International economics
1 GPG’s, IMS & BoP
1.1 GPGs, international finance & the IMS
1.1.1 General
GPG = Global Public Goods eg global public health/ (food) security/…
Since the 1970s, a global financial system has emerged which has had a profound impact at a
global scale (impact on international finance AND international politics)
This has been highlighted by a series of financial crises which culminated in e.g. the Global
Financial Crisis and the European debt crisis in recent years...
But global finance has also affected states during more stable times.
Advanced states have become increasingly “financialized”, i.e. the short-termism of financial
markets has affected the economy, the welfare state and other sectors.
At the same time, the fortunes of developing countries have been influenced by the in- and
outflows of foreign capital in various forms (FDI, portfolio flows, foreign aid and remittances).
rise of global finance has raised the important question: “how can the potentially advantageous
consequences of global finance be realized, while at the same time containing adverse effects?”
o “Can global finance be effectively regulated?”
o “Is int. finance ‘system’ a system that can be managed or a ‘non-system’ difficult to govern?”
o “who is the ‘architect’ to do so?”
o “Should financial globalization be reversed?”
o “what were the implications of the COVID-19 pandemic on the Intern. Finance System?”
system works very well (even thought there are some hickups, it’s stabile in the long run)
1.1.2 Key Challenge
How to make International Finance (financial globalisation or integration) and the International
Monetary and Financial System a stabilizing and positive force for growth and development?:
• Optimal (global) allocation of capital (also from a development perspective) important for
the sustainability issues
• “Financial inclusion”: Access to finance/financial services at macro (country) and micro level
(households) we cannot celebrate that it has so many successes without remebering the
fact that a lot of people don’t have access
• savings mobilization
• Provide harmonious development of global trade and production (e.g. fair and stable
exchange rates)
• Dealing with financial risks & prevent (global) financial crises &limit cost when occurring
• Executed through to good (global) governance principles
,→ relevant to use a Global Public Goods perspective – e.g. Financial Stability as a GPG.... (emphasis
on the centrality of Financial stability of GPG: food security)
1.1.3 GPGs: conceptual issues
1.1.3.1 Definitions
Drawing on Paul A. Samuelson (1954), standard economic theory distinguishes between 2 main
categories of goods: private goods and public goods. This classification depends on 2 characteristics
1. rivalry: one’s consumption of the good reduces another person’s ability to consume the good
2. excludability: the ability of the owner of the good to prevent its use by another person (even if
they don’t pay for it, you cannot exclude people from using it)
A. private good
o = a good that is both rival and excludable
o are produced by the market mechanism (supply and demand)
o private market mechanism: pay for consumption + no longer available for other
B. public good = a good that is non-rival and non-excludable
Thinking in terms of a public-private continuum can help us conceptualize PGs.
The outer poles of the continuum comprise, at one end, purely private (rival and excludable)
goods and, at the other end, purely public (non-rival and non-excludable) goods.
Many other goods might fall somewhere between the two ends, based on various sociocultural,
moral, ethical, environmental or economic/financial considerations.
A. Natural GPGs: existence of which predates the existence of humans (moon - sea)
B. human-made GPGs: arisen from deliberate human choises (global norms that aim for flobal
prublic acceptance)
externalities = third-party effects
o situations where the costs or benefits of any particular good or action are not reflected in
the price of the good itself
o cost of impact is transferred to actors who are not directly responsible (no incentives to
correct this as long as the externalities remain external)
o motivation to invest in the provision of PG’s arises from the desire to encourage positive
externalities or to correct for negative ones
1.1.3.2 Free-riding & globalization
• basic problem: under-provision due to free riding (eg clean air, public lighting)
• to cure it, we must rely on the public sector
• Either we produce it ourselves, or we intervene in the market (change the behaviour in such a
way that this desirable thing is produced in sufficient quantities)
• Typically, the government steps in, financed by taxes.
• global public bad = goods that have a negative utility (community would benefit from preventing
or reducing it) eg air pollution, water contamination, spread of disease, …
,• global cooperation mechanisms
o international agreements, intl rules, intl institutions to specifically produce those goods
o You cannot rely on the market mechanism for those things to automatically happen.
