INTRODUCTION: GLOBAL PUBLIC GOODS (GPG) AND THE BALANCE OF
PAYMENTS (BOP)
1.1 INTERNATIONAL ECONOMICS: A GLOBAL PUBLIC GOODS APPROACH
1.1.1. Public goods
Basic characteristics of a (pure) public good:
- Non-exclusion
- Non-rivalry in consumption
Global public goods = Originates from the concept of public goods in an international concept.
What are public goods? (Global public goods, for example reducing pollution)
Definition saying a public good has 2 characteristics (for example street lights)
- Non-exclusion: The normal price mechanism does not work as a way of regulating
access. Once this good/service is produced, you cannot exclude people from using it,
consuming, enjoying the good. Once it is there you cannot exclude people from the
benefits.
- Non-rivalry in consumption: (=non diminishable) It is not because I use the good,
someone else can’t enjoy it. It does not reduce your ability to have access to the good.
Most goods get smaller when they are consumed (like food), public goods do not.
Private goods, private market produced goods: produced by the market mechanism. Provides a
pricing mechanism for these goods. If you want to enjoy it, you have to pay for it. If you pay for
it and own it, it is no longer available for others to enjoy.
1.1.2. Quasi public goods
In practice: a lot of quasi-public goods (meets only one of these characteristics, like a club
good (=a membership of un)), or ‘joint products’
Common pool resources: Resources that people can consume freely, but there is rivalry in
consumption. For example fish, when someone fishes all of the fish, there is nothing left.
Club goods: A ‘club’ is formed and within this club everyone can consume the services
provided in the club in a nonrivalrous way. But people that are not part of the club cannot
benefit the services and are excluded. For example Netflix, you can only enjoy Netflix if you pay
for it, but there is no rivalry among all the people that pay for Netflix.
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,1.1.3 Free-rider problem
Free-riding: There is no motivation to pay for the public goods, because people cannot be
excluded from consumption. Which means that the non-excludable characteristic of the public
good leads to the problem of free-riding. The free-riding problem leads to a problem
concerning the supply of the good.
→ When this happens, the public good becomes under-provided or undersupplied.
Basic problem: underprovision due to free riding
Under provision due to free riding. Everyone wants them, but no one is prepared to pay for
them. The government can step in. The finance is from taxes. There is a mechanism where the
public sector intervenes. To guarantee this supply. You cannot rely on the market mechanism
for those things to automatically happen.
To overcome underprovision by ‘rules’, ‘institutions’
You can try to overcome this under provision due to rules, institutions... to produce this public
good. (for example the government)
Joint products: goods or services that can be or are produced by the market mechanism but
they have some public characteristics. Public transport for example. It is not 100% one of these
two. Use this concept from a more general perspective – goods and services that cannot be
liable produced by the market mechanism.
Link to global public goods.
1.1.4 Global public goods
Application to global context: global public goods (GPGs)
Global public goods are public goods that are not tied to the national boundaries of a state, but
are international and available on a worldwide basis. For example the need for clean air and the
problem of air pollution. It is not that if you do not pollute the air in your country, that you are
not hurt by the pollution, which can spread to other countries. This means that there is some
kind of international action necessary to cure these problems.
Sometimes a solution to these kinds of problems can best be found at a supranational / global
level. Therefore it is called a global public goods.
All countries are then hit by this problem, for example an international financial crisis. When a
financial crisis hits one country, it will spillover to other countries and become an international
financial crisis, and thus a global public bad.
You have a number of problems or goods that are transnational because they don’t stop at the
border. With globalization, more of these public goods that may first only be national are now
international, global. Some have always been global, like pollution, but some are new because
of globalization.
→ National organizations as providers of global public goods.
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,Some practical examples of global public goods are:
- The rules on trade: The WTO deals with the rules on trade. These rules apply globally
and are therefore available to everyone and nonrivalrous.
