The Present Value of Future Generations: Prioritizing Public Spending for Sustainable Development

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 International Journal of Innovation and Economic Development
Volume 1, Issue 5, December 2015, Pages 15 – 25


The Present Value of Future Generations: Prioritizing Public Spending for Sustainable Development

DOI: 10.18775/ijied.1849-7551-7020.2015.15.2002
URL: http://dx.doi.org/10.18775/ijied.1849-7551-7020.2015.15.2002

Juan E. Chebly

Development and Environmental Studies, Universidad Simon Bolivar, Caracas, Venezuela

Abstract: Purpose: The purpose of this work is to explore how global public finance prioritization, looking especially at global military spending and defense budgets, in search for a more efficient approach to better deal with the opportunity costs between defense and development. Changing the status quo and business-as-usual approaches to public spending can guarantee resources are re-directed to successfully achieve the sustainable development goals by 2030. The underlying question on how we are going to finance sustainable development still remains. ‘Status quo’ and ‘business-as-usual’ approaches have called the SDGs as an ambitious to-do-list that will be practically unachievable. The main argument behind this approach: the SDGs are too many, too ambitious, and more importantly too expensive to be achieved by the year 2030. This works aims to show evidence that financing the SDGs boils down to proper spending prioritization. There is a funneling of the required 90 billion USD per year from the public sector in order to achieve the UN Agenda 2030. While we as humanity seem to agree on ‘the what’ needs to be done, by agreeing on SDGs agreed by the UN General Assembly in September 2015, there is still a big question mark on ‘the how’ are we to implement the sustainable development agenda. This work shows an original answer to this question.

Keywords: Sustainable Development, Financing for Development, Official Development Assistance, Human Development, Public Spending, Production Possibilities Frontier, Comparative Advantage, Tradeoff, Defense, Peace, Security, Agenda 2030, Sustainable Development Goals (SDGs)

1.  Introduction

The devastation and estimated casualties nearing 100 million human beings by the end of the Second World War led world leaders to work together and create a common institution for peace, development, and human rights: The United Nations (UN).

Poverty, increasing inequalities, natural disasters, climate change, environmental degradation, social decay, conflict, and other calamities have posed great challenges to peace, development, and human rights worldwide. Three generations and 70 years of deliverance have led to a consensus among United Nations member states around an ethical normative framework that considers a trans generational approach to its given mandate: a sustainable development agenda and the proposed Sustainable Development Goals (SDGs).

While we as humanity seem to agree on ‘the what’ needs to be done, by agreeing on 17 proposed SDGs to be launched by the UN General Assembly in September 2015, there is still a big question mark on how are we going to implement the sustainable development agenda.  The underlying question on how are we going to finance sustainable development also remains.

‘Status quo’ and ‘business-as-usual’ approaches have called the SDGs as an ambitious to-do-list that will be practically unachievable. The main argument behind this approach: the SDGs are too many, too ambitious, and more importantly too expensive to be achieved by the year 2030.

The purpose of this work is to explore how global public finance prioritization, looking especially at global military spending and defense budgets in search for a more efficient approach to better deal with the opportunity costs between defense and development. The need for a sustainable development agenda is not only enameled in international law and human rights, but has also been validated by social inclusion and participation. Millions of people were consulted in the design of the sustainable development agenda, yet not too often are citizens consulted on how their governments are to prioritize their spending.

Furthermore, investing in sustainable development has proven to have a positive impact on peace and security in many cases. Skeptics often highlight that the sustainable development agenda is not legally binding but rather subject to voluntary commitment by UN member states. However, member states have a moral obligation to their people, and many may also argue that morality supersedes legality and not the other way around. Changing the status quo and business-as-usual approaches to public spending can guarantee resources are re-directed to successfully achieve the sustainable development goals by 2030 and pave way for a more peaceful and safer world.

2. The Post-2015 Agenda and the Sustainable Development Goals

Beyond environmental considerations that point to the need of a paradigm shift in development, we also have alarming indicators worldwide about growing economic and social inequalities. According to the United Nations Development Programmed, “income inequality increased by 11 percent in developing countries between 1990 and 2010” (UNDP 2014). Indicators of income inequality like the GINI coefficient are of remarkable relevance when we consider “the existence of a Kuznets curve; an inverted U-shaped relationship between income inequality and economic development” (IMF 2015). Studies by the IMF (2015), UNDP (2014), and UNSDSN (2013) emphasize how social inclusion can be directly determined by economic, fiscal, and social policies of governments, highlighting the need for a normative ethical approach where social inclusion and participation prevail over exclusion and inequity.