• Globalization
o more of these public goods that initially are only national become international.
o not only national, but also intern.intervention (Institutions as providers of GPGs)
In practice, there are different types of PG’s
A. Quasi-public goods: comply with one characteristic not the other Eg. A club good (NATO
membership) complies to non-rivalry but there can be exclusion to the membership.
B. Joint products: comply with market mechanism, but public characteristic (Public transport)
• Global: goods have worldwide effects beyond national jurisdiction and multiple generations.
• they tend to penetrate countries and national jurisdiction without asking for permission or a visa.
• The public effects of a good can be local, national, regional, worldwide and cross-generational
cross-border, transnational nature.
• !! Global public goods are goods of which benefits or costs are of nearly universal reach or
potentially affect anyone anywhere.
Globalization is the reason for an increasing centrality of GPG’s
A. domain of the global: impacts of actions by individual agents that affect the majority of the
world’s population through aggregation and amplification
B. domain of the networks: channels that interconnect social groups all over the world
C. domain of the local: human activities that compromise the actual production, exchange and
consumption of tangible goods and services by organisation and social groups of all kinds
Need for greater clarity and an afreed conceptual framework – problems:
o definition is blurry
o collective action problem: no supranational governemental authoriy
o range of spill-overs across countries can vary significantly
o GPG’s have to be provided by an individual agent in a specific location
1.1.3.3 Technologies of provision
• = deals with the relationship between individual efforts
• what we do individually for adding to the supply of a GPG AND the total end of supply of
the PG
• How does the individual contribution translate into the total?
3 main technologies of provision/ 3 main types of assembly processes:
1. summation
o the total production of the desirable good is just a simple sum of the individuals
o Eg. Pollution intervention reduces pollution - what is the contribution of each to total?
, o If you do more the effect on the total is higher.
o What’s the policy message? Everyone matters. What you do is important. More = Better
o Aren’t all public goods produced according to this summation technology? No. there are at
least 2 others, that may have completely different policy consequences.
2. summation with a weak link
o You are just as strong as your weakest link.
o The effect of everyone’s contributions is not the sum of what we all do together, but the
sum of that person that does the least.
o Eg. Suppose we are on an island surrounded by water, we all have our own plot of land and
each of us has a coast. Globalization means for the rest no fences between the plots of
lands. We want to protect ourselves against floods, so we build dams (some high, some low,
some free riding, …) If someone didn’t build one, the water rises and crosses the part with
no protection, it will not only flood your piece of land, but the whole land. What is our level
of protection against these floods? The level of the lowest.
o In terms of policy consequences, the level is completely different: you should target the
weakest link, only then is an intervention efficient
o intl financial stability Global public bad: global financial crisis.
o what will happen if the world is financially globalized, cross- border transactions? if there
is a financial crisis in 1 country, there is a high probability that this spills over to other
countries and becomes a global crisis. The IMF should target countries where there is a high
probability that a financial crisis will start.
3. best shot
o effect is determined by the effort of the strongest, the one with the highest contribution.
o Eg. When we try to find new vaccins, it’s most effective to target our contributions to our
best shot, one that has proven to have the capabilities and capacities to succeed. it’s not
smart to spread our resources over everyone and then hoping that it turns out well.
Figure 1 illustrates the provision path of a good following a summation-type provision process
• how to best provide a GPG most efficiently and effectively?
o determine whether the good has specific “systemic integrity requirements” that must be
met for it to emerge & generate expected benefits (A) or if it can be improved incrementally
(B)
o A: important to accept that in determining adequate provision, not only human interests but
also the interests, systemic integrity requirements of the good itself
o ideally, each of the goods would have one or more provision platforms along with platform
facilitators or focal points to keep an eye on the overall process and to report back
periodically to the policymaking bodies concerned GPG provision requires
interdependence
1. Incentives: Encouraging actors to deliver direct and indirect inputs or change behavior to take
account of social concerns.
2. Opportunities: Generating goods and services that either feed directly into a global public good
(GPG) or facilitate its provision by individual states, households, and firms.
3. Demands for international cooperation: Reflecting national preferences for intern. cooperation.
4. Political pressures: from advocacy & lobbying groups calling on governments, intergovernmental
organizations, and other potential providers to help fund or deliver GDGs.
