Governing the Global Economy through Government Networks

Anne-Marie Slaughter, Professor of International, Foreign and Comparative Law and Director, Graduate and International Legal Studies at Harvard Law School

May 23, 2000

Anne-Marie Slaughter, J. Sinclair Armstrong Professor of International, Foreign and Comparative Law, presented findings from her current research on transgovernmental networks. Much of her new research builds upon her 1997 Foreign Affairs article "The Real New World Order." In this article, Professor Slaughter argued that the state is not disappearing in the age of globalization, but is instead disaggregating into separate, functionally distinct institutions. These parts?courts, regulatory agencies, executives, and legislatures?are networking with their counterpart institutions abroad, creating a new set of transgovernmental networks. Professor Slaughter maintains that the networks formed by component state institutions represent a new transgovernmental order that challenges traditional conceptions of unitary state sovereignty.

The Asian financial crisis of 1997-1998 serves as an appropriate starting point in examining the role and influence of transgovernmental networks involved in the governance of the global economy. The Clinton Administration?s response to the problem was largely through the Chairman of the Federal Reserve and the Secretary of the Treasury Department. Both regulatory agencies contacted their foreign counterparts to coordinate a global interest rate cut. Instead of relying upon the traditional diplomatic offices of the State Department, President Clinton confronted the crisis through the existing networks of US regulatory agencies. Although much talk of establishing a new global financial architecture emerged in the wake of the crisis, the most influential governance decisions were created through informal networks of government officials.

Types of Networks

There are two particular types of government networks that are most relevant to global economic issues. The first, relatively more formal type of network is composed of transgovernmental regulatory organizations. The second, less formal type of network is formed through agreements between domestic regulatory agencies.

The Basle Committee on Banking Supervision serves as a perfect example of the more formal type of network. The central bank governors of the Group of Ten countries established the Basle Committee in 1975.1 Currently composed of representatives from 12 central banks with a central secretariat located at the Bank for International Settlements (BIS) in Switzerland, the Basle Committee drafts policies, holds study groups, and presents model codes on banking supervision. Although not a formal international organization, the Basle Committee nonetheless displays a great deal of power and influence in the global economy, effectively promulgating international financial standards. The Basle Committee has no formal basis in international law?there are no binding international treaties that provide a foundation for its policy decisions. All policy decisions are voluntary and nonbinding. Furthermore, the Basle Committee operates without a constitution or by-laws.

Another example of the more formal type of transgovernmental network is the International Organization of Securities Commissions (IOSCO), which currently has 150 members. IOSCO?s members come from a variety of different places, including national securities commissions, stock exchanges, and international and regional organizations. IOSCO focuses primarily on encouraging the development of common accounting standards (through the International Accounting Standards Committee, or IASC, based in the United Kingdom) that issuers of securities can use to offer stock in multiple countries without having to comply with the separate disclosure requirements of each. Although not as successful as the Basle Committee, IOSCO is very influential in drafting model codes and adopting common technical standards in securities regulations.

An additional instance of this kind of network is the International Association of Insurance Supervisors (IAIS), whose membership comprises insurance supervisors from over 100 jurisdictions. IAIS issues global insurance principles, standards and guidance, provides training and support on issues related to insurance supervision, and organizes meetings and seminars for insurance supervisors. Although IAIS may appear to be nothing more than a "talking shop" for insurance supervisors in comparison to the Basle Committee and IOSCO, it is still more formal than other types of transgovernmental networks.

The Basle Committee, IOSCO, and IASIS also form mega-networks. Two mega-networks are the Joint Forum on Financial Conglomerates (Joint Forum) and the Year 2000 Network. In accordance with its 1996 mandate from its three parent organizations, the Joint Forum reviews various means to facilitate the exchange of information between financial supervisors within their own sectors and between supervisors in different sectors. The Joint Forum also examines ways to enhance supervisory coordination and is working on developing principles toward the more effective supervision of regulated firms within financial conglomerates. The Joint Forum is comprised of senior bank, insurance, and securities supervisors from thirteen countries. The Year 2000 Network (Joint Year 2000 Council) is an organization that aims to ensure a high level of attention to Year 2000 issues within the global financial supervisory community. The Year 2000 Network shares information regarding regulatory and supervisory strategies; discusses contingency measures; and serves as a point of contact for national and international private sector initiatives. The Year 2000 Network is a creation of the Basle Committee, the BIS Committee on Payment and Settlement Systems, IOSCO, and IAIS.

These transgovernmental regulatory networks are engaged in a new kind of international law making which is not treaty based, but rather is rooted in agreed practices that are shared amongst the networks? members. There are no binding treaties?these practices are in a sense like free software downloadable from the Internet. The "nationalization" of international law occurs when practices shared by the networks become institutionalized within individual member states.

