The Conundrum of International Economic Regulation: The Case for
Transgovernmentalism from the Viewpoint of Organizational Economics
Sona Muzikarova
BSIS Journal of International Studies, Vol 7 (2010)
The BSIS Journal of International Studies is published by the Brussels School of
International Studies at the University of Kent. Your use of the journal indicates
your acceptance of the Terms and Conditions of Use which state that, unless having
received prior permission, you may only use content in the journal for personal,
non-commercial use.
1
“Europeanization, globalization and private governance mean different things to
different people, but one thing seems clear: they change the role of the state in the
world.”
- Michaels and Jansen, 2007, p.2
1. Introduction: Who Runs the World?
The powerful write history. They snatch seats at the tables of the top ‘clubs’ of the
21st century, at the pinnacle of world management, on the boards of the major
international economic and financial institutions. The five permanent United
Nations (UN) Security Council members – Russia, China, Great Britain, France and
the US – who were the victors of the war fought long ago, and consequently
endowed with veto powers, remain occupied with saving the world from another
devastating war. Meanwhile, the former twin Bretton Woods institutions – the
World Bank and the International Monetary Fund (IMF) – that were set up to
prevent the Great Depression of the 1930s from reoccurring, cope with upholding
the structure of the world’s economic and financial order.1
The General Agreement on Tariffs and Trade (GATT), that is the predecessor of the
World Trade Organization (WTO), guards liberal international trade by preventing
unnecessary protectionist measures amongst states such as those that proved so
harmful in the 1930s. These global governance titans have been supported by
various global treaties, conventions, conferences, global courts, declarations,
agreements, and dispute-settlement mechanisms, as well as by a few strong
David D. Drisoll, “The IMF and the World Bank How Do They Differ”, The International Monetary
Fund, August 1996, available at: http://www.imf.org/external/pubs/ft/exrp/differ.htm
1
2
regional coalitions, such as the European Union (EU), the African Union (AU), and
the North Atlantic Treaty Organization (NATO).2
In an age where capital, goods, services, people, information, and technology move
around freely, national governments realize that the most serious challenges
shaping their future – such as terrorism, state failure, environmental degradation,
limited resources, the fight against poverty, global spread of disease, conflict
prevention, and global financial architecture – need solutions that are worldwide,
not just regional. Current research explores the mechanisms through with the world
ceased to organize itself purely on the basis of national sovereignty, individual
territorial integrity, and nationhood, and the recent forces that altered the classic
chemistry between the state and those subjected to it.
In this paper, I discuss the forces most central to this altered chemistry, as identified
by Michaels and Jansen (2007) – namely, globalization, Europeanization, and the
privatization of authority. I also consider the mainstream academic arguments as to
how best to effectively and legitimately oversee economic interactions in an
economic global terrain transformed by such forces.
Having reviewed relevant literature, and clearly defined the terms for the purposes
of my work, I then offer a theoretical solution to the conundrum of international
economic regulation in the final section of this work. Namely, I deploy the Hayekian
informational economics framework to show that the highly centralized and
supranational “world government” model, which many imagined as the new world
order, is in fact predetermined to fail in its management of the global market, by
virtue of its organization and legitimacy. Specifically, my proposal relies on
“Who Runs the World? Wrestling for Influence”, The Economist, Published on July 3, 2008.
Available at: http://economist.com/node/11664289
2
3
informational imperfections and symmetries as a possible source of global market
failure.
Lastly, I suggest a more realistic conceptualization of the global governance
architecture which is more decentralized, and freer of high politics – one which
appears structurally more efficient, finds a better balance between influence and
responsibility, and is more answerable to demands for fairness.
II. State in the Changing World
“The world is being flattened. I didn’t start it and you can’t stop it, except at great cost
to human development and your own future. But we can manage it, for better or
worse.”
