Global Public Goods (GPGs) — covered in an earlier Borgen post — are essentially goods that enhance the welfare of society when consumed and have associated effects that are not bound by discrete political units. Examples include the provision of knowledge, cleaning up oceans and eradicating disease. The expanding discourse around Global Public Goods has grown in tandem with globalization and international issues that are more technical like phytosanitary foods export, satellite transmissions and financial stability are being studied, explored and debated.

The idea of financial stability as a GPG is better viewed inversely. It is best to look at how the instability of financial markets create recessions, downturns and depressions that slow global output and either increase poverty or decrease the rate of poverty reduction.

Financial markets may be unstable for many reasons including poor oversight and regulation and mismanaged macroeconomic policies at the national level. Advances in financing practices and telecommunications have complicated things and the liberalization of capital flows has raised the level of instability. With increasingly integrated and complex financial markets, mistakes in one nation act as contagions with global effects.

A quick look at Europe’s headache over the debt crisis in Greece, who is now on a course to drop from the eurozone and “destabilize the region and reverberate around the globe,” which, in turn, was catalyzed by the 2008 Wall Street shocks, is a present-day example of how these interdependent markets can result in a type of shared vulnerability and of the far-reaching effects that an unstable financial system results in.

Unfortunately, developing economies are exposed to greater risk due to the volatility of capital flows and the difficulty for developing countries to access financing, something that has been called the double stability and efficiency problem. Many studies have quantified the cost of financial instability on developing countries and an analysis of the literature puts the cost at one percent of GDP per year from 1975 to 2000, resulting in a reduction of income for developing countries by 25 percent for that time period.

It is clear that unstable financial markets are a malady for a strong global economy and that their costs are unfairly distributed, with developing nations being the hardest hit.

So what can be done? The GPG framework advances a solution, one based on the recognition that “the world has made enormous strides in communications and interdependence between countries, yet we have not developed the policies or institutions needed to manage that process.” Therefore, international institutions are needed to ensure the stability of the financial market, precisely because it is an international affair.

The prescriptions for securing stability that this new institution would advance would likely include harmonizing and introducing codes and standards for financial sector regulation, surveillance and coordination of macroeconomic policies and enabling liquidity injections for severely struggling economies, among other technical fixes.

Although unlikely to draw a crowd, these efforts would have a real impact on fighting poverty and making the world a more stable place.

The work required to coordinate and implement something of this nature will require sustained international cooperation, but what better venue to begin than the Third International Conference on Financing for Development (IMF), which is taking place next week in Addis Ababa, Ethiopia’s capital. There, the IMF plans to discuss “international policy issues such as maintaining global financial stability and international tax cooperation.” Along with other international efforts and the difficult realities faced by financing the Sustainable Development Goals, Addis Ababa may prove to be a turning point for GPGs.

– John Wachter

Sources: United Nations Industrial Development Organization, The New York Times, International Monetary Fund