- International financial stability: the goal of the IMF is financial stability and thus tries to
prevent a global financial crisis from happening. This also is a global public good, as it is
nonexcludable and nonrivalrous.
1.1.5. Different technologies of provision
Different technologies of provision exist (e.g. summation, weakest link, best shot)
Different technologies to produce different global public goods (not all made the same way)
Technologies of provision = deals with the way or relationship between individual efforts. In
terms of adding to the supply of global goods. Relationship between the individual contribution
and the total supply of these public goods. Relation between individual and aggregate.
3 important things:
1. Summation
The total is just a simple sum of the individual. Example: pollution. The more individuals
prevent pollution, the cleaner the air gets. So if everybody makes an effort, even if it is
small, it will help in the total picture. The sum of the aggregate, is the sum of what we
all together do collectively, everyone matters, everyone counts. The more you do, the
better the results. It is important that everyone contributes.
2. Weakest link
You are just as strong as your weakest link (=lowest contribution), which determines the
total supply. For example - there are 10 people on an island that each own a piece of the
island, but there are no borders on the island. Everyone on the island is asked to build a
dam to protect the island from the sea. Some people build big dams, others build small
ones. However, there is 1 person that doesn’t care about the dam and doesn’t want to
spend money on it. In this case, the protection against the sea should have been the
public good. However, despite the high dams built by others the water still comes in and
will float the island due to the weakest link (who did not build a dam). This means that
in order to enjoy the public good, the focus should be on the weakest link, which needs
improvement. If you want to protect the world from a global financial crisis, you have to
make sure all the countries individually are stable. For example with the crisis of 2008,
the US was the weakest link and because of them there was a global financial crisis.
3. Best shot
The aggregate effect is determined by the effort of the one with the highest
contribution. When we try to find a new vaccine or a drug. How are we going to direct
our resources? With a best shot is most effective to target our contributions to the best
shot, one that has proven to have the biggest capacity, resources... We don’t have time
to spread our resources, and it is not efficient to do this. Must look at the best shot,
focus on the one with the highest chance, contribution. Give them the funds, it would
be a waste of money to spread it to different countries.
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, Some global public goods have always been global such as global warming but because of
globalization more public goods, that were national, are becoming global.
Optimal capital provision
- We cannot rely on the market mechanism to give poor countries the money they need
for their development. Cannot rely on private capital markets. Need an intervention that
cures, solves this problem of exclusion.
- You can frame the idea of development, aid... that provide financing from this global
public good. A cure for exclusion.
- WTO and IMF as global institutions where the mandate, objective can be clearly
translated into a public good.
1.2. THE CONCEPT OF THE BALANCE OF PAYMENTS
Balance of Payments (BoP): an accounting record (in monetary terms) of all transactions of
goods, services, income and financial assets between domestic households, businesses and
government of a given country and residents of the rest of the world during a specific period
(usually 1 year). Thus, the balance of payment is a sum of all the cross border transactions for a
particular period.
Example of Tanzania
All the residents of a particular country (so not nationality but residents!!)
→ To show the particular set up of a developing country versus the rest of the world
→ All domestic internal transactions are not looked at
→ All cross border transactions between a particular country and the rest of the world for
example the balance of payments of Tanzania = all the cross border transactions between
Tanzania and the rest of the world
1.2.1. The composition of the balance of payments
The balance of payment is divided into 3 separate parts: the current account, the capital
account and the financial account. The most important are the current account and the
financial account. Goods and services are important for the current account, whereas the
capital and the financial account are the primary record of the international flow of financial
capital and other assets.
BoP ‘identity’: Current account + capital (and financial) account = 0
This is always zero but the current and capital account can be different numbers, you can have
deficits in either but the total is always zero, one is the flipside of the other
Current account + Capital account + financial account within de BoP
The financial account is now strictly speaking the one we’re the most interested in because
there the financial transactions are discussed
→ Capital openness refers to transactions that you now find at the financial account of the BoP
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