-
The World is Flat, Thomas L. Friedman, p. 469
At the dawn of the 21st century, we are living in an era of globalization. Thomas
Friedman (1999), the US heavyweight on the subject, asserts that globalization has
become an arrangement of international relations, which has replaced the
preceding arrangement of the Cold War era.3 The Cold War era was a relatively
stationary system of international relations, characterized by the power struggle
between the United States and the USSR. Importantly, state sovereignty had been a
defining principle of international relations amongst states before and during the
Cold War era. According to Friedman, no nation-state would invade another’s
sovereignty, nor trespass another’s sphere of influence in foreign affairs or
economic matters. The principle of state sovereignty is also clearly stipulated by the
Article 2(7) of the UN Charter – the foundational, constituent, and supreme treaty in
3
Thomas L. Friedman, Lexus and the Olive Tree. New York: Farrar, 1999. p.9.
4
international law – which states, “Nothing contained in the present Charter shall
authorize the United Nations to intervene in matters which are essentially within the
domestic jurisdiction of any state…”
However, contrary to the Cold War era arrangements, today’s world order, as
Friedman puts it, “involves the inexorable integration of markets, nation-states, and
technologies to a degree never witnessed before – in a way that is enabling
individuals, corporations, and nation-states to reach around the world farther,
faster, deeper and cheaper than ever before…”
Such deep transnational integration and the worldwide interconnectedness
between nation-states results in their social, economic, political, military, cultural,
and legal affairs becoming removed from their spatial contexts.4 Western nationstates cease to exist as thoroughly isolated, comprehensively sovereign entities
where governments exercise absolute authority over their designated territorial
realm, and remain completely removed from the affairs of others. As a result, it has
been asserted that globalization constitutes a threat to the classic modes of
governance, exercised and enforced by the state in a top-down manner, as
recognized from the Cold War era. Vertovec & Cohen (2002) also suggested that,
“globalization – however the word is understood – implies the weakening of state
sovereignty and state structures (p. 68).”5 Alternatively, globalization sceptics reject
the rise of a global culture or a global governance structure; rather, they claim that
the former cloaks the neo-liberal economic strategies that promote the West.6
Others emphasize the sustained dominance of a sovereign state and its autonomous
Beerkens, H.J.J.G. (2004), “Global Opportunities and Institutional Embeddedness; Higher Education
Consortia in Europe and Southeast Asia.” Enschede: CHEPS.
5 Steven Vertovec & Robin Cohen (eds) (2002), Conceiving cosmopolitanism: theory, context and
practice, Oxford: Oxford University Press, p.86.
6 David Held, Anthony McGrew, David Goldblatt and Jonathan Perraton. Global Transformations:
Politics, Economics and Culture. Stanford: Stanford University Press, pp.32-86: 1999.
4
5
authority over its affairs within the realm of international relations.7 While the
academic debate around whether globalization exists and/or directly produces the
decline of states is fascinating and constructive, it is not useful to explore this
argument in greater detail in this paper, given its scope, and my focus on the
present and future modes of international economic regulation in today’s world. It
should be noted, however, that a deterioration in state sovereignty has been widely
conceded by a large portion of the academic community, and has been evidenced
empirically in international regulatory arenas, including in the field of modern
public international law.
Consider, for example, the recent evolution of new international legal tools and
institutions, such as universal jurisdiction, which allows any state to exercise
jurisdiction over jus cogens international crimes, without having to demonstrate the
traditional nexus – territorial, national, security interest or passive personality –
with the alleged criminal.8 Similarly, relatively new international legal precedents –
such as the ability of international courts and tribunals to indict a serving head of
state despite his or her personal immunity9; or individual criminal accountability in
international criminal law, as embedded in judgments of various ad hoc tribunals,
and the International Criminal Court (ICC) – also point to the tendency that nationstate sovereignty increasingly ceases to be the sacrosanct and guiding principle of
interaction among states. The former Secretary-General of the United Nations,
See for example Hirst & Thompson, 1996.
Malcolm D. Evans (ed.), International Law, Second Edition, Oxford University Press, 2006.
