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Financing sustainable development:
the conventional wayWe’ve seen that what is needed for sustainable development in the poor countries is a large- scale program to satisfy the basic needs of all of humanity. That program should focus on providing education, health care, safety, and minimum incomes through child support, pensions, and setting up environmental improvement programs that would create employment for the poor. Such a program would double as a catalyst for sustainable economic growth: the increased demand it will generate will jumpstart the now stagnant economies of poor countries.
For the rich countries too we have seen that the only way out of current and future economic doldrums is a large-scale public investment program. Those investments should likewise be aimed at improving public education, heath care, and safety, and in the conversion to an environmentally sustainable economy.
So far, we have looked at the rich and poor nations separately. In practice, of course, globalization has caused the economies and social and political systems of rich and poor nations to become more and more integrated. What is needed, therefore, is a global investment program for sustainable development that covers all of the above. Let’s call such a program, for short, a global sustainable development program.
Question: A global sustainable development program as described above would cost many hundreds of billions, if not trillions of dollars. Where would the money come from? Can it be financed in the conventional way, i.e., by tapping the existing money supply through taxation?
Answer: No, it cannot. Economic and especially, political realities are such that it will not be possible, or only very partially so, to finance a global sustainable development program with existing money.Why the use of existing money is not feasible.
Financing a global sustainable development program with existing money hinges on two questions. The first is: is there enough money around to finance a sustainable global development as described above? The second is: if that money is there, can it be accessed, and re-allocated?
(Note on terminology: on this site the terms money and capital are often used interchangeably - although at some points capital has the broader meaning of assets representing a monetary value, such as securities or real estate. This means that the term capital when used on this site does not have the connotation it has in economics, of a production factor in the form of a man-made asset capable of generating income. As used on this site the terms money and capital do include virtual money, i.e., money that does not physically exist in the form of bank notes or coins).
On the question if there is enough money around to finance a global sustainable development program as described above the answer should probably be: there is not. A program to provide the entire global population with access to basic services, notably education and health care, would cost approximately 200 billion dollars a year. With some political will and real commitment on the part of both rich and poor countries, that money could be made available. However, child support, pensions, and environmental improvement / employment programs would cost many hundreds of billions of dollars more. So would the measures in the rich countries aimed at improving public services and the conversion to an environmentally sustainable economy. Within the current political-economic framework it will be impossible to generate such huge amounts of money. Let’s see why.
In conventional economic thinking, public investment is financed either through borrowing in capital markets or through taxation. Large scale borrowing for investment in sustainable development, however, is no option. Most governments, of rich as well as poor countries, are already heavily indebted. With budget deficits on the rise as a result of the current economic downturn, large-scale borrowing for sustainable development would lead to ballooning deficits. Even in better economic times large-scale borrowing for financing sustainable development would be unwise, because most of the investments would not yield immediate returns. Therefore, financing through loans against capital market interest rates would not be economically feasible.
Financing without lending, i.e., from government revenues, would require a huge increase in taxes. Would that be feasible? Looking at the global capital supply – savings, securities, real estate – one might argue that there should be ample money to finance sustainable development. If that were so freeing funds for sustainable development would simply be a matter of redistribution and re-allocation. However, one must take into account that much of the global capital supply is not freely available or cashable. For example, a company may be worth fifty billion dollars in the stock market. However, if a large part of the shares of that company would be put up for sale simultaneously the share price would plummet. As a result, most of this capital would simply evaporate.
Considering that much of the global capital supply is not freely available it is unlikely that the sums of money required for a global sustainable development program could be generated from the existing capital supply. Even if it could it would extract such a large amount of capital from the private sector - consumers, producers, investors - that doing so would cause major economic disruptions.
An even bigger obstacle to financing investment in sustainable development through taxation would be political. The middle class in the rich countries would fervently oppose significantly higher taxes, as it would lower their standard of living. The rich - who hold most of the world’s wealth - have as a rule even less interest in sharing their wealth than the middle class. Since these groups dominate politics – the rich directly or via influence peddling, the middle class though voting – taxation for sustainable development is a non-starter.
See also Global Development: CHAPTER XI: COSTS, BENEFITS, AND FINANCING
and Chapter XII - Money creation: The need for money creationQuestion: If we can’t finance sustainable development from the existing money supply, what should be done?
Answer: The needed funds will have to be created. That should be done in such a way that 1) the demand generated when this newly created money is allocated does not exceed productive capacity, and 2) confidence in its value is maintained.For more, click on: Money creation for sustainable development
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