Economic Research Papers on Investment
International Liquidity Management Since the Financial Crisis
& William A. Allen
, World Economics, December 2015
This article discusses how international liquidity management has been affected by the recent crisis. It notes that since the Bretton Woods system collapsed in 1971 it was expected that the demand for international reserves would diminish, since countries were no longer obliged to sell foreign currencies in case of need to support their own currencies in foreign exchange markets. However, international reserves increased in total from 3.1% of world gross product at the end of 1970 to 16.7% at the end of 2013. The paper explains this phenomenon in the context of the global demand for liquidity up to and after the global financial crisis of 2008-09. Different means of providing international liquidity assurance are assessed and the paper concludes that without an international lender of last resort, the world financial structure remains vulnerable to a new liquidity crisis.
The Illusory Economic Gains from Hosting the Olympics & World Cup
, World Economics, March 2015
The IOC's Olympic Games and FIFA's World Cup are the two most popular global sporting events. Winning the rights to host these competitions comes with great fanfare. Yet except under special circumstances, the scholarly evidence suggests that hosting either event is no economic bargain for the host city or country. Short-run costs for venue construction and operations invariably exceed Games-related revenues by billions of dollars and long-term gains are elusive. The bidding process to host is structured such that a monopolist auctions off the rights to a world of competitors. The top bidder is likely to experience a winner's curse.
Applying Reputation Data to Enhance Investment Performance
, Mike Brown
& Brian Sturgess
, World Economics, December 2014
The fact that corporate reputations deliver tangible shareholder value has been recognised by managers for some time. More recently, techniques have emerged that allow them to measure just how much value reputation delivers and identify the driving factors in order to structure communications and corporate messaging accordingly. While these techniques are having a marked affect on how companies are managing their reputation assets their use also has implications for investors. This paper uses reputation data to analyse the share price performance of companies identified as over- or under-valued. Evidence is found that where reputations are such that they suggest the companies are under-valued, that over time their market capitalizations grow at a greater rate than those whose reputations suggest over-valuation. This implies company reputation can be a powerful leading edge indicator to estimate investor returns and thus contribute to fund management.
How The Crown Estate Could Become Britain’s First Sovereign Wealth Fund
& Keith Boyfield
, World Economics, December 2013
The United Kingdom is one of a few larger economies without a national wealth fund. This paper investigates the feasibility of a recent proposal to turn The Crown Estate, one of Britain’s largest property investment and management businesses, into such a Sovereign wealth fund as an alternative to its privatisation. The Crown Estate was created in 1760 by Parliament as a means of funding the British monarchy, but when the current Queen dies or abdicates there is likely to be a wide ranging debate about the type of monarchy Britain wants and how it is financed. However, with assets of just under US$12 billion The Crown Estate would be small in relation to other national funds. At present, with an estimated six trillion dollars, the global funds under Sovereign wealth management have been steadily increasing their significance in global investment. The largest single fund is the Norwegian Government Pension Fund with assets of circa US$803.9 billion, while greater China controls US$1.63 trillion through four separate funds. The authors argue that any British fund, even if formed out of The Crown Estate, should have access to the revenues from shale oil and gas which could be worth as much as £500 to £800 of GDP per head at 2012 prices.
The New Transparency in Development Economics: Lessons from the Millennium Villages controversy
& Gabriel Demombynes
, World Economics, December 2013
The Millennium Villages Project is a high profile, multi-country development project that has aimed to serve as a model for ending rural poverty in sub- Saharan Africa. The project became the subject of controversy when the methodological basis of early claims of success was questioned. The lively ensuing debate offers lessons on three recent mini-revolutions that have swept the field of development economics: the rising standards of evidence for measuring impact, the ‘open data’ movement, and the growing role of the blogosphere in research debates.
The Economic Impact of Private Equity
, World Economics, September 2013
Over the past half century, private equity has grown from a tiny part of the financial sector into a powerful industry, often controlling global brands. As the industry has grown, so too has academic interest in the sector. However, the vast majority of empirical research has focused on the impact of private equity at the microeconomic level, typically focusing on the experience of a pool of individual firms rather than the economy as a whole. As such, the analysis has tended to be partial in nature, rather than taking a general equilibrium approach. This article reviews evidence on the microeconomic impact of private equity, and examines whether these findings are visible in macroeconomic data. Across a pool of developed economies with significant private equity activity, there is no sign that private equity investment significantly boosts employment, productivity or hence growth at the macroeconomic level.
