One of the most important means of reviving the world economy is by injecting credit and liquidity into the system. For businesses across the region, the main way of generating funding is by creating debt, since it costs less than raising funds by selling equity in companies. Yet the credit hypoxia generated across the region is increasing the reliance on equity-based funding plans, which come with future costs. By using the region’s sovereign wealth funds, however, Lerner argues that Gulf states may still be able to vivify their economies.

You have produced statistics that SWFs were investing in their own countries at the height of the boom. Was this a strategy to shore up confidence against a potential collapse at home?
That’s a very real possibility in terms of what’s going on. Certainly, at least at first glance, there doesn’t seem to be a ready explanation for why you would want to come in at a time when everything is at its peak, because you might think that, at least from a social perspective, already these markets are overheated.

Some experts argue that SWFs have proven to be political as well as economic forces. What do you think?
It’s hard to unambiguously answer, but it’s important to emphasize that sovereign wealth funds do play a multi-headed role. It’s not just purely about generating the most financial returns. They’re also wedded to the country in which they play a role. There’s the expectation that their purpose is to ultimately help the country in which they invest. That being said, you know, one of the important things that I have [seen is that] the inherent challenge is dealing with their multiple roles. I think the more that can be done, to be explicit and clear as to what the mix of roles is, it’s probably going to be better in terms of making better investment decisions.

The one notable exception in the Gulf is Saudi Arabia, which hasn’t set up its own SWF. What do you make of that?
Well, I think it’s a great question and it’s an im-portant one. I don’t think, in terms of the evidence we’ve gathered today, we can say definitively one way or the other as to what the optimum way to organize these things are. I think it’s an issue we need to dig into and understand more.

You have observed severe downward trends with regards to the price-to-equity ratios of local investors. Can you explain why this has occurred?
In a sense, they are a victim of bad timing, which is to say that certainly it seems that the rate of investments by sovereign funds appeared to accelerate in recent years here. I think that if you look in many other regions you will see more growth, but a steady sort of growth. As you know, we’ve had this phenomenon in the last period, where the returns to emerging markets in general have been somewhat disappointing, to put it mildly.

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