Public and Private Financing of Sustainable Development Goals (SDGs)

ABSTRACT

The market will undersupply sustainable development goals (SDGs) due to their substantial public good element. SDG investments should be socially evaluated at accounting prices, for which alternative estimation approaches exist, amongst which political arbitrage is needed. Money should also be integrated in the evaluation, as assets not backed by real wealth creation risk having a higher return in cash than SDGs at the time of the initial finance of investment. Current estimates of SDG cost at market prices cumulated over 10 years vary between 20 and 80% of 2019 world GDP. Actual cost could be higher, possibly 125% of GDP, about one-sixth of the world’s private wealth. The PPP financing route can be followed mainly for larger projects and for a relatively limited portion of aggregate public investment needs. This confirms the public sector’s principal responsibility for actual implementation of SDGs, for which public budgets remain to be mobilised and coordinated at the scale needed.

KEYWORDS:

• Sustainable development goals
• public banks
• monetary production economies
• cost–benefit analysis
• public–private partnerships

JEL CODES:

• E12
• H44
• O16
• Q56

Acknowledgments

The author thanks participants for their comments and, in particular, Giuseppe Fontana, Jan Toporowski and Marcella Corsi and her students. I also thank the generous comments of two anonymous referees.

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

2 Already in the early 1950s, Sergio Steve, when reviewing the public finance literature, noted that such goods are underprovided by the private sector (Castellucci 2018). The term ‘public good’ is used in this text in the broadest sense of collective or social good, including merit goods (see Section Two below).

3 Apart from common sense considerations of their realism (see Dalby et al. 2019, on governance aspects and, particularly, Hosseini 2019, on the ethical aspects), a virulent and polemic criticism can be found in Draperi (2020); see also, Mikulewicz and Taylor (2020). Semieniuk et al. (2021) criticise the energy demand forecasts underlying the economic assessment of climate change. See also, Gregor et al. (2021) for a review of the INET research programme.

4 This is a concept introduced in the UK PPP legislation as a mandatory alternative scenario, to be built and examined at the same time when a public project is proposed for PPP financing.

5 For the transport sector, Ragazzi and Rothengatter (2005) offer an in-depth technical discussion of PPP in Europe; see, in particular, the discussion of tolls as tariffs or taxes in Ragazzi (2005).

6 The author worked for several years in infrastructure financing in former Eastern European countries. He had the opportunity to discuss this issue with the higher management of a top international consultancy firm very active in the PPP sector, with specific reference to the Western Balkans.

7 As noted by Graziani (1985, pp. 171–72), if banks are aggregated in the private sector, the process is likely performed using the IS–LM model, no problem of financing can ever be discussed and the only reason for holding money is the transaction motive.

8 Partly because the subject is relatively recent, Ban and Gabor (2016) trace its first appearance in the literature in 2007.

9 The approach is based on the monetary circuit, i.e., it assumes endogenous money, with the government and the private sector seen as vertically integrated sectors. Banks are separated from corporates and create money.

10 This drive towards ‘market-based finance’ logically appears as the heir to the PPPs promoted under the PFI and can be criticised for the same reasons (see Storm 2018, and other papers in the same issue, particularly Epstein 2018). Bayliss and Van Waeyenberge (2018) argue that the current generation of PPPs bundles them in a ‘market finance’ package that was absent before. However, this might have been one of the original purposes of PPPs.

11 Shadow banking was discussed by Ban and Gabor (2006) without reference to money creation and destruction. Caverzasi, Botta, and Capelli (2019) develop a stock flow consistent model that includes shadow banks. Dunz et al. (2021) also apply a stock-flow consistent model to the question of compounding pandemic and climate risks. Recent contributions to shadow banking analysis are those of Shenai (2018), Collier (2017), Nesvetailova (2017) and Oricchio et al. (2017).

12 Steve (1964 [2007]) identified three cases: (i) methodological individualism, maximum efficiency and full employment of resources; (ii) unemployment equilibria; and (iii) divergence between individual and social values. Here, cases (ii) and (iii) are grouped.

13 On Nordhaus, see Aldy and Stavins (2021) and the tribute articles in the same issue.

14 (1) decreasing costs in production; (2) externalities; (3) Samuelson’s joint supply; (4) non-exclusion; (5) non-rejectability; (6) benefit spillovers; (7) unenforceability of compensation; (8) indivisibility; (9) non-appropriability; (10) non-rivalness in consumption; (11) economies of scale; (12) multiple user good; (13) lumpiness; (14) Marshallian joint supply; (15) free rider possibility; (16) non-subtractability; (17) the fact of not being packageable; and (18) the possibility of a strategy of holding out (free riding).

