One of the main purposes of Global Financial Governance (GFG) is to ensure the system’s proper functioning and stability, in particular preventing the emergence of global financial crises or mitigating their effects. Nevertheless, recurring systemic crises seem to be part and parcel of the global financial system, raising concerns about the system’s resilience, as well as about the potential endogenous sources of instability. However, current scholarship is fragmented, emphasizing either actor-, relation-, or rule-centered mechanisms. The proposed 4-year PhD-project develops a novel multilevel network-co-evolution perspective that allows to integrate previous approaches to model the emergence, dynamics and impact of global financial governance networks in relation to recurring crises and reforms. The project will investigate changes in the structure and shape of the system at the global level, as well as the role and impact that rising “new” powers, in particular China, have on the policy agenda. Focusing on the banking sector and the securities regulation sector, the structure and shape of inter-state networks and inter-organizational networks will be reconstructed from the Bank for International Settlements (BIS) consolidated banking statistics, the International Monetary Fund (IMF)’s Coordinated Portfolio Investment Survey (CPIS), the National Securities Regulatory Commissions, and the Union of International Associations (UIA) database, which has records on about 72,000 international organizations. Multilevel Exponential Random Graph Models (MERGMs) will be used to analyze co-evolution of rules, relationships and performance at the system level. Expert interviews will be used to elicit systematic in-depth information on the role and impact of China, in particular the interplay between its changing position in the networks and its ability (“performance”) to influence the policy agenda. The project’s theoretical focus on competing social mechanism explanations in combination with its novel empirical research design centered around multilevel network-coevolution will provide a more fine grained picture of the dynamics of global financial governance in the face of recurring crises and reforms.
INTRODUCTION AND RESEARCH PROBLEM
One of the main purposes of Global Financial Governance (GFG) is to ensure the system’s proper functioning and stability, in particular preventing the emergence of global financial crises or mitigating their effects. Nevertheless, recurring systemic crises seem to be part and parcel of the global financial system (see Figure 1). Over the period of the past forty years alone (1976-2016), the sector had to face no less than 151 banking crises, 236 currency crises, and 74 sovereign crises, summing up to a total of 461 crises episodes. Moreover, 12% (53) of these episodes were characterized by the simultaneous occurrence of two types of crises, whereas 2% (11) qualify as “triple crises”: a simultaneous meltdown of the banking, currency, and debt sectors. The most recent (2008) Global Financial Crisis (GFC) was such a triple crisis. It still stands out for the severity of its effects on the global economy and society. Many observers agree that both the incidence and impact of global financial crises mark a quite disappointing track record of GFG (Avgouleas, 2012)(Helleiner, 2014)(Pistor, 2009)(Mayntz, 2015). Rather than exhibiting the self-correcting capacities that many had hoped for, the system of global financial governance seems unfit to avert major ruptures (Schularick & Zimmermann, 2018). This massive regulatory failure is considered as particularly disappointing given the deliberate reform attempts that had been undertaken, both after the series of major crises episodes that shook up the financial system during the 1990s, like the 1998 Asian crisis, and the Great Financial Crisis of 2008. Overall, the evolution of global financial governance until the GFC of 2008 has been one of alternating ruptures and reforms: crises were followed by changes in rules, regulations and responsibilities, which turn out to be insufficient to prevent the occurrence of the next crisis, thereby unleashing the next set of reforms. Also the GFC triggered new reforms, this time intended to fundamentally transform the global economic architecture into a truly resilient system that would be well-equipped to effectively deal with changing circumstances. But according to some experts, also post-GFC reforms cannot live up to these ambitious goals (Huotari & Hanemann, 2014). Figure 1: Historical Incidence of banking, currency, and sovereign debt crises (Laeven & Valencia, 2018:11). 4 In sum, after more than a decade into post 2008 GFC reforms, practitioners and academics still try to come to grips with the mid- and long term consequences of the GFC for changes in GFG. Within the debate about the “transformative legacies” (Helleiner, 2014) and future resilience of the GFC, two major interrelated concerns stand out. The related questions stand at the core of the proposed research project. 1. The first concern relates to questions about the structure and shape that the system of global governance will (or should) take: will the reforms result in a strengthening of the multilateral features, will they intensify fragmentation and conflict, or will they result in more “cooperative decentralization”? (Helleiner, 2014). 