The Deficiencies of Prevailing Approaches
Approaches drawing on the realist emphasis on the preeminent role of powerful states in world politics would seem to have a lot to offer in analysing the emergence of the FSF and G-20. The G-7 is an organization of the most powerful states and its prominence in their emergence would seem to be consistent with these approaches. Moreover the creation of the ad hoc G-22 process which preceded the creation of the FSF and G-20 was an exemplary case of the unilateral deployment of power by the US. Whether one regards the US role as exercising leadership which benefitted the system as a whole or as arbitrarily promoting a response to the crisis which was consistent with its own interests and which allowed it to retain its dominance in global finance (by, for instance, ensuring that prudential regulation and continued financial liberalization rather than capital controls was the solution adopted) it seems clear that asymmetries of power and capabilities among states must be a key part of any explanation of the FSF and the G-20.
Yet on further examination shortcomings of this type of analysis become apparent. Power was indeed important but it is difficult to see the project which it was used to accomplish as a straightforward expression of the interests of the states exercising the power. In the case of the FSF, why would the G-7 want to encumber itself with the non-G-7 actors which were part of the Forum and which enjoy some autonomy from the G-7 since their mandate and control rests with bodies, such as the G-10 Central Bank Governors or the International Association of Insurance Supervisors, which are at least one step removed from G-7 political authorities? Why not just work through the G-7 finance ministers? In the case of the G-20, why incorporate political authorities from outside the G-7 into the governance of the regime? From a self-interested perspective this appears to be an irrational weakening by powerful states of their own political dominance.
Moreover, the FSF and the G-20 are quite unlike other institutions, like the General Agreement on Tariffs and Trade, which realist approaches such as hegemonic stability theory have been used to explain, since it is not clear how the institutions themselves directly benefit the powerful states. In the case of the GATT, commitments to trade liberalization are seen as contributing to mutually beneficial growth and to improved access to foreign markets for a country's firms. Thus the benefits for powerful supporters of the GATT are tied to the organization itself. By contrast, from an interest-based perspective, it is not clear what concrete benefits the FSF and the G-20 provide for the G-7 that the latter grouping could not provide by itself. There are no concessions given by non-G-7 actors as a condition of membership. Rather the non-G-7 actors have had their power enhanced by being invited to play a more significant role in coordinating the governance of global finance. The officially declared benefits of the FSF and G-20--enhanced joint coordination--fall outside approaches that stress the preeminence of the most powerful states.
Neoliberal institutionalist approaches initially appear to be better suited to explaining the FSF and the G-20 if one thinks of these institutions as a way to reduce transactions costs among their members. Certain economies of scale in learning about international financial regulation can be achieved by pooling the efforts of a larger group of states than the G-7. Uncertainty associated with financial crisis increased the need for such learning. More opportunities for reciprocal monitoring offset the tendency of states to seek to attract financial flows by reducing regulations at the expense of systemic stability. Nesting the new institutions within the well-established G-7 process reduced their set-up costs.
However two features of the process by which the FSF and G-20 were created highlight shortcomings of a neo-liberal institutionalist approach. First, there is no evidence that these organizations were the outcome of a bargaining process among the actors that would come to constitute their membership. Even among G-7 members bargaining was minimal. For instance the FSF was adopted with no indication of dissensus after Bundesbank president Tietmeyer consulted with the G-7 and the international financial institutions. There was even less evidence of bargaining between the G-7 and non-G-7 states in the creation of the G-20. There were calls for broader representation in the new financial architecture discussions.9 There was also grumbling on the part of Malaysia at its exclusion from the G-20.10 While such statements do highlight the significance of expanded representation they were not associated with a bargaining process--there were no specific demands or concessions put forward by those who would later become members. Moreover the G-20 was put together at a time of weakness for its developing country members which further reduced their potential for bargaining.
Second, the structures of the FSF and the G-20 are not well-suited to the reduction of transactions costs. The FSF has a minimal secretariat and the G-20 has none. Thus, unlike many international organizations, their primary task will not be the production of information. Nor are they set up for another common task of international organizations: offering neutral judgements in response to problems of opportunism and lack of trust. The IMF, with its large professional staff and its ongoing effort to promote transparency and produce data, is far better suited to the types of tasks usually associated with the reduction of transactions costs. By contrast, the primary task of both the FSF and the G-20, like the G-7, is intended to be coordination and the discussion of policy.
