Global Financial Governance Research Articles

Global Governance in a Multipolar World: The Case for Regional Monetary Funds1

The reform of global financial governance is long overdue. Recent changes to the governance of the International Monetary Fund partially address the lack of representation of emerging market countries, but not their loss of confidence in the institution. In the meantime, alternative and perhaps better approaches to the problems of open economics are being proposed at a regional level. We describe these regional monetary funds and discuss their prospects. We conclude that because economic interdependence is strongest at the regional level, regional cooperation seems well-suited to a multipolar world.

Canada, the European Union, and Transatlantic Financial Governance

The focus of economic relations between Canada and Europe - and more specifically, the European Union - is usually on trade and investment, not finance. This has been true since at least the 1970s when Canada's was in vogue, the third option being the idea that Canada should expand and deepen its trade relations with Europe so as to reduce its economic dependence on the United States.1 More recently, the negotiation of a comprehensive economic and trade agreement has dominated the public discussion of Canada's economic relationship with the EU.2 In terms of international finance and its governance, Canada and the EU are normally not concerned with each other but rather with the United States. This is because in the post-World War II period, the US has dominated capital markets and the setting of international financial regulation.3 Cooperation between Canada and the EU in matters of financial governance has instead taken place in international organizations and forums such as the G7, the G20, the International Monetary Fund, the Bank for International Settlements and its Basel committee on banking supervision, and the Financial Stability Forum (now the Financial Stability Board), whose decision-making has traditionally been heavily influenced by the United States.4Today, however, the United States no longer dominates international finance. After a rise in US financial power in the 1990s, the last decade has seen a number of events undermine America's influence. The first was the burst of the dot-com bubble in 2000. The exponential rise of the Nasdaq stock exchange and the massive entry of foreign capital that accompanied the US information technology boom in the second half of the 1990s reinforced the United States' position as the leader of the globalization game. The dot-com bubble crash put a dent in US leadership, however, because the crash was blamed in part on inadequate regulation and supervision of the brokerage firms that promoted the shares of dot-com companies to the public. The second hit was the result of major accounting scandals at Enron and WorldCom in 2001 and 2002, which resulted in their bankruptcy, as well as that of Arthur Andersen - Enron's auditor and one of the world's top-five accounting firms at the time. In this case, it was US accounting standards and corporate governance practices that were blamed for these failures. The third (and final?) nail in the coffin came with the burst ofthe US subprime mortgage bubble in 2007, resulting in a financial crisis that went global and in turn caused the world economy to suffer the so-called great recession.5 In this last case, blame was put on insufficient regulation and supervision ofthe US financial sector. As a result of these failures, the United States' reputation as a beacon of financial stability has been severely dented, which has greatly undermined its ability to influence the governance of global financial markets.Given the dominant role that the United States has played in the domain of international finance in the last 60 years, one should not be surprised that Canada and the EU have focused their international financial governance attention on the US rather than on each other. But now US financial hegemony appears to be waning, and at the same time, Canada's financial profile has reached some kind of apex: its banks did not experience a crisis, while the EU is facing serious economic challenges of its own. What does this situation mean for the economic relationship between Canada and the EU and the challenges that they face in matters of global financial governance? More specifically, how have Canada and Europe responded to the rise and fall of American financial hegemony? Have their responses been similar or different? To what extent have their responses involved collaborating with each other?To answer these questions, the remainder of this article is divided into three parts. First, it is argued that, based on theoretical considerations, Canada would have been expected to follow the US lead in matters of financial governance, while the EU would have been expected to oppose US hegemony. …

The International Financial Crisis, Global Financial Governance and the European Union

The financial crisis that hit the world in 2008 exposed the fragility and weaknesses of our global financial system. It has triggered a global response: world leaders – for the most part in the framework of the revitalised G20 – have held several meetings to discuss and agree on a global plan for recovery and the reform of global financial governance. This chapter addresses these responses, with particular attention to the position, role and representation of the European Union (EU) in global economic and financial governance institutions in the light of the changes brought about by the Treaty of Lisbon.

