International public finance cannot be replaced by private money
Jayati Ghosh (Guest contributor)
Professor of Economics, University of Massachusetts, co-chair of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), member of UN High Level Advisory Board on Multilateralism (HLAB)
Jonathan Glennie
Author, “The Future of Aid: Global Public Investment”, Co-Founder, Global Nation
This article is one of over fifty contributions in a forthcoming report, Time for Global Public Investment: Leaders and experts rethink development finance, to be published in September.
Everyone now seems to recognise that the urgent and complex challenges the world faces today require international cooperation and much more finance. We need not just billions but trillions of dollars to overcome threats to our survival and wellbeing, and to build the world we want. But the very scale of the requirement has been used to reduce the focus on public spending. It is argued that public resources for international concerns are scarce and inadequate, so private finance – which is already much larger in volume – must be the driving force for development and climate change alleviation.
This simplistic analysis must be revised. Obviously, all sources of funds – from domestic taxes to philanthropic funds and remittances, and very much including private finance – need to be maximised if the world is going to get anywhere near meeting the Sustainable Development Goal (SDG) targets. Financial assets held by financial corporations alone amounted to more than USD 500 trillion in 2020; an equivalent amount was held by households, governments and non-financial corporations. Reorienting even a small proportion of these resources towards sustainable development objectives could have an enormous impact.
But a logical fallacy seems to have taken hold. Just because other sources of finance are increasingly important, it does not follow that international public finance ceases to be important at all. In fact, the role of international public finance remains not just significant but irreplaceable.
All dollars are not equal. Private money cannot simply replace public money as some appear to hope. It is not just the quantity of money that matters; the type and quality of money are just as important.
Private investment (other than charitable initiatives) is essentially designed to maximise monetary returns: that is its purpose and determines its orientation. Yet there are many important avenues of investment that are unlikely to yield much – if anything – in the way of monetary profits. This is true of most public goods (think of streetlights or public health interventions) and merit goods (such as education) – both tend to have high positive ‘externalities’ that benefit society more than an individual investor or recipient.
A very large part of the investment required to meet the SDGs falls into one of these two categories. This means that governments have to spend to ensure such investment, either directly or through directing market-based investments through incentives or regulation. In many cases, it is more impactful and more cost-effective for governments to undertake this directly through public investment.
The differences between public and private money at the country level are generally well understood. No one would ever argue at the national level that public money is interchangeable with private money because it is recognised that different types of money lead to different outcomes. Private finance does a poor job at financing public goods; it is not oriented to meet social goals or link strongly to human rights. Such investment, for example in health and education, is therefore typically underprovided by private players, especially in low- and middle-income countries – and needs to be guarded as a crucial resource precisely because it is so scarce.
This is just as true at the international level. Precisely because it is scarce yet crucial, international public money needs to be nurtured, defended and increased. That reality is at the heart of the movement for Global Public Investment (GPI). This is a new approach to concessional international public finance for sustainable development. It moves away from the outdated, patronising and increasingly irrelevant language of ‘foreign aid’ to a new framework of international fiscal cooperation, which requires participation from all countries. In this model, all countries pay in and all benefit because such investment is for meeting common global goals.
GPI’s unique combination of characteristics makes it a critical and essential response to the challenges of the 21st century:
Motivation. While private investment is oriented towards benefiting the investor (whether a household or a firm), the primary purpose of public spending is to benefit society as a whole, not individual profit. With global investment, that purpose extends to global and planetary goals.
Accountability. Every different source of development finance has its own form of accountability. Private funds need to generate profits for business owners and shareholders. Philanthropic funds need to satisfy those providing the money, be they billionaires or the general public who just give a few coins passing by a collecting tin. Domestic public finance is accountable to domestic taxpayers. GPI is different: its accountability trail can pass through implementing organisations to elected politicians and finally to taxpayers again, but this time of other countries. This requires that decisions are made as fairly and expertly as possible, privileging global social interests and those who really need it. This in turn requires different governance structures, to help manage complex mixed motivations and to hold powerful decision-makers accountable.
Flexibility. It is now common to hear of the near impossibility of raising levels of international public finance, which then makes relying on increases in private flows a foregone conclusion. The reality is that private finance for global requirements is even harder to come by, and increasingly requires massive incentives and ‘derisking’ that often costs public exchequers much more than direct investment. In addition, private capital flows tend to be procyclical, drying up or reversing in periods of downswing or in response to shocks. By contrast, international public finance can perform an important countercyclical function, especially if it is mobilised at scale and with speed.
Concessionality. The OECD has recently changed its definition of ‘concessional finance’ to a more complicated one, but most other countries don’t use it and tend to be quite opaque on the terms of their financial transfers. The result is confusion. Concessional should mean free: non-reimbursable, not seeking a financial or political return of any kind, but simply financial provision for the good of the peoples of the world.
These particular characteristics make international public investment probably the single most important source of finance for common global social and planetary goals – and this applies to all countries, no matter what size their economy. This is an idea whose time has come; now we need the political backing to make it happen.
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