When something useful is invented, value is created. The value from the creation is not just in the profits made by making and selling the item, but also from the value of the intellectual property (IP) behind it. The IP is the ownership of the design and the right to do things with the design in the future.
Apple invented the iPhone, and value was created. Foxconn is paid by Apple to make the iPhone for Apple in China. To the extent that customers pay more to Apple for iPhones than Apple pays to Foxconn, Apple makes money. While this moneymaking is going on, Apple is growing in value partly because it makes money on each iPhone, but also because it owns the rights to do whatever it wants with the iPhone in the future.
This creating value from thin air, as Apple did with the iPhone, is what distinguishes the US economy from others. The US is uniquely good at creating value from nothing. The split adjusted price for Apple stock on the day before the iPhone was introduced was $3.04 per share. It has grown 57X since then to $175.43 today.
While it can seem similar, the value created from inventing something is quite different than that day in 1962 when Jed Clampett found oil in his back yard. It is true that the Beverly Hillbillies got rich and Steve Jobs also got rich, but owning the rights to extract oil from the land is more like finding a warehouse of iPhones in your backyard. You can make piles of money by selling them, but when they run out, or when no one wants them anymore – the party is over.
And while selling the found iPhones and getting rich, no one learns how to find other piles of iPhones, or learns how to invent an iPhone, or build a creative enterprise that would soon invent the next iPhone.
This is the problem the countries of Western Asia (what we used to call the Middle East) have been working on for many decades. In 1953, the Kuwait Investment Authority was created as the first sovereign wealth fund. The objective, even then, was to help Kuwait transition from an oil exporting economy to a newer and more stable source of income. Seventy years in, 60% of GDP and 95% of exports are still attributed to the oil sector.
When extracting oil costs $10 or less per barrel, and the market commands over $75 per barrel, it is nearly impossible to diversify – even with the money pile getting bigger and bigger.
Other oil rich countries in the region have similar goals, and similar piles of cash. Four of the top 10 sovereign wealth funds* are in oil rich countries from the Arab World:
Kuwait Investment Authority (#3): $693 billion
Abu Dhabi Investment Authority (#4): $649 billion
Public Investment Fund of Saudi Arabia: (#9): $430 billion
Investment Corp of Dubai (#10): $422 billion
In the early years the focus was on infrastructure projects and real estate investments inside the countries and institutional grade investments outside of the countries. These organizations changed their approach about 10 years ago and started buying up sports teams and hosting sporting events.
While the rest of the world now braces for recession, these countries are expecting record growth, and are getting into position to step in when others are stepping out. They employed a similar strategy during the 2008 financial crisis, and have only gotten more sophisticated since. Mubadala, another fund from Abu Dhabi, has grown from $15 billion in assets during the 2008 cycle to 50 offices worldwide and $284 billion now.
The Saudi’s Public Investment Fund took a $3.5 billion stake in Uber in 2016. The Emiratis and Qataris each invested $200 million with Jared Kushner, only to be outdone later when the Saudis put up $2 billion.
Other investments from the Arab World include:
Qatar bought Paris Saint-Germain and Tottenham Hotspur
Abu Dhabi bought Manchester City
The Saudis created their own Saudi Professional League (Cristiano Ronaldo joined Al_Nassr)
Qatar hosted the World Cup 2022 (reportedly spending $220 billion)
Formula 1 has added events in Bahrain and Jeddah
It is not always obvious how these acquisitions translate to a sustainable and diverse economy; however, one pattern is emerging. When the creative economies create assets from thin air, the Sovereign Wealth Funds from the Arab World are increasingly interested in buying them.
*Sovereign Wealth Funds are investment organizations controlled by governments — usually charged with doing something will the money generated by extracting natural resources.
Links and Resources
Sovereign Wealth Funds: https://moderndiplomacy.eu/2022/07/04/the-rise-of-the-sovereign-wealth-funds-and-how-they-are-affecting-global-politics/
State of Kuwait Economic Diversification: https://oxfordbusinessgroup.com/reports/kuwait/2016-report/economy/gaining-momentum-a-programme-of-economic-diversification-under-way-should-invigorate-the-private-sector
Kuwait Investment Authority Website: https://www.kia.gov.kw/press-room/
FT on SWF Growth: https://www.ft.com/content/33a985a5-6955-4f44-869f-82e82e620581
NY Times on Kushner deals: https://www.nytimes.com/2023/03/30/us/politics/jared-kushner-qatar-united-arab-emirates.html
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