2. The second concern focusses on the actors in the system, and relates to the question about the changing role and impact that “new” powers, like China, and their respective financial organizations have in influencing the reform agenda as well as the structure and process within the system of GFG (Hopewell, 2015). The remainder of this proposal first sketches the state-of-the art in current research, and identifies open questions. Section three (beyond the state-of-the-art) proposes a new integrative theoretical framework and research design. Section four outlines three exemplary studies that will form the empirical core of the research. STATE OF THE ART: THREE PERSPECTIVES ON GLOBAL FINANCIAL GOVERNANCE This section briefly describes (1) the key components of GFG, (2) main phases of its evolution, (3) main perspectives on GFG, and (4) new opportunities for the study of GFG. Elements of the System of Global Financial Governance Global governance refers to the norms of interdependence in the absence of global political authority (Rosenau). It is important to realize that the system of GFG rests on a combination of formal (legal, “hard law”) and informal (conventions, “soft law”) institutions and actors at the level of states or (international) organizations (Avgouleas, 2012)(Brummer, 2015). Table 1 summarizes the four ideal-typical components of GFG. I. At the state level, formal international treaties regulate legally binding responsibilities of and relations between nations. The key actors here are states. II. International Financial Organizations (sometimes also referred to as Institutions), like the International Monetary Fund, regional development banks, or the World Bank are examples for actors at the organizational level. Their formal legal foundation are international treaties. III. An example for informal arrangements at the state level are State-to-State coordination groups (e.g. G7 or G20) and the related protocols. IV. Informal standards and structures, like the Transnational Regulatory Networks (TRN’s), are based on consensus and soft law. At the level of organizations, TRN’s consist of regulatory agencies, central banks, but also private sector players. Table 1: Elements of Global Financial Governance Formal (Hard Law) Informal (Soft Law) State Level I II Organization Level III IV Formal (Hard Law) Informal (Soft Law) State Level I II Organization Level III IV Table 2: Elements of Global Financial Governance 5 Evolution of the System of Global Financial Governance In the evolution of the system of global financial governance, three phases are distinguished, each of which characterized by the introduction of new institutions as a reaction to a previous crisis (Avgouleas, 2012). The first, so-called Bretton Woods phase (1947-1997) followed on the end of the second World War. It is characterized by the emergence of a loose set of global financial arrangements. One of its important moves consisted in the replacement of the increasingly unsustainable system of fixed exchange rates by floating ones. The second phase covers the post-Asian crisis period (1998-2008). It was characterized by the creation of a tighter regulatory framework, the so-called New International Financial Architecture (NIFA), and was strongly centered on the IMF. This system turned out to be particularly ineffective in the domains of crisis warnings and cross-border crisis management, and in fact was unable to prevent the Global Financial Crisis that became apparent in November 2008. The post-2008 period constitutes the third phase. Reforms focused on supervisory structures (enhancing regulatory cooperation and crisis management), improving international financial regulation, and fostering global cooperation. Four “architectural changes” ensued, consisting of international coordination shifting to the G20; the Financial Stability Board (FSB) replacing the Financial Stability Forum (FSF), assigned with co-ordinating standard setting processes; the creation of joint regulatory bodies, the so-called supervisory colleges; and at center stage a reform of the IMF, which manages resources of $1 trillion (Woods, 2010). Their task is to co-ordinate supervision of the most important cross-border financial institutions. But despite these interventions the hope that the 2008 global financial crisis would result in a massive transformation that would increase the resilience of the system of global financial governance has not come true for a large variety of policy domains, ranging from international crisis management to financial regulation (Helleiner, 2014). Perspectives on the System of Global Financial Governance Within the vast literature on GFG, three streams of research are particularly relevant for the current project and its focus on the link between crises, reforms, and structural change. We refer to them as rule-centered, actor-centered, and relation-centered perspectives. Rule-centered approaches consider both formal and legally binding regulations and informal norms and conventions (Whitehead, 2006). One of their key arguments is that independently of the concrete organizational forms that are chosen, any global financial architecture is ultimately designed to develop standards and regulations that then have to be implemented across different legal systems (Brummer, 2015). Hence, the effectiveness of global financial governance crucially depends on the degree to which rules are robustly adopted across different jurisdictions. The problem is that cost and benefits of rule compliance differ across countries, severely weakening their self-reinforcing capacities. This perspective suggests that international financial “soft law”, in principle, can be highly coercive thanks to a multitude of informal social mechanisms that reinforce its disciplining impact, 6 like principles of reciprocity, retaliation and reputation. Furthermore, according to rule centered approaches, also informal norms emerging within the global financial community can have a strong impact on compliance, in particular when these are rooted in strong network embeddedness among the respective individual participants representing the regulating bodies (Whitehead, 2006). However, the influence of such informal norms as the primary force driving rule compliance is likely to fade quickly if confronted with divergent regulatory philosophies, high adjustment costs, or competitive market pressures – conditions that often prevail (Brummer, 2015). In sum, a summary conclusion to be drawn from rule-centered approaches is that divergent cost-benefit ratios across jurisdictions often pose a major obstacle to complying to GFG regulations, and that informal network mechanisms – though potentially coercive enough - so far are insufficiently strong to alleviate this problem.
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Prof. dr. Rafael Wittek
Dr. Malcolm Campell-Verduyn
University of Groningen, Faculty of Social and Behavioural Sciences