Tuesday, June 10, 2014
Global Governance vis-a-vis Global Economy: Is Light Governance Sufficient?
By Bakampa Brian Baryaguma
[Dip. Law (First Class) – LDC; Cert. Oil & Gas – Mak; LLB (Hons) – Mak; GC Candidate – GCA]
Since the mid 20th century, the world has witnessed an increasingly growing trend towards harmonization of world relations and cooperation, in various matters of international concern. Virtually all aspects of human society – anything and everything from climate change, crime, human rights, defence, politics, religion, commerce, to charity – have a global perspective. Our world is steadily knitting into a shared socio-political, cultural and economic touch. The world is becoming one integrated whole.
This harmonization of world affairs is the lifeblood of globalization, a system that perceives social phenomena from a common worldwide perspective, necessitated by enhanced interdependence of states on issues of global reach. One of the issues that rank high on the globalization agenda is streamlining the global economy.
Therefore, globalization has ushered in the phenomenon of global governance, which is characterized by the emergency of international institutions and human communities working across borders. Global governance entails administration and management of the global economy, mainly through delegation of national powers to international financial institutions (IFIs), which are ‘... charged with [preventing and] solving “technical” problems arising from uncoordinated decision making in the global economy.’ This is important for ensuring economic stability, hence sustainable development.
2. The Sufficiency of Light Governance?
Having seen that global governance is an indispensible component of globalization, the million dollar question now is; how much of it is sufficient or acceptable for managing the global economy. There is a view that light global governance is sufficient when it comes to world economy. To my mind, light governance is the kind which, though international, is fairly decentralized at regional levels, less formalistic and inclusive. It is akin to soft governance (distinguishable from hard governance) as a form of process-based coordination that is designed to facilitate the exchange of views and information sharing on an ongoing basis, without a priori expectation of substantial outcomes or agreements. Light governance aims for more integrated management of global economic affairs and is supported by two prominent scholars: Amar Bhattacharya and Dani Rodrik.
Mr Amar Bhattacharya believes that dramatic changes in the global economy should be reflected in the governance arrangements. He argues that the structures of IFIs have failed to account for changing economic realities, because, in his view, there are gaps between their mandates, since they were created for yesterday’s challenges. One of the gaps, he says, is the inequitable representation of poor countries at the IMF. He proposes that Europe needs to adjust its quota and voting share there, by reducing its share of membership.
For his part, Mr Dani Rodrik banks on the European Union experience to support light global economic governance, which he says, ‘... proves that transnational democratic governance is workable ....’ But in his opinion, ‘... deep economic integration requires erecting an extensive transnational governance structure to support it.’ His main concern is with regard to the spread, sustainability and legitimacy of international institutions, as preconditions that must be satisfied before global governance can flourish. He observes that, ‘Our complex and variegated world allows only a very thin veneer of global governance – and for very good reasons.’
These views are both compelling and unassailable. In today’s globalized economy, there must be a modicum of governance. It is notable that, ‘What happens anywhere affects everybody — and increasingly so;’ such that a full-fledged international economic control mechanism can be harmful to local communities, because it may not properly understand and effectively address their peculiar needs. To avoid this misfortune, it is important that global control mechanisms and institutions be as representative and inclusive as possible, like Mr Bhattacharya states.
But equally true is that none or too little governance can be bad. So, we need lighter and more relaxed governance structures that are flexible and effective – like what IMF calls smart governance. Light governance is agreement-oriented. It therefore, enjoys trust and conviction of members, wherein lies its flexibility. Its efficiency lies in its ease and ability to respond quickly to situations, without undue regard to technicalities. Therefore, it is in accordance with Mr Rodrik’s proposal for extensive transnational governance structures that are well spread, sustainable and legitimate enough to support today’s global economy.
