Monday, July 10, 2006

The New Public Finance: Responding to Global Challenges

June 22, 2006 4:00-6:00pm

Speakers: Inge Kaul, Special Advisor, Office of Development Studies, UNDP
Pedro Conceicao, Acting Director, Office of Development Studies, UNDP
Nancy Birdsall, President, Center for Global Development
Steve Radelet, Senior Fellow, Center for Global Development


Inge Kaul and Pedro Conceicao presented their new book, The New Public Finance: Responding to Global Challenges, a compilation of papers about public finance in an increasingly interconnected world. As Inge Kaul explained, the book began as a survey of textbooks on public economics and finance. Surprisingly, almost all of these textbooks were based on a closed economic model. In reality, the world does not operate in closed economic models. This book examines how public finance and policy has changed with the opening of markets.
In their research, Kaul and Conceicao discovered that public finance has changed, and governments are adapting their policies in encouraging ways. For one, governments are increasingly blending domestic and external policy preferences. In an increasingly interconnected world, external political pressures –global companies and NGOs, for example- are forcing states to consider global preferences. As a result, nation-states are acting as “intermediary states”, representing both national and global interests.
Increasingly, governments are cooperating through market mechanisms. These mechanisms allow governments to bypass bureaucratic intergovernmental organizations and supernational mandates. For example, governments engage in risk-sharing techniques through markets. This risk sharing replaces self-insurance, an inefficient practice that hinders governments’ growth potential. Pedro Conceicao referred to GDP-indexed bonds as an example of risk sharing through markets. Governments can issue these bonds to protect themselves from default during a recession without stockpiling enormous cash reserves.
Next, IGOs are adapting to globalization by creating new financing actors and taking advantage of new financial tools. New actors, including global funds for international issues and public-private partnerships, allow IGOs to address issues on an international scale. New financing opportunities, such as advanced purchase commitments, also improve the international community’s ability to address global issues. Advanced purchase commitments are guarantees by governments to purchase a product that has not yet been developed. For example, governments might promise to purchase the first $3 billion of a Malaria vaccine, even though no vaccine exists today. Right now, pharmaceutical companies will only develop a drug for the developing world if there is a market, and markets can only exist if a drug is available for NGOs or governments to purchase. Advanced purchase commitments guarantee a market, thereby encouraging pharmaceutical companies to develop the necessary drugs.
Despite the new public financial system’s potential benefits, this new system has significant drawbacks, as Nancy Birdsall pointed out. For example, even with the expansion of intermediary states and public-private partnerships, the international community still does not cooperate on many key issues for developing countries. Also, when global public goods are under funded, developing countries, and the poor in particular, are hurt more than developed countries. Additionally, aid institutions must ensure their aid is working to build capacity in developing countries, not creating dependent welfare states. Finally, states experience collective action problems. States do not want to act unilaterally or first, and many projects stall because no one is willing to take the first step. Thus, the new public finance system could potentially benefit the world, but the system still faces many obstacles.

by Adam Perry

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