WATERLOO, Ontario — The financial crisis roiling the world is the result of serious shortcomings in domestic financial governance that have also highlighted gaps in the global governance of international finance and capital.
On any given day, mail is delivered across borders; people travel from one country to another via a variety of transport modes; goods and services are freighted across land, air, sea and cyberspace; and a whole range of other cross-border activities take place in reasonable expectation of safety and security for the people, groups, firms and governments involved.
Disruptions and threats are rare — indeed, in many instances rarer in the international domain than in some sovereign countries that should have effective and functioning governments. That is to say, international transactions are typically characterized by order, stability and predictability.
This immediately raises a puzzle. How is the world governed — in the absence of a world government — to produce these norms, codes of conduct, and regulatory, surveillance and compliance instruments? The answer is global governance: the sum of laws, norms, policies and institutions that define, constitute and mediate relations among citizens, society, market and public authorities — the wielders and objects of the exercise of public power.
Yet the “normal” periods of calm, stability, order and predictability are interspersed with periodic bouts of market volatility, disorder and crisis. Both the Asian crisis of a decade ago and the current market collapse demonstrate the need for efficient, effective and transparent regulatory and surveillance instruments and institutions.
The immediate roots of the present crisis lie in the excessive and less than transparent leverage of complex securities and derivatives that introduced one degree of separation too many between the bubble and real economy. The U.S. regulatory regime governing its financial and banking worlds can euphemistically be described as light, incomplete and fragmentary.
Causes of the crises lie in domestic governance imperfections and the solutions entail domestic government and market responses. One after another, led by British Prime Minister Gordon Brown, governments underwrote massive bailouts either by buying toxic debts and/or injecting capital into banks to stabilize financial markets and provide liquidity to keep credit lines open.
The role of global governance institutions is to contain the contagion. Only a new regulatory regime will reassure many countries that the balance has been restored between the risks and benefits of integrating with an open world economy.
The world is interdependent in areas as diverse as financial markets, infectious diseases, climate change, terrorism, product safety, food supply and water tables. Our collective capacity to manage these interdependencies throughout pooled or coordinated policy responses has fallen behind the rise in the numbers and intensity of interdependent sectors.
To borrow language from the climate change context, all countries have a common but differentiated responsibility for the stability of the global economic and financial systems. Countries like China and India have limited access to current global decision-making channels and sharing the responsibility for managing the global order. The idea that they will continue to integrate with the world order on terms and following norms set by the West is quaint and archaic. To be made responsible stakeholders in the management of the regime and the outcomes that come from it, they need ownership of the process.
The short-term, emergency measures to deal with the financial crisis were accompanied by a growing recognition that the system to manage the modern world of banking, capital and finance has to be redesigned. The reality is that corporations, markets and financial flows are global. But the regulatory and surveillance systems are national or, in a few cases like Europe, regional.
Moreover, as stated by U.S. Treasury Secretary Henry Paulson, “If you look at the global financial architecture, I don’t think it reflects the global economy today.” Brown and other Group of Seven leaders are calling for a major global meeting to redesign the world’s finance system and rewrite the rule book of global capitalism. Brown argues for “the same sort of visionary internationalism” as Bretton Woods in 1944.
At present, the perils are global, the risks are socialized internationally, but the benefits remain privatized and are far from global. This is why we need cross-border supervision of financial institutions; shared global standards for accounting and regulation; and international institutions to provide early-warning systems for the world economy. Brown warns that “if risks are globalized, then responsibilities have to be globalized as well.”
None of the existing political or economic institutions — the IMF, the G7 industrialized countries, or the G20 finance ministers — proved adequate to the task of coordinating a response to a global crisis. It is hard to imagine any major global challenge that can be effectively addressed without involving, for example, all three Asian giants: China, India and Japan.
Yet two of the three (India and Japan) are not permanent members of the U.N. Security Council, and two of the three (China and India) are not part of the G7 club. The IMF has shown more skill and determination at preaching to the developing countries what they should do than at persuading industrial countries to act together, while the G20 is prone to blame all ills on the developed countries and ask them for handouts rather than tackle the domestic governance gaps of its own membership.
A new architecture of global governance for the 21st century must bring together the existing G8 (G7 plus Russia) and the major emerging markets of Brazil, China, India, Mexico, South Africa as well as Saudi Arabia and/or Indonesia.
Ramesh Thakur, the director of the Balsillie School of International Affairs in Waterloo, Canada, is the coauthor of the upcoming book “The United Nations and Global Governance: An Unfinished Journey.”