The current global economic consciousness and interaction makes the idea of a global village a growing reality. Like any other village, the global village needs a marketplace that must be well organized, monitored and regulated, because experience shows that separate decision making is hazardous. It is important to create a system that reflects new economic realities and responds effectively to new global challenges. I find that light governance, which allows flexibility and effectiveness – at the heart of which lays the need for ‘... more coordination, disclosure and more transparency’ as imperatives – will suffice to achieve this.
Notes and References
1. Joseph E. Stiglitz, Globalization and its Discontents (2002), at 9, defined globalization as ‘… the closer integration of the countries and peoples of the world …’ due to ‘… the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flow of goods, services, capital, knowledge and … people across borders.’ It is often termed as going global, in reference to the growing global interconnectedness and coordination efforts. From an economic perspective, this trend is due to the need for joint supervised management and monitoring of exploitation of the world’s resources and efficient use of financial systems. It is expected that interdependence will improve human welfare by for instance, reducing or even eliminating high global poverty rates.
2. Philippe Cullet, ‘Differential Treatment in International Law: Towards a New Paradigm of Inter-state Relations’, 10 EJIL (1999), at 550.
3. The term economy emanates from the word economics, which literally, is the science of the production, distribution and consumption of goods or the condition of a country as to material prosperity. See, A.S. Hornby, A.P. Cowie and A.C. Gimson, Oxford Advanced Learner’s Dictionary of Current English (1983), at 280.
In its normative form, economics evaluates the design of institutions for the organization of economic activity, for purposes of allocating social capital through markets. See, Joel P. Trachtman, ‘The International Economic Law Revolution’, JIEL (1996), at 9.
Consequently, the term economy denotes a society’s system of controlling and managing its money, goods and other resources. See, A.S. Hornby, A.P. Cowie and A.C. Gimson, Oxford Advanced Learner’s Dictionary of Current English (1983), at 280.
4. Like the World Bank (WB), the World Trade Organization (WTO) and the International Monetary Fund (IMF).
5. Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy (2011), in chapter 10.
6. UN System Task Team on the Post-2015 UN Development Agenda, ‘Global governance and governance of the global commons in the global partnership for development beyond 2015’ (2013), at 3.
7. Nemat Shafik, ‘Smart Governance: Solutions for Today’s Global Economy’ (2013). Available at https://www.imf.org/external/np/speeches/2013/120513.htm. Ms Nemat gives an example of light global economic governance as the regular discussions among central bankers at the Bank for International Settlements (BIS). On hard governance, she explains that it ‘is typified by quid pro quos in policies with a focus on specific and tangible outcomes.’ For example, the two initial G20 Leaders’ Summits that took place in the immediate aftermath of the 2008 crisis and resulted in the creation of the Financial Stability Board (FSB), created in 2009 with a mandate to develop and promote effective financial regulation. She explains that, ‘Soft governance works when innovation is needed but there is time to act, when getting a subset of countries to act is sufficient and ad hoc implementation can work. Hard governance is needed in a crisis or when global approaches are needed and when consistent enforcement is key.’
8. Amar Bhattacharya, ‘Structural Transformation and Sustainable Growth of the Global Economy: Beyond the Crisis and Lessons for Global Governance’ G-24, (2013), at 44. See also, his lecture on global economy, in week five of the Global Civics Academy lectures series on global civics. In his lecture, Mr Bhattacharya identifies at least three global economic changes:
First, is that before the 2008 financial crisis, out of some 150 emerging markets and developing countries (EMDCs), 94 countries were growing at a rate of more than 5% per annum and a majority of EMDCs – 8 out of 10 – grew at a higher rate than that of many other advanced economies (ACs). It is expected that this trend will continue, although the 2008 crisis has affected, in downward way, both advanced countries and EMDCs. For example, a majority of emerging markets are now net commodity importers (especially food and fuel, which makes them doubly vulnerable to food and fuel price shocks) and not net commodity exporters; financial flows like remittances, have reduced; and high commodity prices;
Second, for the first time, low income countries and especially Sub-Saharan Africa, are part of this trend, thus showing a broad based convergence. He explains that a very strong macro-economic performance, with a vast mature cycle of savings and investments, growing trade and macro-economic resilience, underlines this growth. He notes that savings in EMDCs are higher than in Organization for Economic Co-operation and Development (OECD) countries and have allowed for higher investments and growth;
Third, is the growing heterogeneity across regions, considering purchasing power parity (i.e. comparing like for like e.g. goods being compared at kind of the same price across countries). The BRICS alliance – Brazil, Russia, India, China and South Africa – is notable here. With its continued growth and role as new powers, a rebalancing is taking place.
