The Democratic Deficit in the Institutional Arrangements for Regulating Global Finance

Abstract

The spread of democracy and the benefits associated with this spread have been a recurring theme in post-Cold War discussions of international affairs. Expanded democracy has been seen as leading to more freedom for citizens, as contributing to international peace and stability, and as being generally a desirable goal at both the domestic and international levels. It is striking, then, that talk of democracy has been almost entirely absent from one of the most important issue areas of our contemporary world--the governance of global finance. There are three easy explanations that can be given for this absence. First, global finance has been seen as involving highly technical private transactions that are best handled by experts or market actors operating as freely as possible from the uninformed political meddling that comes with democracy. Second, those states that have been most heavily involved in multilateral rule making in global finance have been the G-7 states--all of which are democracies and are therefore held accountable to their citizens for the rules they have created. Third, even if democracy should in theory be relevant for an emerging set of supranational institutions with considerable autonomy from individual states, it is not easy to see how the formalized procedures that have been associated with democracy might be applied there given the scale, level of complexity, and degree of informality of these institutions. This article challenges these views by arguing that democracy is crucially important for the governance of global finance. Consistent with other articles in this issue of Global Governance, I argue that the governance of global finance involves highly political conflicts that should not and cannot be resolved by technical experts or markets alone. Given the development of new complex and interlinked sources of technical, private, and supranational authority that deviate from the types of formal political authority we normally associate with governance, it is necessary to move beyond an emphasis on formal procedures such as elections in discussing democracy. I proceed by first discussing how the political nature of global financial regulation means it cannot be left to private actors or technical experts and is an issue area for which questions of democracy are relevant. In the following section I discuss the analytical, ethical, and practical merits of democracy. I then provide an account of key developments in post- 1990s international financial regulation in order to assess the relevance of democracy for them. I focus on prudential regulation--regulation designed to shape the conduct of private firms so that their actions do not threaten the viability of the financial system. The Political Character of Prudential Regulation The argument that governance of global finance is best left to private actors and technical experts has been very strong in the area of prudential regulation. In the main international institutions concerned with prudential regulation, such as the Basel Committee on Banking Supervision (BCBS), the International Association of Insurance Supervisors (IAIS), or the International Organization of Securities Commissions (IOSCO), there is a heavy emphasis on technical reports and virtually no references to politics. (1) There are, however, a range of important changes in global finance that have undermined this tendency to minimize the role of politics in prudential regulation. Three sets of changes stand out. First, the severity and frequency of global financial crises have highlighted the fact that prudential regulation is not a relatively unproblematic administrative monitoring of market processes in which risks that are not controlled are willingly taken on by actors hoping to be compensated by high returns. Failures in prudential regulation can have catastrophic impacts on actors that have had no direct involvement in international financial transactions, including workers losing jobs due to currency crises or taxpayers having to bail out failed banks. …