The more informal type of transgovernmental network is created through agreements between domestic regulatory agencies. The Memorandum of Understanding (MoU), the fastest growing international legal instrument in the last fifteen years, serves as the basis for this type of network. MoUs, in essence, are agreements between regulators in specific and discrete subject areas that do not carry legally binding burdens. Representative examples of MoUs come from two US regulatory agencies?the Security and Exchange Commission (SEC) and the Justice Department. The SEC and the Justice Department have increasingly relied upon MoUs in recent years, deciding that MoUs are a much more effective way to do business than traditional, burdensome and time consuming formal treaties. The proliferation of MoUs between regulatory agencies results from their flexibility and speed?they are frequently informal in tone, often avoiding legalistic language, while specifying modes of cooperation, information sharing, and establishing a framework for ongoing networks. MoUs between regulatory agencies are both bilateral and plurilateral. Some of the MoUs are replicated and used as models for future agreements between agencies.

There are also informal joint supervisory initiatives between domestic regulatory agencies. The SEC and the UK?s Security and Investment Board have established a joint statement of cooperation on derivatives, consisting of a seventy-point program that includes information sharing and the creation of more uniform standards. These initiatives are nothing more than ad hoc working groups on particular issues that provide the basis for ongoing networks between regulatory agencies. They often emerge quickly in response to crises. At times, these initiatives coexist with the more formal initiatives of international organizations.

Implications of Transgovernmental Networks

Advantages

The advantages of transgovernmental networks are many. First and foremost is their ability to be fast, flexible, and cheap. They are potentially more effective than traditional, hierarchical international organizations, which can be bogged down by excessive bureaucracies and the occasional paralysis of international politics. Instead of the two-step process of passing an international treaty and then implementing and enforcing domestic legislation, transgovernmental networks only require the single step of implementing policy decisions on the national level. Their speed and flexibility is especially important in responding to international crises.

Second, transgovernmental networks are potentially more accountable to citizens at the domestic level than traditional international organizations. While international organizations (such as the UN) employ a corps of bureaucrats who are not clearly accountable to anyone, national regulators can be held more accountable to citizens within their own country.

Overall, transgovernmental networks can be perceived as the lesser of two evils. Existing international organizations, like the IMF and the World Bank, have come under a great deal of criticism for their own problems of accountability and legitimacy. Transgovernmental networks may seem more palatable to people than traditional international organizations.

Disadvantages

The most serious problems with transgovernmental networks involve questions of legitimacy and accountability. Being composed primarily of technocrats, transgovernmental networks may place more emphasis upon technocracy than democracy. The practice of sharing technical expertise at times may exclude political concerns that have wider implications in policy decisions. Political choices, which might be regarded by technocrats as annoyances, are still an indispensable part of global governance.

Transgovernmental networks may also serve as vehicles for more powerful states to reach consensus on issues, dictating policies to, or even completely excluding, developing countries. For example, the Mexicans are inclined to regard the North American Free Trade Agreement (NAFTA) environmental enforcement network as a mechanism for imposing US environmental regulations on Mexico, penetrating Mexican sovereignty. Networks may also allow powerful states to avoid going through traditional international organizations, which provide more legitimacy at the international level. Finally, some states do not possess the institutional capacity even to participate in transgovernmental networks. Networks can thus exacerbate the existing divide between rich and poor countries.

Furthermore, transgovernmental networks may encourage minimalist global agendas that are isolated within the context of particular issue areas. Broader concerns regarding global justice, human rights, social and cultural development, etc., might be left out of policy decisions. These "neo-liberal" networks provide only as much regulation as they deem necessary. There, however, the networks are an intervening variable. They are not the cause of a global minimalist agenda, but rather reflect deeper political decisions within the global economy.

The horizontal nature of transgovernmental networks might undermine, and possibly conflict, with the role of traditional international organizations. There are situations in which some governments may choose to regulate a particular issue horizontally through networks while other governments may opt for regulation through traditional hierarchical organizations. An example of this tension is the US?s insistence on a network approach on antitrust issues contrasted with the Europeans? preference for a global, international antitrust organization. The broader question involves figuring out to incorporate transgovernmental networks into traditional international organizations. Organizations like the UN, although not perfect, could provide added legitimacy for such networks. The World Intellectual Property Organization, for example, has a special forum for networks of intellectual property rights regulators of the most developed countries. By complementing one another, networks and traditional international organizations can promote effective, legitimate global governance initiatives.

