet, because they are funds owned by a sovereign, they often receive significant scrutiny, especially in developed markets, whenever they invest. To date, most of this scrutiny has occurred on the front end of investments, as host-country politicians and regulators question the motives of SWF investment in their markets. In some cases this scrutiny proves to be strict enough to encourage SWFs to look for other opportunities in other markets. As SWFs have continued to invest responsibly and regulators have become increasingly comfortable with SWF investment, the fear-mongering associated with SWF investment has decreased.

Now, however, concerns have arisen not over how SWFs invest, but how they divest. Indeed, some reports seem to attribute depressed stock market prices and general market volatility to SWF divestment. A headline in Barron’s, for example, claimed that “Selling by sovereign wealth funds is a huge headwind for stocks,” and a headline for an article in the Financial Times declared that “Sovereign wealth funds drive turbulent trading.” Undoubtedly withdrawals from some SWFs — particularly Gulf SWFs — have had an impact on the markets, and particularly on stocks in which SWFs tend to overweight in their portfolios, such as stock in financial firms and some consumer goods companies. Perhaps the biggest impact has been felt by asset managers, which have seen their AUM deteriorate as SWFs withdraw funds.

But how significant are SWF withdrawals from markets? Put in a slightly more pointed way, do SWF withdrawals create systemic risk for the markets? And if they do, what could be done about it? This brief analysis, prepared for the Università Bocconi’s Sovereign Investment Lab 2016 Annual SWF Report, attempts to work towards an answer to those questions, and in doing so, also attempts to provide some perspective on the larger debate in the appropriate role of SWFs in global capital markets.

 

Full paper available for download here.

Munnell & Aubry: Are Counties Major Players in Public Pension Plans?

From the Introduction:

Most analyses of public pensions focus on states and cities. Less has been written about the role of counties, which are significant public service providers in some states. This brief sheds light on pension activity at the county level by documenting the costs, funded status, and unfunded liabilities to determine whether counties should regularly be included in analyses of state and local pensions.

The discussion proceeds as follows. The first section describes the nature and role of counties in the state government structure. The second section takes a closer look at states where counties administer their own pension plans as opposed to participating in state-administered plans, with a special emphasis on Maryland, Virginia, and California. The third section focuses on pension expense as a percentage of revenues for counties and compares this ratio to that of states and cities. The fourth section reports the funded status of pension plans administered by counties and reports counties’ total unfunded liabilities stemming from both their own plans and the state plans in which they participate. The final section concludes that the importance of counties varies significantly across states but, in the aggregate, counties account for only 12 percent of total unfunded pension liabilities. That said, in states such as Maryland, Virginia, and California, discussing the pension landscape without considering counties would provide a very misleading picture.

Available for download here.