The G20: Meetings and Other Docoments
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G-20: Meetings and Other Documents

The G-7, the Financial Stability Forum, the G-20,
and the Politics of International Financial Regulation

Tony Porter
Department of Political Science
McMaster University
Hamilton, ON L8S 4M4, Canada
905-525-9140 x23899
Email: tporter@mcmaster.ca

[Document Contents] [Next]

Introduction

In 1999, in the wake of the two previous years of international financial turmoil in East Asia and elsewhere, two new intergovernmental institutions were created by the G-7 to assist in regulating global finance. The first, the Financial Stability Forum, brought together representatives from G-7 countries and from existing international institutions concerned with international financial regulation. The second, the Group of 20, brought together finance ministers and central bank governors from the G-7 and from twelve non-G-7 emerging market countries, along with high-level representatives from EU, the IMF and the World Bank. This was accompanied by much discussion and further changes in existing institutions as part of the focus on reform of the international financial architecture.

The relatively rapid creation of two new international institutions, under any circumstances, but especially in an issue area which is thought to be notoriously difficult to regulate, offers interesting opportunities to apply or reconsider existing theories of international institutions. The severe practical consequences of the crisis to which these institutions are designed to respond further contributes to the importance of analysing them.

At first glance it appears that these developments can be fairly easily explained by theories that emphasize the self-interested use of power politics by states. Faced with a systemic crisis, the great powers, working together in the G-7, quickly put together institutions which they solidly controlled to respond to that crisis and thereby preserve the advantages they get from their dominant position in the system.

The developments also seem to fit well with approaches which emphasize the mutually supportive roles of states and powerful market actors, as conceptualized for instance in Cox's nébuleuse (Cox, 2000), a transnational process bringing together finance officials, international financial institutions, and other participants in various financially-dominated discourses, to strengthen the degree to which states are forced to adjust to the needs of the global economy. Financial crisis threatens not only wealthy holders of financial assets, but capital more generally, as the stability of international markets as a whole is at risk. Thus it is not surprising that powerful states would organize a response to such a threat.

Finally, liberal approaches which emphasize bargaining among rationalistic actors would see these developments as the result of the desire of the states involved in them to work together to prevent international financial crisis, a task in the interest of all participants.

Despite the apparent ease with which these developments can be explained as a reflection of the interests of powerful state and economic actors or an outcome of rationalistic bargaining there are anomalies that raise questions. Why did the G-7 feel a need to institutionalize the participation of non-G-7 countries? Why was the apparently weaker and less formal G-20 developed rather than relying on the IMF with its proven record of obtaining compliance of developing countries through practices of conditionality? Why were two institutions, the FSF and the G-20, formed in quick succession, despite their apparently overlapping mandates? Why did some of the ideas which emerged from the G-7's work, like some support under certain conditions for slower liberalization, or the need to impose the costs of crisis on private actors, appear to work against the powerful financial interests which seem to be driving the globalization of finance? And why was there no evidence of negotiation on the part of the emerging market states, the inclusion of which is the one of the most striking features of the developments?

This essay argues that it is necessary to go beyond above approaches to address the role of legitimacy if we wish to fully understanding the process through which the FSF and G-20 were created in 1999. Legitimacy can be defined as the acceptance of the exercise of power or of a set of social relationships because it is believed that these are based on a justifiable set of rules.1 As such legitimacy plays a key role in the maintenance of social order. Many people attribute the effects of power or compliance with social rules to the deployment by the powerful of resources, especially the exercise or threat of coercive force. By contrast, those who have studied legitimacy have held that effective power and compliance can only be occur if there is a belief in their rightness. As Franck (1990: 15-16) has noted, "most contemporary legal philosophers deem coercive power necessary but insufficient to secure habitual social assent to governance...Those who claim to have identified one or more non-coercive factors in the engendering of obedience generally use the term legitimacy and its variant, legitimation, to enclose some or all of the additional or alternative (non-coercive) requisites of obedience".

Clearly legitimacy at the international level differs substantially from legitimacy in domestic polities. Everyday domestic democratic institutions, such as parties and elections, which are commonly crucial in legitimizing policies, are absent, as are other traditions and institutions which link rulers and the ruled. Nevertheless it is possible to identify specific features of the exercise of power internationally that are associated with its degree of legitimacy. In international law these have traditionally been restricted to the character of relations among states. In this essay I go beyond this state-centrism to identify features of the market economy and of bodies of technical expertise that foster or undermine legitimacy.

This essay does not suggest that power is irrelevant in the creation of the FSF and G-20. On the contrary--it is crucial. However identifying institutional characteristics that distinguish legitimate power from unlegitimated power enhances our ability to understand the process by which the FSF and G-20 were created. As we shall see, the concept of legitimacy draws our attention to certain normative features of power relationships and thus supplements power analyses that are based on capabilities and outcomes. We shall also see that the concept of legitimacy helps us to identify a crucial and distinctive complex of norms under conditions of high asymmetries of power that are an under recognized subset of the broader universe of norms which constructivist approaches address.

Canadian Finance Minister Paul Martin, who would shortly thereafter become head of the G-20, noted in July 1999 "It is not reasonable to expect sovereign governments to follow rules and practices that are 'forced' on them by a process in which they did not participate. Therefore, whatever form the renewed global financial architecture ultimately takes, all countries must 'buy into it' and take ownership. Only then will the framework have legitimacy" (Martin 1999). This essay suggests that this is not simply rhetoric but that it reflects the concrete significance for contemporary international institutions of legitimacy. In the remainder of the essay I shall first discuss legitimacy conceptually and then examine its relevance to the creation of the FSF and G-20.


1 For various definitions of legitimacy see Beetham 1991, 3; Franck, 1990: 16, 24, 150; Lipset 1984, 89; Schaar 1984, 108.

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