Wednesday, December 17, 2008

A Change in Fortunes

Commentary - Executive magazine

The double whammy of the subprime market crisis followed by the deepening financial crisis has seen a remarkable change in fortunes among the vanguard of economic power. Recall British Prime Minister Gordon Brown’s visit to the Gulf in November to essentially beg for money to help shore up Britain’s ailing industry.

Not even a year ago such a trip by the leader of one of the world’s leading financial centers - and accompanied by 27 senior business executives - would have been unthinkable. Rather the trip would have been about cementing economic relations, making some speeches about the value of the free market, a veiled reference to democracy, and hopefully the flogging of British goods/services/weapons.

But these are different, and difficult times, and pride is being forced off faces to be replaced with knitted brows and forced smiles of gratitude (if the money is stumped up).

And perhaps rather unsurprisingly, there are elements among this increasingly dishevelled elite that are not happy about this change, particularly when it comes to non-Western entities buying up landmark buildings and sizeable assets in Europe and the USA.

The British popular press is a glaring example, which appears unable to accept the shifts in economic power, with regular commentaries and articles bemoaning such “humiliation” on the world stage. Gulf sovereign wealth funds (SWFs) have come under particular criticism over the past year and a half, largely knee-jerk jingoism of the sensationalist kind.

Take this example from an editorial in The Daily Express in November: “There is mounting concern about individuals and sovereign wealth funds in the Middle East that are buying into key British businesses...Now they are buying out our assets, our country, with our own money. It is a sad, sickening prospect.”

That a change in fortunes affects the psyche of a former world power is somewhat understandable, though there is little need, to use a common expression, “to bite the hand that feeds you.”

But such resentment has been around for quite some time, and recent changes are no exception. One notable factor in this new alignment of the financial stars is how pragmatic political leaders are compared to popular feeling. Just think back a few years to Dubai Ports World’s attempt to acquire the rights to run American sea ports. The Bush administration was all for it, whereas US media made a mountain out of a mole hill. Newspaper cartoons depicted terrorists hidden inside containers, Arabs dressed in jelabas turning a blind eye to dubious cargos sailing past the Statue of Liberty, and all the old, staid Orientalist clich├ęs were dragged out that seemed to confirm what the Arab world has long suspected: that Americans and the West view Arabs as untrustworthy and potential terrorists.

The Dubai Ports episode was a particularly virulent case, and the emirate did well to back out quietly without making a fuss. The spate of SWFs buying up assets and icons over the past year is being taken in a rather different light, but is nonetheless seemingly dependent on the acquisition. After all, Manchester City’s supporters couldn’t have been more enthusiastic about the Abu Dhabi United Group for Development and Investment purchase of the soccer team this year. But when it came to Abu Dhabi's SWF pumping some $7.5 billion into Citigroup, and Kuwait investing in Merrill Lynch a year ago, up went the cry of the barbarians being at the gates and concern over vested political interests. As if Western multinationals, the International Monetary Fund (IMF), or the World Bank don’t have vested political interests everywhere they operate!

But as with jingoistic attitudes having to change, so it looks as if the West’s dominance of the IMF may also have to adapt to the fallout from the financial crisis. The fund is looking to the Gulf’s finances – with oil producing countries generating some $1 trillion over the past few years from high oil prices – to help the IMF’s bail out packages. In return, Gulf countries will want more than just a seat at the IMF’s table; they will want to have an actual role in the fund’s decisions.

As Brown said in Abu Dhabi, “I very much accept the argument that countries which do contribute in this way should have a greater say in the overall governance of the IMF.” Whether this will happen, and to what degree, will have to wait until the next meeting in April.

And as for the Gulf helping to shore up British business – despite the reservations of the popular press – Brown’s visit helped to land $1.5 billion in deals, while Barclays Bank bypassed a handout from the British Treasury through a $11 billon stake from the Abu Dhabi royal family. The times are a-changing, and hopefully so will attitudes as the axis of financial power starts to shift.

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