Comment on "The Growing Importance of Regional Public Goods by Marco Ferroni"
Paper for conference on "Financing for Development: Regional Challenges and the Role of Regional Development Banks"
© Peterson Institute for International Economics
Ferroni's paper on regional public goods (RPGs) raises some essential issues with respect to the role of regional development banks in the financing of RPGs. The current focus of the donor community on global public goods (GPGs) for development, spurred by globalization, appears to ignore RPGs. At this juncture, an empirical breakdown of official development assistance into support for national public goods (NPGs), GPGs, and regional public goods (RPGs) is not available (see, e.g., Hewitt, Morrissey, and Willem te Velde, 2001). However, regional aid unallocated by country is a tiny faction (less than eight percent) of regional assistance, thus suggesting that most support go to NPGs and other forms of country-specific aid (Cook and Sachs, 1999, p. 444). This apparent lack of attention to RPGs is particularly ironic, because there are far more examples of RPGs (e.g., energy grids, waterways, peacekeeping operations, pest control, forest fire suppression, healthcare infrastructure, curbing acid rain, geoclimatic-specific agricultural research) than truly global public goods (e.g., eliminating polio, curbing global warming) (Arce and Sandler, 2002; Kanbur, Sandler, with Morrison, 1999; Sandler, 1997, 1998, 2002). RPGs are also more prevalent than interregional public goods, whose benefits affect two or more regions (e.g., transtropical public goods) but not the entire world.
Ferroni's message is that a division of labor among the global multilaterals and the regional development banks is necessary for effectively supporting public goods. This message must be taken seriously if foreign assistance is to have the greatest impact possible as some portion of this assistance is directed to supporting public goods. In making his case, Ferroni follows the lead of the Global Development Finance report (World Bank, 2001) and appropriately distinguishes between core activities that provide GPGs and RPGs directly and complementary activities that allow developing countries to absorb these RPGs. Parts of those complementary activities include NPGs in the form of education, healthcare infrastructure, Internet connectivity, and national institution building. Ferroni also makes a crucial distinction with respect to the financial instruments for funding these activities - i.e., loans for complementary activities with little regional benefit spillovers and grants for core activities with significant regional benefit spillovers. For core activities, grants are required to motivate recipient countries to account for the benefits that the supported RPGs confer on other nations.
Regional development banks are uniquely positioned, as shown below, to assist in the financing of RPGs. Not only can these banks coordinate diverse donors - for-profit corporations, not-for-profit firms, charitable foundations, donor countries, nongovernmental organizations (NGOs) - but they can also foster partnerships and networks for the provision of RPGs and complementary activities. Like their global counterpart, regional development banks can collect and disseminate information on RPGs.
The Challenge Posed by RPGs
To an untrained eye, RPGs appear to present an easier collective action problem than GPGs, because there are fewer nations involved (Barrett, 2001). Group size is, however, just one consideration when assessing collective action difficulties (Sandler, 1992, 1997). There are a number of factors that inhibit the financing of RPGs relative to GPGs. First, donors have a greater experience in supporting NPGs and GPGs as recent statistics suggest. Second, a culture has developed where donors are comfortable in giving loans or grants to nations to support development-enhancing NPGs, or donating to global multilaterals (e.g., the World Bank, United Nations) to finance GPGs and other transnational public goods (TPGs) with wide-ranging spillovers. For loans for NPGs, donors can hold the recipient country accountable; for support to world bodies, donors can rely on these bodies for a subsequent accounting of the funds. RPGs fall between the chairs, because loan contracts written to a group of nations are difficult to draft and even more difficult to enforce. Additionally, many regional bodies in the developing world, though maturing, are still comparatively weak compared with their counterparts (e.g., European Union) in the developed world. Third, unlike GPGs and TPGs with their wide-ranging benefit spillovers, RPGs may not provide any direct benefit spillovers to donors, and this factor limits donors' altruism. For example, the curing of an infectious disease - a GPG - that poses a threat to developed nations mobilizes actions to limit the disease's foothold in developing countries. Consider the successful international efforts, coordinated by the World Health Organization, to eradicate smallpox. RPGs do not provide similar spillovers, so that donors may be less motivated. Fourth, many regions in the developing world do not contain a wealthy dominant nation that can spearhead the requisite collective action for RPGs. Fifth, rivalries among nations at the regional level in these developing areas can block localized actions to fund RPGs (Arce and Sandler, 2002; Cook and Sachs, 1999; Stålgren, 2000).
If efforts to support these RPGs are to be fostered, than these collective action difficulties must be overcome. Intervention by institutions and coordination of potential supporters of RPGs are required to address such difficulties. Although RPGs have received relatively scant attention by the international community, the same is not true of the academic community, as the references herein indicate. Earlier pieces by Sandler and Sargent (1995) and Sandler (1998) focus on the subtleties of collective action problems associated with RPGs in contrast to GPGs. These papers also indicate those cases involving RPGs where intervention may or may not be needed.