Byways and Highways of Direct Investment: China and the Offshore World

This paper examines a lacuna in the literature on foreign direct investment (FDI) flows to China: the absence of analysis for the prominent location of small Caribbean and Pacific islands as leading sources of FDI. An indeterminate amount of domestic capital is embedded in these FDI flows, which distorts comparative studies on FDI in developing economies between China and other states. Direct investment from China has also increased in recent years and offshore financial centres (OFCs) often serve as the initial destinations. This paper excavates the rationales behind the presence of OFCs and suggests that Chinese actors will emulate the practices of developed state multinational corporations and high-net-worth individuals. The implications of these investment practices are outlined along with possible trajectories for their impact on the process of financial liberalisation in China. Consequently, it encourages increased Chinese participation in the development of global financial governance.

Nonsense on Stilts: United Kingdom Perspectives on the Global Financial Crisis and Governance

This article explores the governance implications for the UK of the financial crisis. It locates the UK’s system as a differentiated polity within a system of multi-level governance, noting the importance of EU institutions in reassessing the regulatory framework for the finance industry. It explores the historical, political and theoretical context and argues that the reforms so far advocated remain a part of the new public management (NPM) paradigm. There is something of a mix of dynamics involved, and although the debates taking place are wide-ranging, they are rooted in the structures of the past and the present. UK governance needs to invest in its values as well as its institutions.

Global Financial Crisis, Public Administration and Governance: Do New Problems Require New Solutions?

A financial crisis, or any crisis, is likely to produce a variety of responses from governments. This article discusses the range of responses that may be possible, pointing out that diametrically opposite answers may be made to the common problem. The analysis points to the persistence of many dichotomies in our thinking about public administration and public policy. These varied responses to crises are investigated in several political systems including the Baltic States and the European Union.

Symposium Introduction: The Global Financial Crisis, Governance and Institutional Dynamics

This Introduction sets the scene for the Symposium by appreciating the significance of analyzing the global financial crisis and responses to it from governance and institutional perspectives. There were clear systemic failures that had long existed and continue to be in need of concerted action. These failures and relevant responses are appropriately addressed in terms of the intertwining of states, markets and civil societies, with associated reference to choices and opportunities, principal-agent relationships, guardians and the guarded, and levels of maturity, responsibility and trust. There are significant systemic challenges which remain to be met.

Global financial governance and the developing anti-money laundering regime: What lessons for International Political Economy?

The developing anti-money laundering (AML) regime exhibits a specific, non-financial set of policy preoccupations. Yet it is important to examine AML from a global financial governance perspective as the regime essentially imposes controls on the movement of money. This article analyses the political, institutional and regulatory evolution of the regime and argues that it serves to address a need for action on a diverse set of public policy goals (corruption, drug trafficking or terrorism); to relieve financial centres in advanced economies from offshore competitive pressures; and, unintentionally, to shape private sector practices so as to consolidate the position of key market institutions. The article stresses that the achievements with respect to its goals remain modest at best in relation to its ambitions, while important side-effects raise concerns about its role, efficiency and legitimacy. It also examines the possibility that AML has been tacitly accepted as the price for capital mobility.