As noted above, a third set of approaches to understanding the creation of the FSF and the G-20 are those which emphasize the mutually supportive roles of states and powerful market actors, such as Gramscian approaches. In structure the FSF and G-20 bear some similarities to the informal and interconnected network of institutions, such as the Trilateral Commission or the Group of Thirty, which bring together top leaders in business, government and academia to forge capitalism-friendly policies for the global economy. However the creation of the FSF and the G-20 increased the autonomy and distance of their member states relative to business rather than increasing their linkages. Private associations, such as the International Institute of Finance, which was created by the world's largest commercial banks and involves itself in global policy matters on their behalf, played no significant role in the creation of the FSF and the G-20. Indeed two of the prominent ideas endorsed by states in their discussion of the new financial architecture which accompanied these institutions' creation were ones that were contrary to the interests of wealthy financial firms and investors: plans for private sector burden-sharing in crises 11 and a shift towards greater acceptance of slower liberalization and, under some certain conditions, the use of capital controls. Of course one could claim that states need to work against the short-term interests of capital in order to safeguard their longer-term interests in systemic stability, but this would become a non-falsifiable statement of faith about the two actors' mutual interests since the institutional linkages that would be needed to manage such long-term coordination were made more difficult rather than being strengthened.
It would also be difficult to argue that the creation of the FSF and G-20 were responses to the pressures generated by counter-hegemonic forces or global civil. Civil society actors have been vocal and well organized in some areas of global finance, such as the investment provisions of the NAFTA, the defeat of the Multilateral Agreement on Investment, or the influencing of IMF or World Bank policy on debt. However they have been notably absent from the issue area of global financial regulation and from the process by which the FSF and G-20 were created in 1999.
The Contribution of the Concept of Legitimacy
In this section it will be argued that the question of legitimacy is crucial in understanding the creation of the FSF and the G-20. Legitimacy here refers to the legitimizing effects of private and technical authority as well as more directly political legitimizing mechanisms. The two institutions are quite different in their relationship to these sources of legitimacy. The FSF built upon a distinctive relationship between technical and private authority that had developed over the international regime for prudential regulation's quarter century of development but supplemented with the political authority of the G-7. In contrast the G-20 was more directly political, both in the greater weight in its membership of political officials, and in its inclusion of key governments from outside the G-7.
The FSF, in the understated way in which it was created, in the institutions it linked together, and in the heavily technical orientation of the tasks it set itself, drew heavily for its legitimacy on the accumulated technical authority of the international regime for prudential regulation. Over the decades since its beginnings in the mid-1970s institutions such as the Basle Committee and the Committee on Payments and Settlement Systems have produced increasingly sophisticated technical reports which have identified problems and proposed best practices and standards for addressing them. Currently a key task of the FSF and G-20 is to further consolidate these sets of standards.12 The standards are norms and regulations but of a particular type. They obtain their legitimacy not primarily from a process of discursive interaction among states nor from a process of bargaining by democratically accountable states. Rather they are grounded in bodies of technical knowledge that foster legitimacy for the reasons set earlier in this essay: a successful performance orientation; an emphasis on practical and quasi-natural relationships in which politics is excluded; and an ostensible openness to criticism, revision and input from technically qualified individuals. The tradition of technical authority upon which the FSF drew was closely connected to the larger legitimizing contribution of private authority. Technical tasks were oriented towards reinforcing the four legitimizing effects of global finance's private character: its performance; its naturalness; its private character; and its openness and fairness. Three of the more general features of legitimacy identified by Frank; determinacy, coherence and adherence, were all strengthened by the growth in the regime's technical complexity. The fourth, symbolic validation, was fostered by the image of central bankers as prudent experts untarnished by politics..
However developments between the creation of the FSF in February 1999 and the G-20 in September 1999 indicate that the traditional legitimizing features of the international regime for prudential regulation were inadequate given the crisis and other developments of the previous two years. All the factors contributing to legitimacy which were listed in the previous paragraph were undermined. The technical and private solutions were revealed to be perform suboptimally; to require more political intervention than had been admitted; to be problematic in terms of fairness; and to possess less determinance, coherence and adherence. An initial effort to blame the crisis on factors external to the international regime--"crony capitalism"--a technique which had worked in earlier crises, was relatively ineffective given how recently the victims of the crisis had been held up as paradigmatic examples of the positive values of markets--and was soon downgraded as an explanation.13 Moreover, aside from its ability to facilitate collaboration among its member-institutions the most noteworthy feature of the FSF was its heavy G-7 representation. This introduced a new political dimension to the regime which complicated legitimation. As noted above, political legitimation involves openness and rules, neither of which was a property of the informal FSF with its limited membership.
A first attempt to address this problem was to expand the membership of the FSF to include Australia, Hong Kong SAR, the Netherlands and Singapore and by indicating that non-G-7 countries would be permitted to participate in FSF working groups.14 Moreover Tietmeyer indicated in a September 1999 article that "participation was envisaged to be extended over time to include representatives from additional national authorities able to contribute substantially to the process" (Tietmeyer, 1999b). This was followed by the more dramatic creation of the G-20 with its broader political membership from outside the G-7.