The Role of Regional Development Banks
Clearly, a division of labor must form between global multilaterals and the regional development banks in their support of development-enhancing public goods with alternative spillover ranges (Kanbur, Sandler, with Morrison, 1999; Ferroni, 2002). This key message cannot be emphasized enough. From an institutional perspective, the comparative advantage of alternative institutions needs to be exploited to limit transaction cost and to maximize allocative efficiency. As a first cut at this labor division, the World Bank, UN Development Program, and other global institutions should support TPGs, including GPGs, whose benefit range exceeds that of a region. Transtropical public goods, such as population control and curing malaria, represent examples of these TPGs. In contrast, regional development banks should support RPGs, whose benefits are primarily confined to their region. If, for some TPGs, contiguous regions constitute the range of benefit spillovers, then networks involving these neighboring regional development banks may be best relied upon to finance the public good. For noncontiguous regional spillovers, the global bodies should assist in the financing of the TPGs.
Greater reliance on these regional development banks for financing RPGs fosters efficient allocation of resources in a number of ways. First, regional development banks are better equipped to acquire the knowledge of the potential recipients' tastes for RPGs and their absorption capacity. These regional development banks are positioned through their support of complementary activities to know how prepared their client states are to take advantage of RPGs. Second, as Ferroni (2002) indicates, regional development banks have displayed a real willingness, in terms of past contributions, to support RPGs - the track record is there. Third, with fewer participants at the regional, than at the global, institutional level, transaction costs are saved. Fourth, repeated interactions among regional development banks and their client nations also limits transaction costs by reducing asymmetric information and building trust. Fifth, regional development banks have a greater propinquity in space and culture with their recipient nations than is true of their global counterparts. Sixth, and of utmost importance, these regional development banks have a familiarity with emerging regional trade pacts - e.g., Mercado Commún del Sur (MERCOSUR), Andean Community, Central American Common Market (CACM) - that can form partnerships with the regional development banks to finance RPGs. Many of these trade pacts have greater economic integration as a goal and, as such, have a desire to supply RPGs. The regional development banks are positioned to work with such emerging common markets, which may eventually be able to organize members to collectively provide collateral for loans supporting RPGs.
To fulfill the RPG vision of Ferroni (2002) and Kanbur, Sandler, with Morrison (1999), the regional development banks must be strengthened in terms of their funding. This can come from support by the World Bank or by the diverse donors. Donors must come to understand that the regional development banks are uniquely suited to finance a wide range of RPGs. Moreover, donors must recognize that funds channeled through those banks can support essential core and complementary activities in terms of RPGs needed to further development. I fully endorse the case being made by Ferroni. His paper does any excellent job in introducing the reader to the rich array of RPGs that can be best supported by the regional development banks.
In closing, I should emphasize that aid for RPGs and GPGs will require additional amounts and sources of funds. The inflow of money from NGOs, partnerships, and charitable foundations will be very helpful. If poverty is really to be alleviated through official development assistance, support for these public goods must be in addition to the traditional forms of foreign assistance. Additionally, more empirical work is needed to distinguish the flow of funds to the various classes of public goods and to traditional kind of poverty-alleviating activities, so that relative support can be properly judged.
Arce M., Daniel G. and Todd Sandler (2002), Regional Public Goods: Typologies, Provision, Financing, and Development Assistance (Stockholm: Almkvist and Wiksell International for Expert Group on Development Issues (EGDI), Swedish Ministry for Foreign Affairs).
Barrett, Scott A. (2001), "Financing Global Public Goods," in Christopher D. Gerrard, Marco Ferroni, and Ashoka Mody, eds., Global Public Policies and Programs: Implications for Financing and Evaluation, Proceedings from World Bank Workshop (Washington, DC: World Bank), 193-203.
Cook, Lisa D. and Jeffrey Sachs (1999), "Regional Public Goods in International Assistance," in Inge Kaul, Isabelle Grunberg, and Marc A. Stern, eds., Global Public Goods: International Cooperation in the 21st Century (New York: Oxford University Press), 436-449.
Ferroni, Marco (2002), "Regional Public Goods: The Comparative Edge of Regional Development Banks," unpublished manuscript.
Hewitt, Adrian, Oliver Morrissey, and Dirk Willem te Velde (2001), Financing International Public Goods: Options for Resource Mobilisation (London: Overseas Development Institute), preliminary draft.
Kanbur, Ravi, Todd Sandler, with Kevin Morrison (1999), The Future of Development Assistance: Common Pools and International Public Goods (Washington, DC: Johns Hopkins University Press for Overseas Development Council).
Sandler, Todd (1992), Collective Action: Theory and Applications (Ann Arbor, MI: University of Michigan Press).
Sandler, Todd (1997), Global Challenges: An Approach to Environment, Political, and Economic Problems (Cambridge: Cambridge University Press).
Sandler, Todd (1998), "Global and Regional Public Goods: A Prognosis for Collective Action," Fiscal Studies, 19(3), 221-247.
Sandler, Todd (2002), "Regional Public Goods: Demand and Institutions," unpublished manuscript.
Sandler, Todd and Keith Sargent (1995), "Management of Transnational Commons: Coordination, Publicness, and Treaty Formation," Land Economics, 71(2), 145-162.
Stålgren, Patrik (2000), "Regional Public Goods and the Future of International Development Co-operation," EGDI Working Paper 2000:2, Swedish Ministry for Foreign Affairs, Stockholm.
World Bank (2001), Global Development Finance: Building Coalitions for Effective Development Finance (Washington, DC: World Bank).