Summers Talks Ec in DC

WASHINGTON—Former University President Lawrence H. Summers argued that developing nations should invest more of their foreign exchange reserves in equities, rather than relying on U.S. treasury bonds, in a speech at the World Bank last week.

His speech, entitled “Almost a Free Lunch,” drew a standing-room only crowd to the bank, located in the heart of Washington D.C.

Summers said that the world’s developing countries currently hold at least $1.5 trillion in excess reserves beyond what they need to cover short-term debt.

“It is, I think, not an exaggeration to assert that holding all of those assets in the form of U.S. treasury bills...[is] financial malpractice,” he said.

While the real return for most central banks’ portfolios has historically averaged less than 2 percent, major pension portfolios—which typically have significant stock holdings—average close to 6 percent real returns each year, Summers said.

By buying fewer risk-free treasury bonds and carefully investing in riskier stocks, Summers suggested that countries could derive increased revenue from their reserves, a nearly “free” source of extra funds.

Summers said that one of the reasons developing countries do not currently pursue smarter investment strategies is that the leaders of central banks are afraid to take on much risk.

“If I am a central banker and I choose to invest my reserves more aggressively and I am successful...[most people] will never know what I did,” he said. But if those investments fail due to a weak market, central bankers face “substantial career risk.”

Summers made scattered references to Harvard during his speech, primarily through comparisons between the way Harvard’s endowment is managed and the way central banks manage their reserves.

But, when discussing “the risks of politicization of the investment process,” Summers made no references to the 2005 divestment campaign that led Harvard to sell its shares of a Chinese oil company, Sinopec, with ties to the Sudanese government. Instead, he mentioned issues like pressure for fund managers to avoid investments in tobacco companies, and suggested that countries could invest in index funds to avoid political problems.

This speech was not the first time that Summers has called for developing countries to invest their reserves more aggressively; he made the same argument in March while travelling through India.

When asked what feedback he has received since March and whether he has revised his argument much since then, Summers said that he has been busy, “either completing my presidency at Harvard...or recovering from my presidency at Harvard,” a remark that drew laughter from the audience.

—Staff writer Evan H. Jacobs can be reached at ehjacobs@fas.harvard.edu.