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Review by Financial Times
Page 8, May 11, 1999

Turning Economic Understanding into a Public Good

By Andrew Balls in London

"Externalities" and "public goods" are central ideas in economics. It is worth spreading them beyond those who have learned the jargon in economics classes to the people who do the things that the concepts help explain, says the UN.

The idea of public goods (and bads) "should be shared beyond the specialized, rarefied circles of micro-economics and introduced into the vocabulary of those who grapple daily with real-world challengers", the United Nations Development Programme says in a book published yesterday.

An externatlity arises, when an individual's (or group's) action affect others. Externatlities can be good or bad: pollution is a negative; creating widely applicable knowledge is a positive.

A public good is a special category of externality. It is a non-rivalrous (my consumption of it does not affect yours) and non-excluded (nobody can be excluded from consuming it). National defense is an obvious example.

The editors of the book say the world leaders have not kept pace with the globalization of financial markets and problems that call for greater international co-operation. They argue that there is a discrepancy between the global boundaries of today's main policy concerns and the essentially national boundaries of policymaking.

This many of the crises dominating the world's public goods (and bads) which are non-excludable and non-rivalrous on a global scale: financial stability and systemic risks, free trade, environmental sustainability, knowledge and communicable diseases.

The market alone will tend to under-supply public goods, because people and countries can "ride free", and over-supply public bads. because people and countries do not individually bear the cost.

The report comprises essays and case studies by 30 academics and development professionals, including Joseph Stiglitz, the world Bank's chief economist, Robert Lawrence, the US Council of Economic Advisors' chief economist, Jeffrey Sachs, director of the Harvard Institute for International Development and Amartya Sen, Nobel prize winning economist.

Co-operation must be of a new type, the report says: "Not just co-operation that keeps global public bads at bay (until they reach crisis proportions) but co-operation that centers on creating global public goods..."

The report calls for countries to act at the national level to maximize internal public goods.

For example, international financial stability requires that all countries ensure that their financial systems are sound and well-supervised.

It proposes that countries would have to qualify for full participation in the international financial market in the same way as counties apply for membership of the World Trade Organization.

Other policy proposals include:
- Preparing national externality accounts. For there to be effective international co-operation and debate, the report says countries need to know the nature and level of the externalities they produce and receive.

-Placing greater emphasis on "internalizing" cross-border spill overs. For example, when dealing with diseases, often the most effective measure is to do more about it in the poorest countries, the weakest in the chain.

-Strengthening regional co-operation. A bid short coming of the International Monetary Fund and the World Bank, Jeffrey Sachs writes, is that they are country-focused. Externalities are addressed only when a crisis has occurred.

-Improving existing international institutions. The report proposes a participation fund, self-administered by developing countries, to allow them to enter into international negotiations on a more equal footing. It also proposes a "knowledge bank" to assemble, store and disseminate knowledge of special relevance-for example scientific research - to developing countries.

"It is the self-interest of the international community to assist developing countries not only because they are poor but also to enable them to make their contribution to the provision of essential global public goods." the report says.

Nation states will suffer continuing erosion of their capacities to implement nation policy objectives unless they take further steps to co-operate in addressing international spill-overs and systemic risks, the report concludes.

Global Public Goods - International Co-operation in the 21st Century. http:// www.undp.org/globalpublicgoods

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