Using Reputation to Grow Corporate Value
, Brian Sturgess
& Michael Brown
, World Economics, September 2013
Corporate reputations rank amongst companies’ most valuable assets. They are delivering substantial proportions of their market capitalisations and are a major source of value generation. Their significance is being felt in a wide variety of business sectors including real estate and in particular Real Estate Investment Trusts (REITs) where, as this paper demonstrates, they have become critical drivers of shareholder value as investors increasingly find the surveyor estimates of underlying asset values wanting. This is having significant implications on how, for example, REITs need to manage their corporate reputations and deploy the likes of reputation value analysis to ensure that the messaging they’re delivering is both securing and growing corporate value.
How Safe is SAFE’s Management of China’s Official Foreign Exchange Reserves?
, Robbert-Jan Korthals
& Ng Kuan Khai
, World Economics, June 2013
This paper examines whether the State Administration of Foreign Exchange (SAFE) and its subsidiary SAFE Investment Company (SIC), the sole managers of China’s gargantuan official foreign exchange reserves (OFER) until 2007, have shifted their investment behaviour since the inception of China Investment Corporation (CIC). We find that external conditions such as overexposure to US dollar-denominated assets and declining value of the greenback, as well as internal conditions like the rise of CIC as a rival to manage China’s OFER, have prompted SAFE-SIC to depart somewhat from their pre-2007 conservative style of investing most of China’s OFER in low-yielding foreign government bonds, especially US Treasury bills. Since 2008, SAFE-SIC, in a seeming competition with CIC, have started to pursue higher-risk, higher-return investments. However, we observe that this bolder strategy of SAFE-SIC might not be sustainable for long, because: (a) it duplicates CIC’s explicit mission already set by the State Council to invest in higher-risk, higher-return assets; (b) it runs against SAFE’s core mission to preserve, rather than grow, China’s OFER; and (c) SAFE is tied down by other core responsibilities such as the regulation of China’s foreign exchange administration system, the stewardship towards full capital-account convertibility, and the gradual internationalisation of the renminbi (RMB). As such, engaging in higher-risk, higher-return investments would most likely remain a secondary priority within SAFE’s overall mandate.
Measuring African GDP: The next success story?
, World Economics, June 2011
There is much speculation about the growth potential of African economies. But in the light of unreliable official statistics and the highly selective information often presented by investment companies with an incentive to highlight the positive, this article aims to provide some extra analysis to add to the recent widespread comments on high growth rates within the continent. Problems are noted with official economic data and the strengths of Purchasing Power Parity (PPP) measures for GDP comparisons are noted. GDP figures for Africa and five other major economic areas are analysed for the three decades to 2010 in terms of GDP growth and GDP level by decade. These figures are then viewed in per capita terms, drawing attention to significant population growth within the continent, and therefore less impressive per capita figures. A closer look at the location and distribution of economic activity within the African continent highlights the high concentration of economic activity within a small number of countries. However, it is concluded that the future prospects for African growth are still generally positive. Despite the heavy reliance on oil exports in some countries, headline GDP figures also reflect incidences of broad-based growth which looks set to continue so long as Asian demand remains high and good economic policies are pursued.
Keywords: Africa, Algeria, Angola, Economic growth, Egypt, EU, GDP, Growth, India, Kenya, Nigeria, PPP, Sub-saharan Africa, US
Vibrant Africa Continues to Attract: The economic potential of Nigeria and Sub-Saharan Africa
, World Economics, June 2011
The global economic crisis of 2007–09 left Sub-Saharan countries relatively unscathed. There are a number of reasons for this, but one crucial factor has been the relative lack of integration of the economies of most Sub-Saharan countries with the world economy. This insulated much of the region from the severities of the asset ‘boom’ and ‘bust’ that whiplashed global financial markets in the developed world between 2007 and 2009. There are some positive, rather than neutral, aspects of Africa’s growth potential and the unfolding investment story.