The G20 System and Its Implications for Global Financial Governance

본 연구는 G20체제의 등장과 L20으로의 격상이란 국제금융 거버넌스 체제의 새로운 변화에 주목하면서, 그 원인과 이것이 글로벌 거버넌스에 갖는 의미를 평가하려는 시도이다. G20체제가 미국 패권의 하락의 결과이고, 이것이 수평적인 글로벌 금융 거버넌스 체제의 서곡이란 평가에 대해 미국의 패권은 금융 측면에서 오히려 강화되었고, 주권침해 우려로 인해 강력한 국제제도에 거부감을 가지는 미국의 선호가 글로벌 금융 거버넌스 체제의 근본적인 변화를 어렵게 할 것이라고 반박하고 있다.BR 미국은 금융규제의 실효성을 제고시키기 위해 보다 많은 나라가 참여하는 것이 유리했고, 또 국내적으로 거세진 금융규제 요구에 직면해 일방적인 금융규제가 금융산업의 경쟁력을 약화시키지 않도록 하기 위해서 국제공조가 필요하였다, 이런 점에서 G7에서 G20으로의 회원국확대는 합리적인 선택이었다. 그리고 구속력이 큰 공식적인 제도가 아닌 G20이란 정부 간 협력체는 미국이 협상과정에서 자신의 정치적 영향력을 최대한으로 발휘할 수 있고, 자신의 주권에 대한 침해 우려가 적으며, 신속하게 금융위기에 대응할 수 있다는 장점을 가졌다.BR 본 연구는 미국의 패권이 지속되고, 미국이 G20을 문제해결 수단으로만 접근하는 한 G20이 미국의 패권을 중심으로 한 국제금융 거버넌스 체제의 본질적인 변화를 가져오기 힘들 것이란 예상을 하고 있다. 금융위기 극복이후에도 G20정상회의가 글로벌 금융 거버넌스의 중핵으로 자리 잡기 위해서는 새로운 의제 개발, 제도화, 그리고 선진국-개도국 사이의 괴리 극복이란 과제를 해결해야 할 것임을 아울러 지적하고 있다.

The Yellow Brick Road to People Politics: How the 1997-1998 East Asian Financial Crisis Justified a Role for Civil Society in Global Finance

In 1997-1998, the East Asian financial crisis profoundly exposed the flaws embedded in the governance of global finance, and attracted much attention from civil society, which presented numerous proposals to either overhaul or amend the existing financial architecture. But what are we to make of people politics? The purpose of this article is to investigate whether the crisis spawned a role for civil society in global financial governance. This issue is important because by realising the role civil society plays, we grasp how they help to improve the highly flawed financial architecture. Ultimately, I argue the crisis justified civil society as a source of information that empowers public awareness, stems alternative perspectives, and increases the legitimacy of global financial governance.

Money laundering prevention and small state development: insights from the case of the Bahamas

This paper analyses the impact to the financial sector of small states from the regulatory mandates of global financial governance against money laundering and terrorist finance. As an acknowledged and documented strategy for economic development, the experience of the offshore financial sector of the Bahamas is central to this analysis. Enacting new legislation was politically divisive in the Bahamas, because of a recognition that it could lead to a reduction in the economic contribution provided by offshore finance's licensing fees and employment. New compliance and regulatory arrangements were indeed costly, but the size of the Bahamian offshore financial sector ensured fewer adverse impacts than in some other small island states. The experience of the Bahamas provides indicative pointers for the future prospects of any developing economy's financial sector in its interactions with global financial governance.

The future of global financial stability

The current economic crisis has revealed the shortcomings of the current global financial system, and it is clear that there must be a fundamental shift in the approaches to global financial governance. The seeds for a more comprehensive global system have been sown, as evidenced by the increasing amount of international dialogue, not only amongst the global economic giants but also amongst emerging economies. However, there is a need to develop mechanisms for high-quality regulation rather than falling into the trap of reacting to the current crisis.

Regul(ariz)ation of Fringe Credit: Payday Lending and the Borders of Global Financial Practice

The recent financial crisis has been punctuated by a discussion of the future of global financial governance in terms of a ‘regulation/deregulation’ formula. This paper argues for a broadening of this frame by taking seriously recent claims of performativity. To place changes associated with financial globalization in a more complicated critical context, this paper explores the ways in which global finance has often entailed a redrawing of the boundaries between the financial and the everyday. To develop this argument, the paper focuses, in particular, on practices of payday lending and on recent regulatory changes which have performed payday lending in a particular set of ways. Reading payday lending as both a repertoire of market devices and a set of dividing practices, this paper concludes that regulation performs the object it seeks to manage by invoking ambiguous, and not singular, territories of governance.

