Debate

UNDP: options for global policy-making

Hunger in Africa: neglected farmers

Clashes within civilisations


03/2006		  

[ Interview with Inge Kaul, UN Development Programme ]

“Options for efficient policymaking”

While public purses are becoming tighter, global problems such as avian flu, climate change or terrorism are growing. The UN Development Programme (UNDP) believes that a new understanding of public finance is needed for humankind to find its way out of this dilemma. The boundaries must blur between public and private, domestic and international finance.

To some extent, the boundaries are already blurring, as is evident in the case of public-private partnerships. But many other innovative tools to improve risk management and fund public tasks are still unused, says Inge Kaul, policy adviser and former head of the UNDP Office of Development Studies. Together with two dozen other international authors, Kaul has outlined these tools in a new book entitled “The New Public Finance”.
– To promote research on malaria vaccines, the international community could commit to purchasing such medication in advance. Doing so would give an incentive to pharmaceutical companies to invest more.
– Indexing state loans to a country’s gross domestic product would reduce the burden of debt in times of poor growth and serve as protection from financial crises.
– Securitising future transfers from migrants would give developing countries access to more affordable credit on capital markets.
Other proposed mechanisms include global trading in emission rights or public guarantees for private investment in developing countries. According to the authors, such measures could yield up to seven trillion dollars, which would reduce the pressure on public budgets and give new scope to policy-making.

Ms. Kaul, according to The Independent, a British daily, you have come up with a plan to solve the world’s most pressing problems in a single stroke. Do you agree?
No, I don’t because I don’t like our book to be called a plan. Our main argument is that many market products are available today. Governments could use them in order to achieve their policy goals. In that sense, what we suggest are options, not a plan.

You mention an amount of up to seven trillion dollars in untapped wealth. That statement will arouse high expectations. Do you stand by this claim?
Let me clarify the point. We are not talking of money that will suddenly become available in an account somewhere. We are talking about avoiding costs by implementing policies of crisis-prevention rather than merely reacting to crises as they occur. The sum includes welfare gains accruing from the absence of such crises, which would otherwise disrupt growth.

According to your book, the suggestions are neither new nor revolutionary, as most have already been applied. Does that mean the international community is on the right track in dealing with global problems?
No, it does not. While most of the tools we mention are indeed already available, they are not yet common practice. When a problem arises, it is normally said that we face a lack of resources. Next, a donor conference raises funds and throws money at the problem. What we are saying, however, is that we must prevent crises from occurring in the first place, by better managing the risks. For example, we need to raise awareness of the fact that people today should insure themselves not only against fire and sickness, but also fluctuations in income.

Where do we need to catch up the most?
The public sector must accept that the market has moved on, that it is no longer what it was in 1950. Public-sector leaders must improve their ability to assess the relevant competencies of the public and the private sectors. Let’s take public-private partnerships as an example. The state must regulate partnerships with business more efficiently. This is true for advanced as well as developing countries. If governments sign inadequate contracts, private companies will get the most of them.

To sum up the fundamental criticism of PPPs, private companies often assume free-rider positions, while consumers suffer from increasingly poor services.
Don’t lose sight of the fact that we are also dealing with new technologies. To us, public finance is about more than just managing money, it is also about improving tools. Our book doesn’t deny that there are problems with PPPs, for instance in the UK or the USA, where PPPs are particularly common. However, our response should not be to categorically dismiss such partnerships. Instead, we must keep working on making them operate better.

You begin your argument by stating that public finance is increasingly geared towards efficiency criteria, and the boundaries between public and private finance are becoming blurred. But there is no natural law for that to happen. The process is intentionally brought about by policymakers.
Our book is an appraisal of recent trends. If you don’t like them, you’ll have to change policy. But you will only be able to do so if you know the trends. Our intention was to point out where we stand in regard to dealing with global problems, and what tools and mechanisms could be applied. We did not want to give instructions on doing this or that. We’re not saying globalisation should evolve this or that way. You won’t find a single sentence in the book that starts with, “One should”. We simply examine what is going on. We emphasise that how we handle our public assets should be decided by our political leaders. If they do not make the decisions, someone else will. Markets, for instance, are good at identifying lots of new product niches.

You suggest setting up an international public-private Finance Council. Would that be a kind of world executive board in charge of handling global problems more efficiently?
We were thinking more of an innovation council. We see that policymakers sometimes need a little pressure before they embrace innovation. In dialogue with private-sector leaders, they will better understand how market-based tools such as advanced purchase commitments or GDP-indexed loans actually work. Such advice would also help to build up mutual trust.

Drawing attention to innovations is one thing. But it is tangible political interests that influence the definition of global problems and the allocation of funds. Aren’t such interests underexposed in your book?
We are mainly concerned with implementation, once a certain policy decision has been made. We point out new, viable options. We dealt with the question of policy priorities in 2003, in our previous book “Providing Public Goods”.

In other words, you assume policy changes accordingly.
That’s right, our current book does not make statements about what should be done, but how certain goals could be achieved.

Doesn’t that make your suggestions somewhat impractical?
I don’t think so. For instance, there is consensus that financial crises are very costly and should be avoided. We suggest GDP-indexed loans as a means to do so. Our book only deals with generally acknowledged problems.

The problems may well be acknowledged, but political reality hardly changes. You suggest better harmonisation of taxation, for instance, but non-governmental organisations have in vain been demanding that for years.
That is correct. Progress in this area happens to be very slow. The reason is that taxes are central to the traditional understanding of state sovereignty. However, progress was very fast when safety standards at airports were at stake in anti-terrorism measures. International agreement was reached virtually overnight. Increasing taxes, on the other hand, involves so many different aspects, that there are good reasons for making decisions primarily at the domestic level. Incidentally, another message of our book is that political reality is not at all stupid. The political process leads to perfectly sensible decisions.

You suggest that more emphasis should be placed on the benefits efficiently providing global public goods would bring about. Such progress often only result from long-term efforts, whereas politicians typically think in short election terms.
When I say that political reality is not stupid, I am assuming that enough pressure is brought to bear on policymakers. The state today is under considerable pressure from outside as well as from inside. Governments must mediate between both forces. If they adapt to pressure from outside – from the markets, for instance – doing so will open up new possibilities. However, they should not align themselves too closely and risk giving up too much. This is why civil society groups are so important, they are pushing in the opposite direction. There are many options for making global policy today, without the state going overboard. We suggest various options in our book. Now it is up to the right people in the right places to adopt them.

Questions by Tillmann Elliesen.

Dr. Inge Kaul
is a policy adviser and former director of the Office of Development Studies at the UN Development Programme in New York.
inge.kaul@undp.org


On the Web:
http://www.thenewpublicfinance.org