Michael Spence: Rebalancing the State Balance Sheet

Nobel Laureate in Economics and NYU Stern Professor Michael Spence writes on Project Syndicate about “Rebalancing the State Balance Sheet.” Spence highlights the tension states face with managing their assets and suggests ways to think about more privatized sorts of management.

Here is the dilemma: Governments with substantial assets have flexibility and the capacity to act, but they can also mismanage their assets to the detriment of markets and economic dynamism. In China, where the asset side of the balance sheet is large, the strategy of shrinking it via privatization has been largely rejected, at least for now. The loss of resilience would be too great. That leads to the challenge of effective management of public assets – management that promotes rather than impedes market efficiency and innovation.

Here, what might be called the pension/sovereign-wealth-fund model – in which a public entity holds and manages a diversified portfolio of assets as a financial investor with appropriately specified duties and governance – seems to be the right way to go. The asset side of the balance sheet is maintained in the aggregate, but the management of the assets, particularly the diversification of holdings, can be thought of as prudent and de facto privatized.

Read the entire article at Project Syndicate. Nobel Laureate A. Michael Spence joined New York University Leonard N. Stern School of Business as a professor of economics in September 2010. He is a senior fellow at the Hoover Institution and the Philip H. Knight Professor Emeritus of Management in the Graduate School of Business at Stanford University.

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