15 Ver Eecke groups (1), (3), (8), (10), (11) (12), (13) and (16) above under this heading, which generalises the more classical ‘non-rivalness’ property.

16 Ver Eecke groups here (2), (4), (5), (6), (7), (9), (14), (15), (17) and (18) above, which together generalise the classical ‘non-excludability’ property.

17 On common goods, see Bance and Schoenmaeckers (2021) and the articles included in the same special issue of Annals of Public Cooperation Economics. Bance (2018) discusses the joint production of public and common goods.

18 Hugon (2003) discusses the notion of global public goods (international, national, and local) and the concept of ethical public economy. He notes that, ‘On observe, par rapport à leur dimension globale, un retard et un décalage de la théorie des biens publics et de leur prise en compte par les décideurs’ [With respect to the global dimension of public goods, one observes both phase-shifts and time delays between their theory and their consideration by decision-makers] (p. 4). Like Nell, he emphasises that the notion of what is considered public or private evolves in time. Nell adds that, with economic development, there is a tendency towards an increase in the share of public and collective goods.

19 This point is often stressed by Mazzucato; see above.

20 This can be seen as a problem in inverse optimisation see, for instance, Aloqeili (2017), Talbot (2016) or Terekhov et al. (2010).

21 Clearly, all Marxian analyses give prominence to the question of the class struggle.

22 For a discussion, see Florio (2014, ch. 3).

23 See also, Bellino (2009) for a development along the lines of Pasinetti (1981, 1993) and Di Bucchianico (2020) for a Sraffian development along Garegnani’s lines.

24 This points to a possible over-valuation of profits in national accounts, which can explain the so-called ‘fallacy of composition’, or why the whole is different from the sum of its parts. To correct for this logical flaw, Vallageas developed an empirical research programme to calculate national accounting flows at ‘value-income’ prices and/or ‘wage-value’ prices (Vallageas 2002, 2010). One can remark that rigorous cost–benefit analysis neglects profits to avoid double-counting.

25 Internal carbon pricing (ICP) is a method for allowing companies to internalise the implicit (actual or expected) cost of carbon. CDP reported in 2015 that the ICP used by large American corporations could vary between $14/t in Google and $80/t in ExxonMobil. See also, Bento and Gianfrate (2020).

26 Engle (2019) defines the social cost of carbon as the present discounted value of the welfare damages resulting from an additional tonne of CO² emissions today. He notes that Nordhaus gets $25/t with an integrated assessment model. The Obama administration used instead $45/t while the Trump administration used $1/t. Meanwhile, Ricke et al. (2018) derived $417/t as the theoretically correct value. See also, Wagner (2021) and Taylor et al. (2021), who put the marginal cost of removing a tonne of carbon on an optimal path at $200/t ($55/tCO²).

27 They corresponded to a GDP of $30 trillion in 2014 for the developing countries in aggregate while, according to World Bank Development Indicators, GDP of low and middle-income countries was $28.5 trillion in 2014.

28 In fact, the share of SDG expenditure in GDP is likely to be higher in developed countries. See, for instance, Kharas and McArthur (2019).

29 For instance, a bottom-up calculation based on the likely cost of reproduction of the European road network shows that this public asset alone is likely to represent 48% of EU GDP in gross terms (Cingolani 2006, pp. 10–13).

30 It is noteworthy that, if the benchmark of 100% of GDP for the public capital stock is retained, with a generous 33 years for the average lifetime of the public capital stock, 3% of GDP must be invested yearly just to keep the value of the public capital stock constant.

31 The simple calculation above tends to generate lower absolute disparities in public capital per capita at market prices than those implied by the IMF estimates. While the figures retained here imply a ratio of 23 between high- and low-income countries’ per capita public capital, the IMF figures imply a ratio of 28 between the stock of public capital of high- and low-income countries.

32 This is closer to the upper range of van Vuuren et al. (2020), which refers however only to climate change. Taylor et al. (2021) state that 2.5% of world GDP is needed to mitigate the effects of climate change.