Keywords: Africa, Algeria, Angola, Debt relief, Economic growth, Egypt, FDI, Global financial crisis, Great recession, Growth, Infrastructure, Kenya, Morocco, Nigeria, Power, South Africa, Sub-saharan Africa, Tunisia
A New Challenge: The myriad new opportunities offered by East Africa’s oil and gas basin
, World Economics, June 2011
Over the last five years there has been a noticeable shift in focus among leading oil and gas companies active in the continent of Africa. Rather than focusing on West and North Africa for investment opportunities, there has been a move to explore new prospects in East Africa. The region is rapidly becoming a prominent investment destination in both the upstream and downstream oil sectors. In 2011 several majors including BG, Eni and Petrobras, are planning to sink wells and all of them are investing significant amounts in search of deepwater gas reserves. Alongside these exploration initiatives the author assesses plans for a new pipeline with a capacity of 450,000 barrels a day, to be constructed from Juba in Southern Sudan to Lamu on the Kenyan coast. Increasingly, as the author notes, the region is emerging as a significant location for investment in hydrocarbon resources.
Keywords: Africa, Angola, Hydropower, Japan, Kenya, Mozambique, Nigeria, Oil, Oil prices, Oil wealth, Russia, Sub-saharan Africa, Uganda
Connecting the African Continent: Infrastructure, growth and poverty reduction
, Nemat Shafik
& Leonard Tedd
, World Economics, June 2011
This paper provides an overview of the contribution of economic infrastructure to growth and human development in Africa. Challenges for infrastructure provision including finance, recurrent costs and public-sector responsibilities are covered, together with assessment of the global trends of urbanisation, climate change and future resource scarcity. The paper describes and explains the work of the UK Department for International Development on economic infrastructure in Africa, covering innovations in areas of private-sector infrastructure, regional approaches, improving the investment climate, and international coordination. The paper concludes with several policy directions for current political processes.
Keywords: Africa, Climate change, Corruption, Development, Development strategy, Energy, Growth, Hydropower, Infrastructure, Mozambique, Nigeria, Poverty, Power, Public sector, Sub-saharan Africa, Tanzania, UK, Water, Zambia, Zimbabwe
Boosting Infrastructure Investments in Africa
, World Economics, June 2011
The absolute and relative lack of infrastructure in Africa suggests that the continent’s competitiveness could be boosted by scaling up investments in infrastructure. Such investments would facilitate domestic and international trade, enhance Africa’s integration into the global economy and promote better human development outcomes, especially, by bringing unconnected rural communities into the mainstream economy. While there are yawning gaps in all infrastructure subsectors, inadequate energy supply is directly correlated to low education levels, poor health outcomes, as well as limited economic opportunities and technology choices. Efforts by government to invest in infrastructure have proved inadequate to close the infrastructure gap. These investment opportunities have not been seized by the private sector due to the unfavourable business environment, poor incentives and regulatory frameworks. Therefore, Africa’s infrastructure challenge is not only in closing the huge financing gap, but also in building the necessary skills and capacity to attract investments. Although scaling up infrastructure investments offers the private sector enormous opportunities, unlocking these investments should be preceded by appropriate policy and structural reforms. The good news is that there is hope, and current developments are signalling an increased awareness by African governments. Development partners should therefore take advantage of the increasing political will for reform through knowledge and capacity building activities, especially, in fragile and post-conflict countries where the need is greatest.
Keywords: Africa, Aid, Bonds, Communications, Competitiveness, Development, Development strategy, Egypt, Energy, FDI, Growth, Growth strategies, Hydropower, Infrastructure, Investment, Kenya, Nigeria, Power, South Africa, Sub-saharan Africa, Supply side development, Tanzania, Transport, Water
The Unfolding Sovereign Debt Crisis
, World Economics, December 2010
After the excessive expansion of new forms of private sector credit over two decades of disinflation, a huge pyramid of global liquidity was accumulated. That sparked a boom in asset prices (stocks, bonds and real estate) way beyond anything experienced in the growth of production, investment or consumption. Eventually the bubble burst and along came the credit crunch and the ensuing Great Recession. Desperate to avoid a meltdown in global financial institutions and another Great Depression, governments have dramatically increased sovereign debt issuance to fund bank bailouts and provide fiscal stimulus to the real economy. Monetary authorities have generated huge increases in liquidity to finance this debt. So, instead of the private sector deleveraging, there has been a massive increase in public sector leverage heaped on top of existing private sector debt. Soon central banks will have to withdraw this liquidity largesse or face a major acceleration in global inflation and another credit bubble. This poses a new stage in New Monetarism as sovereign debt competes with the private sector for available global savings.
