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.