Restraining regulatory capture? Anglo-America, crisis politics and trajectories of change in global financial governance

A growing number of respected commentators now argue that regulatory capture of public agencies and public policy by leading banks was one of the main causal factors behind the financial crisis of 2007–2009, resulting in a permissive regulatory environment. This regulatory environment placed a faith in banks own internal risk models, contributed to pro-cyclical behaviour and turned a blind eye to excessive risk taking. The article argues that a form of ‘multi-level regulatory capture’ characterized the global financial architecture prior to the crisis. Simultaneously, regulatory capture fed off, but also nourished the financial boom, in a fashion that mirrored the life cycle of the boom itself. Minimizing future financial booms and crises will require continuous, conscious and explicit efforts to restrain financial regulatory capture now and into the future. The article assesses the extent to which this has been achieved in current global financial governance reform efforts and highlights some of the persistent difficulties that will continue to hamper efforts to restrain regulatory capture. The evidence concerning the extent to which regulatory capture is being effectively restrained is somewhat mixed, and where it is happening it is largely unintentional and accidental. Recent reforms have overlooked the political causes of the crisis and have failed to focus explicitly or systematically on regulatory capture.

The End of Liberal Finance? The Changing Paradigm of Global Financial Governance

Has the global credit crunch shifted the foundations of global financial architecture away from the philosophy of ‘neoliberalism’? In this article, we argue that the neoliberal project is most probably dead and buried, despite the apparent commitment, which we detail in this article, to the spirit of neoliberal thinking in economic thought. By analysing three constitutive elements of neoliberalism (its public, private and regulatory components) before and after the credit crunch, we reveal important geopolitical shifts which are likely to prevent a return to ‘business as usual’ in the world of finance. We find that the defining trend among these changes is the global rise of the Eurozone. Specifically, we argue that the ideal, Anglo-Saxon model of neoliberalism was viable because it was heavily subsidised from around the world. Accordingly, the key to the future of Anglo-Saxon neoliberalism lies with the willingness of European, East Asian and Middle Eastern creditors to continue extending their financial support to the Anglo-Saxon model of finance. We believe that they are unlikely to do so in the future. Spurred by the magnitude of the credit crunch, the rise of Europe is progressively weakening each of the three dimensions of Anglo-Saxon neoliberalism we identify in this article.

Reflexiones sobre la gobernanza financiera global. Innovación de pocos y mal de muchos

Nos proponemos reflexionar sobre las relaciones financieras globales a la luz de la presente crisis de 2008. En lugar de las reacciones urgentes e irreflexivas a la crisis financiera que hemos visto que han tenido nuestros políticos; proponemos plantearnos la importancia de analizar las contradicciones del presente, pues señalan el camino hacia una práctica política que incluya la participación ciudadana en los procesos globales de decisión. De esta forma, abogar por la reconciliación entre Ciencia, Tecnología y la Sociedad que evite una nueva crisis futura. Se propone una nueva simbiosis entre la política, los mercados y la sociedad civil, que permita el surgimiento de una gobernanza financiera global.

Ambiguous incorporations: microfinance and global governmentality

AbstractIn the spring of 2007 an event dramatically reshaped conversations relating to microfinance. This event was the Initial Public Offering (IPO) of Mexico's largest microfinance organization, Compartamos. The IPO, as this article suggests, is indicative or a broader trend through which microfinance is increasingly becoming financialized, increasingly becoming governable as a financial object. This is important at one level because it crystallizes some of the key issues at stake as microfinance becomes increasingly more reliant on global capital markets. At another level, however, the Compatarmos case is significant because of the conceptual issues it raises in relation to global finance. The main argument I put forward in this article is that the Compatarmos case – and the process of financialization it represents – is important because it allows us to glimpse global finance, and the question of global financial governance, as a decentred process in formation. Drawing on a Foucauldian notion of governmentality, I argue that the Compatarmos case orbits around two processes; processes of incorporation and differentiation. In this context, the Compartamos case implies the importance of analyses that can make global finance visible as a diverse and mundane object that is never settled in any final kind of way.