At best, the global cost of capital is going to rise sharply, pushing economic growth of the major countries below trend for a decade ahead. At worst, there is a serious risk of a succession of sovereign debt defaults that could plunge the world back into depression. Sovereign debt is being discredited. There is a way out, but governments need to take painful, but necessary, actions.
Keywords: Debt, Fiscal policy, Global financial crisis, Global imbalances, Greece, Japan, Keynesian, Recession, Recession, Sovereign debt, USA
Regionalising Infrastructure Reform in Developing Countries
Ioannis N. Kessides
, Roger G. Noll
& Nancy C. Benjamin
, World Economics, September 2010
The principal conclusion of this essay is that regionalisation of infrastructure regulation (i.e. the creation of supranational regulatory authorities such as WATRA or ECTEL) is likely to yield significant benefits that go beyond exploiting economies of scale in both infrastructure industries and regulatory institutions. Regional integration of regulation, combined with regionalisation of regulated firms, assists developing countries in overcoming national limits in technical expertise, enhances national capacity to make credible commitments to stable regulatory policy, facilitates the introduction of competition into historically monopolised markets, improves the efficiency of infrastructure industries by allowing them to grow without respecting economically artificial national boundaries, and ultimately increases infrastructure investment.
Paying the High Price of Active Management: A new look at mutual fund fees
Ross M. Miller
, World Economics, September 2010
Financial economists have long known that actively managed mutual funds underperform comparable index funds and that investment management fees are a major contributor to this underperformance. This article shows that the impact of mutual fund fees is even greater when one examines what funds actually do with investors’ money. Many actively managed mutual funds have returns that are closely correlated with comparable index funds and yet have annual fees that can be 100 times higher. Because such ‘shadow’ or ‘closet’ index funds provide minimal active management of the assets they hold, the implied annual cost of the active management can dwarf the stated cost. This article provides a simple measure of what investors are actually paying fund managers for that active management that they can compute for themselves data available for free on the Internet. A recent sample of 731 actively managed large-cap US mutual funds has an average active expense ratio of 6.44%, more than 400% greater than their average reported expense ratio of 1.20%. This article also finds that even large, seemingly low-cost, mutual funds common in retirement plans frequently have active expense ratios above 4% a year.
Are MENA Countries Reaping the Benefits of Inflows?: A comparative analysis of migrants’ remittances and FDI flows
& Ida Aghdas Mirzaie
, World Economics, September 2009
Using data for a sample of developing countries, we analyse the effects of external flows, namely migrants’ remittances and FDI flows, on real output growth, price inflation and components of aggregate demand. The historical evidence indicates unstable patterns of FDI inflows to a sample of nine MENA countries. In contrast, remittances flows appear to be more stable over time in recipient countries. Except for Jordan, real GDP growth does not vary significantly with FDI inflows. Tunisia provides the only significant evidence of an increase in price inflation in response to FDI, which is coupled with a significant increase in private investment. FDI flows stimulate a significant increase in imports in Egypt. Remittances inflows appear, in general, a more important determinant of macroeconomic performance. Remittances inflows stimulate real output growth in Jordan, and decrease price inflation in Egypt and Tunisia. The increase in growth in Jordan is coupled with an increase in private consumption, private investment, real exports and imports with respect to remittances inflows. Moreover remittances increase export growth in Tunisia.
Keywords: Demand, Development, FDI, Globalisation, Globalization, Immigration, Inflation, Migration, Poverty, Remittances, Saving
Can Africa Catch Up?
, World Economics, June 2002
The trend towards globalization of the last few decades has been manifested in
the sustained growth of world trade and flows of investment and technology. For
most regions this growing integration has led to rapidly growing per capita
incomes, while Africa has stagnated at the income level achieved about three
decades ago. This paper shows that Africa is marginal to the world economy, but
that the world economy is very important for Africa. In terms of openness to trade
Africa closed up during the 1960s and 1970s, while it has been trying to open up
since then. So far the results in terms of growth have been modest. The question
posed here is whether Africa can effectively link up with the rest of the world
and start a catch-up process, or whether marginalisation is inevitable.
Keywords: Angola, Botswana, Competitiveness, Convergence, Development, Growth, Kenya, Mauritius, Mozambique, Nigeria, Openness, Poverty, Productivity, South Africa, Tanzania, Trade, Uganda, Zambia, Zimbabwe