33 Coal represents some 38% of electricity generation (IEA 2018).

34 Things are slowly changing as a result of the effects of the COVID-19 pandemic, but for the time being this change does not appear to be irreversible: the overall austerity orientations of most economic policies worldwide seem to have been abandoned only temporarily. In any event, the cost of SDGs would add to the remedial action being taken in response to the pandemic, hence the figures above probably underestimate the required public effort and point to the need for strong programming capacity of public expenditures at national level that must also be coordinated at international level.

35 Davies, Lluberas, and Shorrocks (2017) value the wealth of households at $251 trillion in 2014, which is equivalent to three times world GDP for that year and appears broadly consistent with Gadzinski et al. (2018), given that they include more assets, and notably those of the corporate sector. McKinsey (2021) put world net wealth at $510 trillion.

36 For the banking sector, Olaf Weber (2019, p. 226) distinguishes both socially responsible investment and impact investment, which he sees as subordinating sustainable finance to risk, new business opportunities and cost savings, from sustainable finance itself, which puts sustainability issues at the centre of business investment strategies.

37 Government bonds financing public and merit goods and bought by the private sector are an alternative means of achieving public–private partnerships.

38 The approach is more macro than that of Ban and Gabor (2016). The description of the financial sector is simplified. For instance, the shadow banking sector is not separated from the rest of the ‘non-monetary’ short-term banking sector, i.e., it is consolidated with money market funds, etc. See Pozsar et al. (2013) for an exhaustive mapping of the complex shadow banking sector.

39 This was recognised by some classical authors of the 20th century, such as Wicksell, Schumpeter and Keynes and, in the previous century, by the banking school; see Graziani (1987b, 2003). In the variant of the theory of emissions developed by Bernard Schmitt, money created ex nihilo is nonetheless an asset liability, which has zero value.

40 See Graziani (1985, 1987b) for the Keynesian finance motive and the distinction between initial and final finance. These correspond, respectively, to the ‘efflux’ and ‘reflux’ phases in the writings of 14th century banking (Seccareccia 1996); see also, Merhling (2020) for a focus on the reflux phase. In the circuit, the part of investment that is not accumulated in kind by enterprises is funded by households’ monetary savings at the stage of final finance, as in mainstream approaches; however, the whole investment is already financed by credit at the initial finance stage, together with wages. As noted by Graziani in several of his writings (1985, 1987b, 2003), by focusing only on final finance, the mainstream, but also the neo-Keynesian and some post-Keynesians, fall into the trap of thinking that saving finances investment, whereas the causality from investment to savings is what really distinguishes Keynes and Kalecki from the mainstream. This also explains why, for modern finance accounting, prices coincide with market prices.

41 Here, the distinction between Parguez and Schmitt concerning the possible financing of ex ante (extra-) profits by banks is neglected (see also, Seccareccia 1996). For the intermediate position of Graziani, see Bellofiore (2020). All these authors would agree that income corresponds to the sum of consumption and investment and thus of that of wages and profits.

42 This is simpler than developing a complete stock-flow consistent model, which would not be flexible enough to describe gross flow transactions. This way of presenting the problem is easier to manage, at the risk of facilitating some errors due to over-simplification. The interested reader can refer to Vallageas (2018) for a systematic exposition of the monetary circuit in terms of rigorous standard accounting. For interesting applications of stock-flow consistent modelling to the problems of SDGs, see Dunz, Naqvi, and Monasterolo (2018) and Dunz et al. (2021).

43 For an alternative account of the dynamics of asset price inflation using collateral, see Toporowski (2020).

44 Numbers are hypothetical. As compared to the use of letters, they allow one to check immediately how balance sheet identities are respected and they simplify the exposition.

45 In other words, the two initial phases of the canonical monetary circuit are collapsed in the opening balance sheet, leaving the production phase to the transaction period and the reflux or circuit closure phase to the closing balance sheet.

46 Clearly if, in the example, the government secured its initial finance through the selling of bonds to RCM rather than through a loan from commercial banks, this would open new opportunities for increasing the participation of the wealth accumulated by the private sector in the past to the final financing of SDGs.

47 DARPA took autonomous decisions using predictable budgetary appropriations it could use for the pursuit of public missions.

48 Massé (1965 [1991]) initiated a tradition in the theoretical economic policy literature of identifying ‘expectational market failure’ (Guesnerie 2005, 2013) and the need for economic policy to address it. Retaining a subjective viewpoint on probability such as that of de Finetti (1952), it is worth remembering that probability evaluations converge to frequency and become objective once they are shared by all rational individuals.

49 These accounting prices should be defined more in the spirit of Polanyi and Myrdal than in that of Tinbergen.