Responses to Legitimacy/Accountability Concerns

Research involving transgovernmental networks is still in its nascent stages. At this early point, it is premature to definitively label networks as "unaccountable" or "illegitimate." Two radically different critiques are forming on transgovernmental networks. One viewpoint asserts that these networks do not possess any real power?crucial decisions within the international arena are still carried out through the hierarchical structure of the unitary state. The other perspective maintains that the technocratic interests dominant in government networks divert important decision making power away from the unitary state. These critics are deeply concerned that technocratic collusion is occurring, strengthening the hands of technocrats while decreasing democratic accountability in global governance efforts. With such a diverse reaction to transgovernmental networks, their accountability and legitimacy must be examined on a case by case basis.

Furthermore, the Internet can make transgovernmental networks more transparent and accountable to governments and citizens. By going virtual, it is possible to make networks real and tangible. Citizens should insist that regulatory networks have a website that details their meetings, conferences, and policy decisions.

The strengthening of legislative networks can also increase the accountability of transgovernmental networks. Legislative networks already exist on such issues as human rights, the environment, and trade. Although they are not as developed as regulatory and judicial networks (except in the European Union), networks of legislature members in charge of key committees who oversee domestic regulatory agencies could improve accountability and legitimacy at the global level.

We need to rethink traditional concepts of accountability and legitimacy in a world in which regulatory agencies have become transnational. Our own constitutional basis for the powers of such agencies is not specific enough to account for the transnationalization of these agencies. New concepts of legitimacy and accountability in a world of transgovernmentalism will help clarify the standards we use to evaluate networks.

Conclusions

Regardless of whether transgovernmental networks are fundamentally disliked or considered trendy and inconsequential, the reality is that they are here to stay. Their horizontal, flexible nature makes them optimal for the information age. At the UN Millenium summit to be held in the fall of 2000, discussions will not involve amending the UN Charter, but will instead center upon UN involvement in transnational civil society. NGO networks are widely recognized, transgovernmental networks are still all too often overlooked. We should think about this form of global governance explicitly in particular, when such networks can serve as an alternative to traditional international organizations, and when as a complement.

From the US foreign policy perspective, it is necessary for officials to answer the charge that networks are merely an extension of US/Western power. Many people are concerned that these networks will serve as a vehicle to further divide developed and developing countries. Networks, however, have the potential to empower the developing world. They offer a two way street of information dissemination in which developing countries can express their views to US/Western officials and can influence policy. The principle mode of power in government networks is persuasion; government officials are often surprised to find that they must listen and respond to the concerns of other countries in order most effectively to make their own case.

Discussion

Many interesting viewpoints were brought up during the discussion section. One participant asked whether transgovernmental networks would replace the traditional, international system of one country, one vote, fundamentally transforming conceptions of state sovereignty. Professor Slaughter?s response highlighted two aspects of transgovernmental networks. First, as the state disaggregates into component institutions, sovereignty itself disaggregates with those institutions. Each individual institution theoretically represents national interests and carries the vote of the state. Second, transgovernmental networks that operate within international organizations are legitimized through the democratic structure that such organizations offer within the international arena.

Another participant asked which actors had the most to benefit, and which had the most to lose, from transgovernmental networks. Professor Slaughter?s response touched on many aspects of transgovernmental networks. In many cases developed countries benefit more from transgovernmental networks than developing countries because they have been able to free themselves from the constraints of international organizations. The flexibility and speed of transgovernmental networks have allowed them to act quickly on global problems. In some cases, developing countries are also forming their own alternative, counter networks to the established networks of the West. Though it is true that in some networks technocratic interests are given a higher priority than democratic interests, the disaggregation of the state can potentially benefit individuals worldwide. If the state is disaggregated, its institutions become portable. People all over the world are able to use foreign government institutions to further their own interests. Examples of this phenomenon are seen with environmental groups in Ecuador and Nigeria that are using US courts to sue multinational corporations. Further, disaggregating the state makes it possible to include with some state institutions in transgovernmental networks even when other state institutions are labeled as corrupt or oppressive.

One participant inquired into the uniqueness of transgovernmental networks. The participant argued that the involvement of US regulatory agencies in foreign affairs is nothing new?what is new and interesting, however, is the involvement of non-state actors in these networks. Public-private hybrid networks, according to the participant, are the real, most consequential, change in global affairs in recent years. Professor Slaughter responded by saying that although public-private hybrids do exist and are effective, transgovernmental networks still provide the power and legitimacy that is necessary to marshal support for new global structures. These networks provide the starting blocks for global governance initiatives that have maximum effectiveness and reach. The involvement of NGOs is important, but states are still the primary, most essential actors in global governance.

1 The Group of Ten is made up of eleven industrial countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States) which consult and cooperate on economic, monetary and financial matters.

Prepared by Jonathan Blavin, Junior Fellow.