9. Colin I. Bradford, Jr. and Johannes F. Linn, ‘Reform of Global Governance: Priorities for Action’ 163 BPB, (2007), at 2, identify four most prominent global changes: first, changing demographic and economic balances, largely due to the rapid economic growth of China and India; second, dramatic expansion of global interdependencies with rapidly growing trade and capital flows, as well as in the energy markets, in health, migration and illicit drugs, and in the environmental and security arenas; third, there are increasing links among these global issues such that stove-piped global institutions, operating on issue-specific mandates, will not be able to deal with these interrelationships; and fourth, emergence of new and growing global risks that need urgent attention, including global financial imbalances, energy insecurity and global warming, and threats of global epidemics.
10. Amar Bhattacharya (in his lecture), supra note 8, at 52. This view is shared by Colin I. Bradford, Jr. and Johannes F. Linn, supra note 9, at 1, who say that, ‘Many of today’s international institutions were created at the end of World War II, more than 60 years ago. … [since then] very little has been altered in the basic structure of these global institutions. Global institutions are not working well individually and as a group.’
11. Amar Bhattacharya, supra note 8, at 53. The IMF is responsible for international financial stability, for example harmonizing interest rates. In his lecture, Mr Bhattacharya explains that, amongst EMDCs, the most disadvantaged and disenfranchised are the low income countries, including those in Sub-Saharan Africa, who see their shares in governance actually decline and although they are seeing a modest increase in their role in the global economy, by virtue of the fact that they are poor, they are disadvantaged. He notes that the main reason for disadvantage of these countries is the over-representation of Europe: the IMF managing director is always European; the IMF board has 24 seats; eight of nine directors are from Europe; and Europe has 33% of actual and 34% in terms of calculated quota share, even though its share of GDP is only around 23%.
Colin I. Bradford, Jr. and Johannes F. Linn, supra note 9, at 4, suggest that ‘An unrestricted, merit-based selection of the Managing Director … and a reduced number of directors’ seats on its executive board are important ways to strengthen the effectiveness of the IMF and enhance its legitimacy beyond the rebalancing of its shares and votes.’
The UN System Task Team on the Post-2015 UN Development Agenda, supra note 6, at 8, has also weighed in on this matter, warning that, ‘… political sensibilities are likely to arise in terms of refining the institutional mandates of intergovernmental organizations, as well as implementing reforms concerning the adequate level of representation of hitherto underrepresented Member States.’ It therefore, recommends that, ‘… to address these sensitivities, governance targets should be concrete, where possible, yet must allow for political compromise and flexibility.’ See, ibid.
12. Ibid., at 55. Plus, Colin I. Bradford, Jr. and Johannes F. Linn, supra note 9, at 3, say that, ‘… the IMF suffers from a legitimacy deficit because of an out-dated distribution of ownership shares and votes — giving too little to the rapidly growing emerging economies [and] a restrictive leadership selection process ….’
Even the IMF Deputy Managing Director, Nemat Shafik, supra note 7, is aware of the need for reform, because she says that, ‘… further shifts in quota and voting shares to dynamic economies will also be needed. To achieve this, some countries will have to accept relative declines in their quota and voting shares. [As] … it will be crucial for the IMF’s effectiveness and legitimacy to ensure that its governance structure reflects the relative position of its member countries in the global economy.’