Intersubjective Expectations and Performativity in Global Financial Governance

Irrespective of the expectations of those who relied upon market discipline to obviate systemic risk, the extant system of financial governance failed to avoid systemic risk, which refused to be “sliced and diced.” A constructivist explanation for this failure of private market governance might be provided with reference to the following social theoretical insights. First, contrary to the Efficient Markets Hypothesis, market prices of financial assets do not reflect “correct” prices based on current information, but market actors acquire financial assets on the shared expectation they will rise (Minsky 1986). This leads to waves of excessive credit creation in the economy and the mispricing of financial risk. Second, market actors do not act on the basis of “rational expectations,” but on the basis of “intersubjective expectations.” They look to one another for signals regarding how to react to market events. When their intersubjectively shared social understandings are disappointed, they can panic and freeze, generating enormous market volatility in search for a new “equilibrium” (Hall 2008). Third, since financial market behavior is performative rather than reflective of exogenously functioning market processes, this perfomativity amplifies market volatility and destructive mass-market behavior. We are now bearing the consequences of our misconceptions about how basic processes of market rationality actually operate. Much of the difficulty in which we presently find ourselves may be traced to the belief by actors in the financial markets, and by central bankers with supervisory responsibility for the financial system, that financial markets behave in accordance with the Efficient Markets Hypothesis of neoclassical economics. In accordance with this hypothesis, markets always clear at the “equilibrium price.” The prices of commodities and assets are always and everywhere the “correct” price that constitutes equilibrium between demand and supply. A continuous stream of new information regarding changing supply and demand functions governs price …

Sovereign Wealth Funds, Banks and Governments in the Global Crisis: Towards a New Governance of Global Finance?

The governance of finance is replete with challenges as evidenced by the frequent financial crises that have accompanied the growth and development of financial markets. Every crisis can be taken as a symptom of governance failure. The immediate reaction tends to be an attempt to fix the problems that gave rise to the most recent crisis. By definition, such a regulatory approach lags behind actual developments on the financial marketplace, thereby inadvertently sowing the seeds for the next governance failure. A similar lag effect can be observed in current attempts to repair the governance of global finance. This paper argues that reform proposals currently under discussion fail to take into account important changes in the organisation of global financial relations between financial intermediaries, their home governments and sovereign wealth funds (SWFs). They challenge the basic principles that inform conventional regulatory regimes: a clear distinction between public vs. private; regulation vs. firm-level governance; and stakeholding vs. supervision. The paper discusses alternative modes of governance that have emerged during the crisis and are complementing for, if not substituting, more conventional forms of governance.

Ideas and interests in global financial governance: comparing German and US preference formation

Financial crises underline the necessity for more effective global governance. Despite the creation of the Basel II Accord, no agreement has been reached on the reform of the International Monetary Fund (IMF). Why do governments only selectively agree to reform global governance? I argue that convergence and divergence of governmental positions cannot be explained solely by the logic of the international system, institutions or globalization. Instead, they strongly reflect domestic ideas and interests. Furthermore, the ability of governments to compromise internationally is influenced by the different impact of domestic ideas and interests. With regard to their prevalence in domestic preference formation, ideas prevail when governance affects lobby groups diffusely and poses fundamental questions on the role of politics in governing the economy. Interests prevail when lobby groups are affected directly and new governance concerns a specific distribution of costs. These arguments are tested on the preference formation of the United States and German governments on the IMF and Basel II.