Investing in public goods

Investing in public goods

D.A. Simarmata, School of Economics, University of Indonesia,
Jakarta, matabm@centrin.net.id

Global Public Goods (GPG) comprise many aspects, namely
climate, atmosphere, rain forests and biodiversities, health,
science, financial stability, global justice and peace, and so
on. Investments in most of these activities, such as in the
preservation of the environment and human capital formation bring
results in the long run, in contrast to the quick-yielding
industrial sectors. Hence the GPG needs long-term investment.

Unfortunately, short-term investments are increasingly
dominating the flow of capital on the global scale, at the
expense of long-term capital. The current global financial
architecture defends it, presenting arguments on the benefits of
the free flow of capital, and neglecting its potential negative
effects. Recent crises in Asia have strengthened an opposing
attitude to the old credo investments, favoring short-term
capital rather than foreign direct investment (FDI).

From the other side, the criteria of capital adequate ratio
(CAR) from the Bank for International Settlement (BIS) specifies
that the shorter the duration of the loan, the lower its weight
in the determination of the minimum capital requirement for a
bank. Lower CAR is equivalent to higher potential profit for the
bank operation. Institutional investors and mutual funds have a
huge amount of money at their disposal.

For these institutions, a small difference in real interest
rates on investments in different countries could generate a
substantial amount of money in return. US$ 1 billion will bring
in $1 million per year if there is a difference of 0.1 percent in
interest rates. Each country has its own internal dynamics with
interest rates, making the existence of a real difference between
one country and another highly probable. All these have mutual
reinforcing effects for the growing preference for short-term
capital, mostly related to the movements of huge sums of money.

The Bretton Woods Institutions, namely the International
Monetary Fund (IMF) and the World Bank are the main avant-garde
of the free flow of capital. The latest financial crisis in the
East Asian countries is mostly attributed to these phenomena,
notwithstanding other factors, as the lack of democracy the
inadequacy of financial institutions, the widespread corruption
practices in the business communities, and so on.

The crisis of 1997 has resulted in a sudden explosion in the
number of poor people in Indonesia. All these have further
negative consequences on the environment due to unavailability of
funds for poverty alleviation and the environment. The government
has to run budget deficits due to the dwindling tax base while at
the same time the foreign creditors reject any cancellation of
debt payments, disregarding its impoverishing effects on the
population and the devastating environmental impact. Contrary to
its charter, the IMF has been working primarily at the service of
foreign creditors, neglecting its main reason for existence, to
improve global welfare.

One of the main sources for sustainable development,
preserving the ecology and environment in general, is the
official development assistance (ODA), with its concessional
interest rates and long-term commitment. But the volume of ODA
declines, in contrast to the ever rising demands for the
environment and ecology, components of GPG.

In 1992, the UN Conference on Environment and Ecology (UNCED)
estimated that it would require $600 billion per year to
implement Agenda 21 in developing countries, including $125
billion in grants or concessional terms from the international
community. Regrettably, in the year of 2000 net ODA from the OECD
countries amounted to only $53.1 billion, including contributions
to the Global Environment Facility (GEF).

The configuration of regional and national environments and
ecology encompassing biodiversities all over the globe are the
constituting elements of global environmental architecture. The
main problem of global sustainable development is to obtain
sufficient funds from global financial architectures to be used
for environmental undertakings. How should the global financial
architecture be suitably designed to meet the demands of the
global environmental architecture in harmony with the economic
growth objectives.

The world capital flows to the emerging markets are dismal.
The publication of the Institute of International Finance, Inc.
on April 22, 2002 shows that the FDI flows for this year are
expected to decline to $ 117 billion from $ 140 billion in 2001.
The net portfolio investments to Asia are expected to rise to $16
billion this year, compared to only $13 billion last year. The
latest data shows the prevalence of private capital flows in the
world, in contrast to what happened some years ago, where it was
still dominated by the official capital flows.

Now the private capital flow dwarfs the official capital flow,
with a high preference for short-term capital. In terms of its
effects, anyone familiar with the monetary theory will be quickly
aware of the analogy between bad money and good money issues. Bad
money drives out good money, and short-term capital drives out
long-term capital. This is exemplified by the above information
from IIF.

What is to be done? The world community has to be aware of the
threat of environmental and ecological damage on humanity. Any
local ecological damage will end up having a global impact. The
forest fires, for example, first considered a local occurrence,
ended up worsening global warming. Many signs of global warming
effects have manifested in the recent climate irregularities.

Mankind needs immediate global actions rooted in the local
dimensions to save our planet. One of them is in the field of
financing. An adjustment of the global financial architecture to
the global environmental architecture is urgently needed, and the
limitation of short-term capital is a suitable step in that
direction.