The idea rests on the observation that governments around the world have an estimated $75 trillion of dollars of public assets, ranging from corporations to forests, which are often badly managed and frequently not even accounted for on their balance sheets. Over recent decades, policy makers have focused almost solely on managing debt while largely ignoring the question of public wealth. Given that in most countries public wealth is larger than public debt, just managing it better could help to solve the debt problem while also providing the material for future economic growth. A higher return of just 1% on global public assets would add some $750 billion to public revenues. Poor management not only throws money down the drain, but also forecloses opportunities. As an example, the fracking revolution, which is making the U.S. self-sufficient in oil, has taken place almost entirely on private land.
In this Citi GPS report and as a preview to their upcoming book, Dag Detter and Stefan Fölster present their thesis that the governance of public wealth is one of the crucial institutional building blocks that divides well-run countries from failed states. They argue that the polarized debate between privatizers and nationalizers has missed the point — what really matters is the quality of asset management, and the focus when it comes to public wealth should be on yield rather than ownership. They calculate that improvements in public wealth management could yield returns greater than the world’s combined investment in infrastructure such as transport, power, water and communications. They also note that improvements in public wealth management could help to win the war against corruption as assets are moved at an arm’s length from politicians. They thus address at a single stroke two of the great problems of our age: the shortage of infrastructure investment thanks to the overhang of the public debt and the halt in the advance of democracy thanks to the prevalence of poor government.
Improving the quality of asset management starts with transparency. Back in 1983, Chief Economist Willem Buiter argued that governments needed to have a clearer picture of their total balance sheet and should construct a “comprehensive balance sheet” including all assets and liabilities of the state, including commercial and non-commercial assets as well as central bank assets. He notes that even partial success — and the recognition of what information is still missing and preventing the completion of the comprehensive balance sheet — can inform policy debate and improve the accountability of the state and its agents.
Finally, the authors argue that the best way to foster good management and democracy is to consolidate public assets under a single institution — a national wealth fund — which is removed from direct government influence. This structure maximizes economic value consistent with the principles of corporate governance. It can also be a vehicle for improving access or the cost of borrowing on the international capital markets for financing infrastructure projects or other commercial ventures or assets.
Authors: Dag Detter,Stefan Fölster,Willem Buiter,Michael Bilerman,Andrew Howell,Edward L Morse,Anthony Pettinari,Harvinder Sian,