If we look then at the G-20, its utility for legitimating G-7 policies is evident. By including China, Russia, India and Indonesia it can claim to represent the world's largest and most populous countries and ones with, historically, very different social systems. Together the G-20 countries account for 87 percent of world gross domestic product and about 65 percent of world population. 15 Moreover officials stress the G-20's representativeness. The official backgrounder on it notes that "through broad participation by industrialized countries and key emerging markets, the G-20 will represent a range of viewpoints." 16 Tietmeyer has noted of the standards that are being developed, that "the emerging economies to which those standards would apply should be involved more closely in these processes, in order to enhance their commitment to implementing them." (Tietmeyer, 1999b). Similarly the official report on the first G-20 meeting noted of the commitments of Ministers and Governors to completing reports on standards that "this commitment will help mobilize support for measures to strengthen domestic capacity, policies and institutions".17 The G-20 also has an advantage relative to the IMF despite the latter's more universal and formal character because of the IMF's poor performance during the 1997-98 financial crisis and its negative reputation as secretive and arrogant.
A deliberate effort by Martin to keep the G-20 focused on practical tasks18 also evoked the more traditional technical legitimacy of the regime. Its four priority areas, stock-taking on progress in reducing financial vulnerability; assessment of compliance with international codes and standards; reports on those codes and stability assessments; and an examination of differing exchange rate regimes; while involving conflicts, also remain quite technical. Indeed Martin admitted after the first meeting of the G-20 that the meeting had mainly dealt with 'plumbing' issues. 19 Additionally, while the G-20 was promoted as an important mechanism for the involvement of non-G-7 countries, there were also limits set on the prominence of its political role. For instance the G-20 Berlin backgrounder indicates that "The G-20 will help co-ordinate the activities of other international groups and organizations, such as the Financial Stability Forum", but, after its first meeting the German and Canadian finance ministers noted that the G-20 did not want to be a decision making body. 20
Despite these efforts to limit the politicization of the G-20 it was clear by its first meeting that there were political conflicts that were not acknowledged officially. A key line of tension was between the US on the one hand and France and Japan on the other. Reflecting earlier tensions over the G-22 process in which the US, working through the G7, drew in key developing countries and thereby created an alternative governance mechanism to the IMF in which Europe retained more influence, the French insisted that the G-20 not displace the Bretton Woods institutions while the US seemed to want to weaken the IMF, not just by creating an alternative G-20 site of authority, but also by diminishing its role in longer term financing for developing countries in favour of a greater private sector role, to be regulated by the FSF-related standards. Tensions over exchange rates revealed a similar disagreement, with the US pushing for a rejection of pegged exchange rates while France and Japan, interested in EU and East Asian zones of monetary coordination respectively, were sceptical of this US campaign as are China and India.21 In the background were prior statements of support by Japan, China and Russia for the unorthodox approaches adopted by Hong Kong and Malaysia to the Asian crisis.22
Despite their significance of these political conflicts for the G-20 it is unlikely that they will be managed by it. Rather, the G-20, with its once yearly meetings and lack of permanent secretariat, will in the immediate future continue to be a mechanism for upgrading the involvement of non-G-7 countries while maintaining careful limits on their political power. At the same time the G-20 is not simply a peremptory usurption of IMF prerogatives in a power play by the US. Nor, with members like China and Russia, is it a meaningless cooption of compliant US allies. Rather it is a mechanism crafted to carefully draw on and supplement the existing regime for financial regulation's technically-based legitimacy with certain elements associated with political legitimacy, which in a domestic polity we would also associate with democracy, such as openness to wider participation, to freer discussion, and, despite its lack of bureaucracy, an increase in formality and thus rule-governedness relative to the more ad hoc G-22 and bilateral consultations that preceded its formation.
The analysis of legitimacy developed earlier in this essay, in addition to highlighting factors important to the creation of the FSF and G-20, also allows us to indentify weaknesses of the existing arrangements. Despite the ways in which they can foster legitimacy which were noted above they continue to lack certain features which, in other contexts, would be associated with legitimate political institutions. First, their rule-governedness remains minimal. The principles guiding membership selection, agenda selection, and decisionmaking capacity remain undefined. Founded by the G-7, which itself lacks a foundation in a globally agreed system of rules, the FSF and G-20 remain vulnerable to charges that they are arbitary political creations. Their continued reliance on technical authority for legitimacy can always threaten to become problematic if technical solutions falter. It is unlikely that the present institutional character of the FSF and G-20 can continue without either moving towards a further expansion of legitimacy-producing processes or fading in significance.
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