1 GPG’s, IMS & BoP
1.1 GPGs, international finance & the IMS
1.1.1 General
GPG = Global Public Goods eg global public health/ (food) security/…
Since the 1970s, a global financial system has emerged which has had a profound impact at a
global scale (impact on international finance AND international politics)
This has been highlighted by a series of financial crises which culminated in e.g. the Global
Financial Crisis and the European debt crisis in recent years...
But global finance has also affected states during more stable times.
Advanced states have become increasingly “financialized”, i.e. the short-termism of financial
markets has affected the economy, the welfare state and other sectors.
At the same time, the fortunes of developing countries have been influenced by the in- and
outflows of foreign capital in various forms (FDI, portfolio flows, foreign aid and remittances).
rise of global finance has raised the important question: “how can the potentially advantageous
consequences of global finance be realized, while at the same time containing adverse effects?”
o “Can global finance be effectively regulated?”
o “Is int. finance ‘system’ a system that can be managed or a ‘non-system’ difficult to govern?”
o “who is the ‘architect’ to do so?”
o “Should financial globalization be reversed?”
o “what were the implications of the COVID-19 pandemic on the Intern. Finance System?”
system works very well (even thought there are some hickups, it’s stabile in the long run)
1.1.2 Key Challenge
How to make International Finance (financial globalisation or integration) and the International
Monetary and Financial System a stabilizing and positive force for growth and development?:
• Optimal (global) allocation of capital (also from a development perspective) important for
the sustainability issues
• “Financial inclusion”: Access to finance/financial services at macro (country) and micro level
(households) we cannot celebrate that it has so many successes without remebering the
fact that a lot of people don’t have access
• savings mobilization
• Provide harmonious development of global trade and production (e.g. fair and stable
exchange rates)
• Dealing with financial risks & prevent (global) financial crises &limit cost when occurring
• Executed through to good (global) governance principles
,→ relevant to use a Global Public Goods perspective – e.g. Financial Stability as a GPG.... (emphasis
on the centrality of Financial stability of GPG: food security)
1.1.3 GPGs: conceptual issues
1.1.3.1 Definitions
Drawing on Paul A. Samuelson (1954), standard economic theory distinguishes between 2 main
categories of goods: private goods and public goods. This classification depends on 2 characteristics
1. rivalry: one’s consumption of the good reduces another person’s ability to consume the good
2. excludability: the ability of the owner of the good to prevent its use by another person (even if
they don’t pay for it, you cannot exclude people from using it)
A. private good
o = a good that is both rival and excludable
o are produced by the market mechanism (supply and demand)
o private market mechanism: pay for consumption + no longer available for other
B. public good = a good that is non-rival and non-excludable
Thinking in terms of a public-private continuum can help us conceptualize PGs.
The outer poles of the continuum comprise, at one end, purely private (rival and excludable)
goods and, at the other end, purely public (non-rival and non-excludable) goods.
Many other goods might fall somewhere between the two ends, based on various sociocultural,
moral, ethical, environmental or economic/financial considerations.
A. Natural GPGs: existence of which predates the existence of humans (moon - sea)
B. human-made GPGs: arisen from deliberate human choises (global norms that aim for flobal
prublic acceptance)
externalities = third-party effects
o situations where the costs or benefits of any particular good or action are not reflected in
the price of the good itself
o cost of impact is transferred to actors who are not directly responsible (no incentives to
correct this as long as the externalities remain external)
o motivation to invest in the provision of PG’s arises from the desire to encourage positive
externalities or to correct for negative ones
1.1.3.2 Free-riding & globalization
• basic problem: under-provision due to free riding (eg clean air, public lighting)
• to cure it, we must rely on the public sector
• Either we produce it ourselves, or we intervene in the market (change the behaviour in such a
way that this desirable thing is produced in sufficient quantities)
• Typically, the government steps in, financed by taxes.
• global public bad = goods that have a negative utility (community would benefit from preventing
or reducing it) eg air pollution, water contamination, spread of disease, …
,• global cooperation mechanisms
o international agreements, intl rules, intl institutions to specifically produce those goods
o You cannot rely on the market mechanism for those things to automatically happen.