13. In his lecture. See, supra note 8. Whether this will happen remains to be seen. But if what Nemat Shafik, supra note 7, says; that, ‘The key reason why the IMF has remained relevant has been a political governance structure that, albeit slowly, does adapt to changes in the world economy,’ is true, we hope it will.
14. Dani Rodrik, supra note 5. But Mr Rodrik is more critical and sceptical of the concept altogether. He says, strongly that, ‘We may think we live in a world whose governance has been radically transformed by globalization, but the buck still stops with domestic policy makers. The hype that surrounds the decline of the nation state is just that: hype. Our world economy may be populated by a veritable alphabet soup of international agencies – everything from ADB to WTO – but democratic decision making remains firmly lodged within nation states. “Global governance” has a nice ring to it, but don’t go looking for it anytime soon.’ He therefore, urges treading carefully adding that at best, the European experience is the exception that tests the rule, and urges treading cautiously, noting that Europe’s murky ‘... experience also lays bare the demanding requirements of such governance.’
However, Rodrik acknowledges the changed international socio-politico and economic dynamics. For instance, he confidently states that, ‘The nation state is passé. Borders have disappeared. Distance is dead. The earth is flat. Our identities are no longer bound by our places of birth. Domestic politics is being superseded by newer, more fluid forms of representation that transcend national boundaries. Authority is moving from domestic rule-makers to transnational networks of regulators. Political power is shifting to a new wave of activists organized around international non-governmental organizations. The decisions that shape our economic lives are made by large multinational companies and faceless international bureaucrats.’
15. Ibid. For example, in his view, ‘We would need to create a “global body politic” of some sort, with common norms, a transnational political community, and new mechanisms of accountability suited to the global arena’ and further, that, ‘... global governance must transcend exclusive clubs of regulators and technocrats’ in order to achieve legitimacy. ‘The creation of legitimate global institutions,’ Colin I. Bradford, Jr. and Johannes F. Linn, supra note 9, say, ‘ involves multiple goals: First, the institutions must be representative. Second, the institutions need to be effective. Third, collectively the international institutions need to serve as an effective global governance system. Finally, the international institutions should offer opportunities for national and international leaders to forge coalitions for action and reform.’
16. Colin I. Bradford, Jr. and Johannes F. Linn, supra note 9, at 1, state that ‘... the global institutions at the core of the international system, such as the United Nations, the International Monetary Fund, the World Bank and the G8 Summit are, to varying degrees fragmented, unrepresentative and ineffective, and generally suffer from an corosive decline in their legitimacy. They are increasingly fragile and unable to address the global challenges of the 21st century.’ The UN System Task Team on the Post-2015 UN Development Agenda, supra note 6, at 4, agrees with this view.
17. Dani Rodrik, supra note 5. Some of which include, according to him, the lack of clear accountability relationships, which forms the Achilles’ heel of global governance; perceived inability of international regulators to provide good explanations for what they choose to do; and a general absence of individuals who feel that they are global citizens.
18. Nemat Shafik, supra note 7.
19. The 2008 financial crisis offers a good example. Occurring at the height of global economic interconnectedness, its lesson is that unregulated market systems can be disastrous to economies. (See, Barack Obama, ‘The Remaking of America’ (2009), in United States Department of State and Bureau of International Information Programs, President Barack Obama: in His Own Words, at 8.)
According to Nemat Shafik, supra note 7, only then did it become ‘… clear that there had been an undersupply of global governance in the years leading up to the crisis.’ She also says that the crisis was a disruption in a relatively small segment of the U.S. financial system, which spilled into distant markets and countries and morphed into a full-fledged global financial crisis.
20. Nemat Shafik, supra note 7.
21. Colin I. Bradford, Jr. and Johannes F. Linn, supra note 9, at 7.
22. Hakan Altinay, in his follow-up remarks to Mr Bhattacharya’s lecture, supra note 8.