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Figure 1: GINI coefficient by Country (Source: World Bank 2014)

Despite the possible distances between schools in socio-economic thinking of our times and the practical applications of these schools, we are facing a reality that transcends political and socio-economic ideologies. We are facing a panorama of increasing social inequality in the world where human development is greatly compromised due to poverty and conflict (UNDP 2014). Evidence of this is the studies and statistics by the United Nations Development Programmed (UNDP) which include the human development report and the multidimensional poverty index. Other alternative indicators have also been presented by the work of Cobb, Halstead & Rowe (1995), Daly & Cobb (1989). This work has paved the way for alternative indexes like the Genuine Progress Index (GPI), which incorporates externalities such as violence, social decay and environmental degradation to the economic equation. GPI can show how even advanced economies are far from achieving genuine progress.

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Figure 2: Comparison between GDP per capita and GPI for the U.S. (1950-2010)

Source: rprogress.org

If this is the fate of countries with advanced economies, then countries with less developed economies may face even harsher realities in terms of genuine progress. This points to the fact that it only through sustainable development that “every human being can live a life worthy of their own human dignity” (Nussbaum 2011).

We know that the Earth, since it has a finite space, also has finite resources. That is why an approach such as sustainable development is needed to correct these assumptions taken for granted in a reality where the finiteness of the world is not considered. A case study that illustrates this paradox is the case of Aboriginal Rapa Nui on Easter Island “where there are almost no native trees left due to the devastating effects of deforestation. The Rapa Nui cut down the trees for firewood and to build canoes as transportation for the giant Moa statues found in several parts of the island” (Chambly et al 2012). It seems the aboriginal Rapa Nui believed the trees in their island were infinite. This was not the case, since indiscriminate deforestation resulted in great social problems, including social exclusion, famines and violence, which finally neared the extinction of the Rapa Nui culture (Terry 2009).

If current socio-economic thought is also based on false premises of infinitude, it is no surprise then that both social exclusion and environmental degradation prevail worldwide. Environmental services and the world’s resources are not infinite, and therefore deserve to be treated ethically and with restraint. That is why a global sustainable development agenda aims to become a global-ethical-regulatory framework to guide the activities of human beings towards inter-generational inclusive wellbeing of people, planet and all species (Laguna-Ceils 2013).

3. Official Development Assistance and the OECD

The Organization for Economic Cooperation and Development (OECD), with a current membership of 34 member countries, was founded in 1961 under the premise of transnational equity as a boost for international trade propelled by economic progress. The history of OECD dates back to 1948’s creation of the Organization for European Economic Cooperation (OEEC), a predeceasing organization which was created to serve as an administrative entity for the Marshal Plan. Later in 1961, during the Convention on the Organization for Economic Cooperation and Development, membership was extended to non-European nations.

The OECD’s Development Assistance Committee (DAC), a forum which focuses on poverty alleviation, served as a platform for the launch and deployment of the Official Development Assistance framework (ODA). This framework has had symbolical and practical relevance regarding international development outcomes. On one hand, nations of the world with advanced economies acknowledge less privileged nations’ development as a priority. As a result, resources start to flow from nations with advanced economies to nations with developing economies.  In 1970, OECD countries agreed to allocate 0.7% of their Gross National Income towards ODA. This target “was first agreed and has been repeatedly re-endorsed at the highest level at international aid and development conferences: in 2005, the 15 countries that were members of the European Union by 2004 agreed to reach the target by 2015” (OECD 2015).

While there is a very strong moral argument to help those who are most in need, weather at the individual or the national instance, there are economic principles that highlight the long-term benefits that derive from ODA. Some have already been mentioned, like the interdisciplinary studies of UNDP, IMF and UNSDSN. However, there is also strong evidence of how poverty and income inequality hamper economic development within the very foundations of the political economics discipline.

For one, we have the Riparian and post-Riparian theories that build on David Ricardo’s Theory of Comparative Advantage. The link between the long-term benefits of ODA and this theory is evident. If we start from the assumption that international trade is always a positive-sum game, then having more advanced economies in the world will allow for more positive-sum and comparative advantages in trade. In other words, the world’s production possibilities frontier, or our capacity for global output expands. Hence, there are more gains on both ends of the equation. However, even when this rationale has been and continues to be widely supported by consensus within international development institutions, we still face a grim reality; current ODA disbursements only account to an average 0.29% of OECD countries aggregated GNIs (OECD 2014).

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Figure 3: ODA Shortfall (Difference between Pledged and deployed ODA)

Source: globalissues.org with OECD data

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Figure 4: ODA Shortfall (Difference between Pledged and deployed ODA)

Source: globalissues.org with OECD data

4. Financing for Development

In 1991, under the auspices of the 46th UN General Assembly resolution 46/205, UN member states decided to call for the establishment of an international conference on “financing for development”. This milestone of international development gave way to almost two decades of work and two international conferences on the topic of financing for development. The First International conference took place in Monterrey, Mexico, in March 2002. The outcome document, also known as the Monterrey Consensus, embraces six major areas of Financing for Development:

  1. Mobilizing domestic financial resources for development
  2. Mobilizing international resources for development: foreign direct investment and other private flows
  3. International trade as an engine for development
  4. Increasing international financial and technical cooperation for development
  5. External debt
  6. Addressing systemic issues: enhancing the coherence and consistency of the international monetary, financial and trading systems in support of development (Monterrey Consensus 2003).