• Globalization
o more of these public goods that initially are only national become international.
o not only national, but also intern.intervention (Institutions as providers of GPGs)
In practice, there are different types of PG’s
A. Quasi-public goods: comply with one characteristic not the other Eg. A club good (NATO
membership) complies to non-rivalry but there can be exclusion to the membership.
B. Joint products: comply with market mechanism, but public characteristic (Public transport)
• Global: goods have worldwide effects beyond national jurisdiction and multiple generations.
• they tend to penetrate countries and national jurisdiction without asking for permission or a visa.
• The public effects of a good can be local, national, regional, worldwide and cross-generational
cross-border, transnational nature.
• !! Global public goods are goods of which benefits or costs are of nearly universal reach or
potentially affect anyone anywhere.
Globalization is the reason for an increasing centrality of GPG’s
A. domain of the global: impacts of actions by individual agents that affect the majority of the
world’s population through aggregation and amplification
B. domain of the networks: channels that interconnect social groups all over the world
C. domain of the local: human activities that compromise the actual production, exchange and
consumption of tangible goods and services by organisation and social groups of all kinds
Need for greater clarity and an afreed conceptual framework – problems:
o definition is blurry
o collective action problem: no supranational governemental authoriy
o range of spill-overs across countries can vary significantly
o GPG’s have to be provided by an individual agent in a specific location
1.1.3.3 Technologies of provision
• = deals with the relationship between individual efforts
• what we do individually for adding to the supply of a GPG AND the total end of supply of
the PG
• How does the individual contribution translate into the total?
3 main technologies of provision/ 3 main types of assembly processes:
1. summation
o the total production of the desirable good is just a simple sum of the individuals
o Eg. Pollution intervention reduces pollution - what is the contribution of each to total?
, o If you do more the effect on the total is higher.
o What’s the policy message? Everyone matters. What you do is important. More = Better
o Aren’t all public goods produced according to this summation technology? No. there are at
least 2 others, that may have completely different policy consequences.
2. summation with a weak link
o You are just as strong as your weakest link.
o The effect of everyone’s contributions is not the sum of what we all do together, but the
sum of that person that does the least.
o Eg. Suppose we are on an island surrounded by water, we all have our own plot of land and
each of us has a coast. Globalization means for the rest no fences between the plots of
lands. We want to protect ourselves against floods, so we build dams (some high, some low,
some free riding, …) If someone didn’t build one, the water rises and crosses the part with
no protection, it will not only flood your piece of land, but the whole land. What is our level
of protection against these floods? The level of the lowest.
o In terms of policy consequences, the level is completely different: you should target the
weakest link, only then is an intervention efficient
o intl financial stability Global public bad: global financial crisis.
o what will happen if the world is financially globalized, cross- border transactions? if there
is a financial crisis in 1 country, there is a high probability that this spills over to other
countries and becomes a global crisis. The IMF should target countries where there is a high
probability that a financial crisis will start.
3. best shot
o effect is determined by the effort of the strongest, the one with the highest contribution.
o Eg. When we try to find new vaccins, it’s most effective to target our contributions to our
best shot, one that has proven to have the capabilities and capacities to succeed. it’s not
smart to spread our resources over everyone and then hoping that it turns out well.
Figure 1 illustrates the provision path of a good following a summation-type provision process
• how to best provide a GPG most efficiently and effectively?
o determine whether the good has specific “systemic integrity requirements” that must be
met for it to emerge & generate expected benefits (A) or if it can be improved incrementally
(B)
o A: important to accept that in determining adequate provision, not only human interests but
also the interests, systemic integrity requirements of the good itself
o ideally, each of the goods would have one or more provision platforms along with platform
facilitators or focal points to keep an eye on the overall process and to report back
periodically to the policymaking bodies concerned GPG provision requires
interdependence
1. Incentives: Encouraging actors to deliver direct and indirect inputs or change behavior to take
account of social concerns.
2. Opportunities: Generating goods and services that either feed directly into a global public good
(GPG) or facilitate its provision by individual states, households, and firms.
3. Demands for international cooperation: Reflecting national preferences for intern. cooperation.
4. Political pressures: from advocacy & lobbying groups calling on governments, intergovernmental
organizations, and other potential providers to help fund or deliver GDGs.
