The Great Game Again?

• Author: Raghuram Rajan
• Position: Economic Counsellor and Director of the IMF's Research Department

Countries seeking economic security by acquiring commodity producers risk violating good business sense

Some commentators see the desperate search by countries to acquire commodity-producing firms in other (typically poor, developing) countries as a repeat of the Great Game-the tussle among powers like Britain and Russia for influence in the Middle East and Central Asia during the 19th century. In this view, those that acquire the greatest share of commodity producers early on will enjoy the greatest economic security in the future, as growth in China, India, and other populous developing countries creates shortages of commodity resources. Economic security is the new justification for purchases, such as minority stakes in opaque companies in poorly governed countries, that would otherwise make little business sense. In this replayed Great Game, will those who move fastest and farthest acquire the most economic protection? Does the gain from economic security trump common business sense?

A questionable buying spree

I'll leave aside the question of whether we're inevitably headed for a sustained period of commodity demand outstripping supply, even though in the past such predictions have proved unfounded. Let me take as given that such an eventuality is possible. To simplify the argument, I'll assume that state-owned companies undertake the acquisitions and that all income and value obtained flow directly to the citizens of the acquiring state-a questionable assumption at best. Even under these strong assumptions, should a country go on an acquisition spree to protect itself?

Precisely how an incipient imbalance between demand and supply would play out matters. Consider the most likely situation, where a world market for a commodity-let's use the example of oil in what follows-continues to operate. If there's an incipient imbalance and oil is in fixed supply in the short run, the market price for oil will shoot up so that demand is brought down to equal supply.

How does ownership of foreign oil assets help? One might think that a country that owns foreign oil can use the profits from sales to keep its domestic price low and thus insulate the economy from high oil prices. But this doesn't make economic sense. The market price of oil reflects its opportunity cost. Rather than subsidize the price in the domestic oil market (and thus give domestic manufacturers and consumers...