The Financing for Development framework was implemented and clearly linked to the United Nations Millennium Declaration of September 6th, 2000.  Heads of state and government gathered at the United Nations Headquarters in New York in the so-called Millennium Summit within the framework of the 55th UN General Assembly. This two-day summit produced a document better known as the Millennium Declaration. This document is a statement that sought to reaffirm “the UN and its Charter as indispensable foundations of a world that is more peaceful, more prosperous and more just” (Millennium Declaration 2000). The document is anchored in the Universal Declaration of Human Rights (UDHR), and reaffirms the fundamental values that should prevail in international relations in the twenty-first century. The Millennium Declaration gave way to the Millennium Development Goals (MDGs) which the post-2015 and the SDGs agenda are called to succeed. It is no coincidence then that three years later, in 2003, concerned UN member states implements resolution 46/205 to organize the Monterrey International Conference on Financing for Development under the following relevant concerns to the then current development agenda:

  1. We note with concern current estimates of dramatic shortfalls in resources required to achieve the internationally agreed development goals, including those contained in the United Nations Millennium Declaration.
  1. Mobilizing and increasing the effective use of financial resources and achieving the national and international economic conditions needed to fulfill internationally agreed development goals, including those contained in the Millennium Declaration, to eliminate poverty, improve social conditions and raise living standards, and protect our environment, will be our first step to ensuring that the twenty-first century becomes the century of development for all.
  1. Achieving the internationally agreed development goals, including those contained in the Millennium Declaration, demands a new partnerships between developed and developing countries. We commit ourselves to sound policies, good governance at all levels and the rule of law. We also commit ourselves to mobilizing domestic resources, attracting international flows promoting international trade as an engine for development, increasing international financial and technical cooperation for development, sustainable debt financing and external debt relief, and enhancing the coherence and consistency of the international monetary, financial and trading systems” (Monterrey Consensus 2003).

The follow-up and review of the Monterrey Consensus happened five years later during the 2nd International Conference on Financing for Development in Doha, Qatar 2008. The main outcome of Doha mainly reaffirmed the Monterrey Consensus and the assessment of development-financing needs within the six specific categories laid down in Monterrey. The ongoing global financial crisis played a significant role in the context of Doha, which in turn called for a high-level UN conference specifically on the financial crisis and its effects on development.  For the purpose of this work we could say that this financing framework laid the foundation to the 3rd International Conference on Financing for Development (FFD3) hosted in Addis Ababa, Ethiopia in July, 2015. The outcome of FFD3 will be a framework that should clearly guide how we are to finance the post-2015 development agenda and the SDGs. While the preceding negotiations pointed to a promising outcome document from Addis Ababa, there are some missing links that were overlooked: one of them is the opportunity cost between global defense spending and public spending for development financing.

5. The Current Panorama

The world economic output measured as the Gross World Output (GWD) has reached an approximate USD 75 trillion in 2013 (World Bank 2015). In comparison, Official Development Assistance (ODA) was USD 134.8 billion in the same year. (OECD 2015)  A simple calculation shows that ODA constitutes a mere 0.18% of GWP. It is worth noting once again that the ODA target set by OECD donor countries is 0.7% of Gross National Income (GNI), while current disbursements only account to an average 0.29% of OECD countries aggregated GNIs. However, if we conceptualize sustainable development as the overarching normative-global-development framework, then relying solely on a mere 0.18% of global is not a viable alternative. ODA plays a key role in international development, but it is far from constituting the most important source of funding that has fostered the successful development outcomes of the last decades. According to the World Bank, “we need global development cooperation that attracts aid from diverse sources, emphasizes domestic resource mobilization, and capitalizes on the potential of the private sector”. Furthermore, “financing a transformative development agenda will require that available resources be used more effectively and strategically to catalyze additional financing from official and private sectors” (World Bank 2013).

