Lawrence Summers lauded the potential for large pools of Asian capital to improve the global financial system at a conference yesterday marking the 25th anniversary of the Korean National Pension Service (NPS).
Delivering the keynote presentation at the event in Seoul, Summers said: “The NPS is a model for something profoundly important.” That something he describes as “patient capital” that is internationally diversified and deployed flexibly.
Summers was secretary of the US Treasury during the Asian financial crisis and is now president of Harvard University. His remarks served to bless the NPS as a top-tier investor at a global level.
NPS saw its assets under management hit W380 trillion ($340 billion) as at July, possibly nudging it past the Netherlands’ ABP as the third largest public pension fund in the world.
Summers says the deployment of such “patient capital” over a period of decades not only helps funds such as NPS to meet their social obligations at home, but also allows them to play a key role in channelling capital to global corporations and entrepreneurs at a time when lending and credit markets in the developed world remain under strain.
The sort of capital needed to repair Western infrastructure is cheap to borrow today, thanks to ultra-low interest rates, but it’s an investment that traditional sources of capital can no longer meet.
He says investors that must meet quarterly market expectations aren’t suited for such long-term commitments, while the financial institutions that would traditionally have made such investments are in many cases retreating, particularly if they face short-term liabilities (as most banks do as they depend on overnight financing).
“It’s for those with a long view, investing for social security or for the future of nations,” Summers says.
He also gave his take on the global financial crisis, noting the irony that the same traits which got the developed world into such a mess – overconfidence that fuelled reckless lending, borrowing and spending – are what are needed to get the world back on its feet, at least for the short term.
While this may be the primary responsibility of governments, Summers notes it creates an opportunity for Asian institutional money to profit. The global financial crisis has underpriced risk assets and made safe-haven assets overly expensive.
However, despite outlining many risks to the global economy, he says he is an optimist. Our era is marked by two dominant trends: the rise of emerging markets, and the information-technology revolution. The two are linked, as the close-knit world created by IT has hastened the incredible leaps in living standards in emerging nations.
Summers – holding up his mobile phone to note it has more computing power than the Apollo space programme of the 1960s – says this twin development is enabling huge parts of the world to see living standards grow at an unprecedented pace.
The knowledge economy has ushered in global integration and growth in economics, production and services at a scale that would have been unimaginable just a decade ago. We are only now understanding what innovation in biotech, manufacturing and communications will lead to in the coming decade.
“In terms of its significance to human living standards, only the Industrial Revolution and the Renaissance match [our era],” Summers says. “And the knowledge economy may come to overtake them.”