Many point to global growth, via aggregated domestic growth, as the main driving force behind successful development outcomes, such as the decrease in nominal poverty by almost a half since 1990 (UNMC 2014). This rationale is very accurate. Halving global poverty in the last two decades has been achieved mainly due to increased growth of emerging economies. This highlights the importance and central role that national economies play in global development. While this may seem an intuitive assertion, there are certain relationships that are not that evident when it comes to financing development. One example is the amount of GWP that is devoted to military expenditures vs the amount of resources devoted to the United Nations development efforts. While there will always be staunch advocates for the necessity of ramping up defense budgets in all parts of the world, and certainly staunch critics and skeptics of the role the UN plays in international development, let us take a look at the mentioned example:

Official military spending worldwide in 2014 was close to USD 1.6 trillion. On the other hand, the United Nations Development Programmed (UNDP) is funded by estimated voluntary contributions by member states of USD 5 billion. Given that the UN budget is quite complex, we can only estimate UNDP’s budget. However, UN member states mandatory contributions were also about USD 5.5 billion in 2014. For this conceptual exercise lets then compare global military spending to that of the combined budgets of mandatory contributions of UN member states plus UNDP’s annual estimated budget. The comparison will render a ratio of 152 to 1. In other words, we as humanity, spend 152 times more on defense than we do on the core UN development system. This comparison might be subject to plenty of adjustments, but the ratio is so stark that one might ask, why do we spend so much on defense? There is no simple answer to that question.

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Figure 5: Annual Cost Estimation of MDG Cost vs. Global Military Spending in 2009 (Source: demilitarize.org)

 

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Figure 6: Military Expenditure as a percentage of GDP by country

Source: CIA World Fact book

6. Prioritizing Public Financing for Sustainable Development

Looking at how much will it cost to achieve the SDGs by 2030, estimates by the UN Sustainable Development Solutions Network point to additional investments of around USD 3 trillion to achieve the SDGs by 2030 (UNSDSN 2015). This translates to a rough USD 200 billion per year increase on development investment efforts. This estimate includes an estimated USD 90 billion per year coming from public, non-commercial funding. This table does seem ambitious when looking at current ODA levels and UN system budgets, but this should not come as a surprise. If by consensus we can foresee the unsustainable path of status-quo, business-as-usual practices and the need for a different paradigm for development, then we can imply that new paradigms for financing sustainable development are also necessary. In the words of Albert Einstein, “doing the same thing over and over again and expecting different results” is nothing short of insanity.

Table 1: Preliminary and incomplete incremental investment needs for the SDGs in developing countries (in constant 2010 $ billions) 3

table1

Source: Schmidt-Traubel (forthcoming)

To place things into perspective lets once again indulge in a simple exercise of ratio analysis. By comparing annual global military spending (1.6 trillion) once again this time vs. UNSDSN estimated necessary investments to achieve the SDGs (90 billion), we come up with a 17 to 1 ratio. In other words, we already spend 17 times more on defense than we would be required to spend on achieving the so-called ‘to-do-list’ for people and planet. This also means that the amount of public spending needed for SDGs is a mere 5.6% of our current global military spending.

This level of analysis is quite conclusive. Current patterns show that our global production possibility frontier, that is, our capacity for global output, is more than sufficient to finance the investments necessary to ensure the survival of our species and the planet. This sounds like a very straight forward balance of accounts, even when there is plenty of room for adjustment in estimates. However, even with the most pessimistic forecasting, one thing remains clear: we can finance sustainable development.

Defense spending pundits would conversely argue that defense spending is already slim. The rise in anarchy and terrorism around the world is a real calamity that we must face; it is true we are living in troubling times where world peace and security are severely threatened. We can argue that for the great majority of the world, peace and security are indeed desirable outcomes. Differences however start to show when we analyze how to achieve peace and security. Defense spending pundits usually refer to history as an example of why high military spending is needed. One example may be the Pox Romani, whereby the Roman Empire was able to provide relative peace and security in the world for almost 1000 years. “In a way a unit-polar world is seen as safer than a plural-polar world” (Premix 2007).

However, the story of countries like Costa Rica, Iceland, Switzerland, Grenada, and many others who have chosen to de-militarize, do provide living examples of how a nation can prioritize development while at the same time improving national security. The effectiveness of development in fostering security is actually recognized by the country that spends the most in defense: the U.S. The White House National Strategy in 2010 clearly identifies the need to “Achieve Balanced and Sustainable Growth” and “Accelerate Sustainable Development” as strategies that merit their own subsections. The document also affirms that “accelerating investments in development that can narrow inequality, expand markets, and support individual opportunity and state capacity abroad” are key to national security (US National Security Strategy 2010).

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Figure 8 – UNDG Global Conversation on the World We Want 2015: Visualizing the relationship between Sustainable Development, Poverty, and Peace

Source: data.worldwewant2015.org

7. Recommendations to Policy Makers

  • Take into account the relevance and need for the Sustainable Development Goals.
  • Consider that the Sustainable Development Goals will require extra financing
  • Consider shaping national strategy to incorporate the SDGs
  • Consider that the world’s production possibilities frontier can indeed allow for the proper financing of the Sustainable Development Goals
  • Take into account that an overall rerouting approximately 5% on global military spending to the SDGs will be enough to find the resources necessary to achieve the SDGs by 2030.
  • Emphasize development as the main driver of security and peace in the long term.
  • Ensure that public finances are open, transparent, and accountable.

References

 

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