9 See the recent Sudanese President Al-Bashir’s arrest warrant by the International Criminal Court
[ICC], for instance. More information can be found at the ICC Official Website and/or at the following
URL: http://www.icccpi.int/menus/icc/situations%20and%20cases/situations/situation%20icc%200205/related%20ca
ses/icc02050109/icc/02050109?lan=en-GB
7
8
6
Boutros Boutros-Ghali, summarizes the current tendency: “The time of absolute
sovereignty…has passed; its theory was never matched by reality.”10
III. Defining Terms: Globalization, Europeanization & Privatization
The preceding section (II) presents pertinent academic and empirical evidence
substantiating Michaels and Jansen’s (2007) claim that ever-increasing world
integration, however conceptualised or defined, distorts the standard chemistry
between a sovereign state and those subjected to it. This section of the paper (III)
looks at the forces most central to this altered chemistry, as identified by Michaels
and Jansen (2007): namely, globalization, Europeanization, and the privatization of
authority. It will also look at the academic arguments around how to effectively
supervise economic interactions in a global terrain transformed by such forces.
The contrasting academic doctrines highlight the serious conceptual and practical
problems of transnational governments in an increasingly globalized world, and
underline the conundrum of governing economic interactions under the pressure of
global and regional integration, which I then address in detail in the following
section (IV).
Globalization is neoliberal in character. It strives to remove barriers to trade, and
privatize available resources and services, potentially leading to a final, extreme
scenario in which public life is at the mercy of brutal market forces11, and where
“creative destruction”12 guarantees great economic efficiency and promises large
economic gains for those who survive. Ultimately, the promise of large economic
Boutros Boutros-Ghali, An Agenda for Peace (New York: United Nations, 1992), para. 17.
Share The World’s Resources, retrieved on November 16, 2010, available at:
http://www.stwr.org/globalization/neoliberalism-and-economic-globalization.html
12 Joseph A. Schumpeter. Capitalism, Socialism and Democracy, New York: Harper, 1975 [orig. pub.
1942].
10
11
7
gain is the grounds on which states are willing to forego some of their sovereignty
to transnational and/or private agents in a global marketplace.
A similar underlying principle can be observed behind the phenomenon of
Europeanization, which also matters when theorizing contemporary modes of
governance and international economic regulation, as it posits a form of unusual
supranational governances outside of a single sovereign nation-state. On the one
hand, we see European member states voluntarily delegating their sovereignty to
the European Union (EU) in the exchange for access to a greater common market,
and the free movement of goods, services, labor and capital that benefit member
states’ economies. On the other hand, as a result, we observe the development of
hybrid forms of supranational law at the EU level, which are frequently criticised on
the basis of legitimacy, competences, and clashing legal cultures, and due to the
diverse European societies that foster them.13
Furthermore, the forces of regional and global integration blur the traditional
dichotomy between private and public law. Typically, the public sphere is
characterized by state power and legitimate coercion14, as opposed to private law,
which is traditionally marked by the law of contracts and obligations between
private parties and by independent economic activity in civil society.15 This
distinction is extremely relevant for theorizing modes of transnational regulation,
as customary definitions of private law imply autonomy from the state within
national contexts. This can lead one to infer a seemingly effortless solution to the
conundrum of transnational regulation, based on coordinated private law, free of
Michaels and Jansen, 2007.
Anne Claire Cutler, Private Power and Global Authority, Cambridge University Press: 2003, pp. 60107.
15 Antonio Gramsci, “The Modern Prince,” Prison Notebooks, pp. 158-163.
13
14
8
supranational authority, and extrapolated beyond national borders. Such a response
is reminiscent of the 19th century lex mercatoria – a transnational body of private
commercial law, fully autonomous from the state, created by the needs and
practices of commerce and developed by international arbitration.16
However, as Michaels and Jansen (2007) correctly emphasize within the
contemporary context, even where we dismantle private and public law within a
single national legal regime, we find that the boundaries still shift across other legal
cultures and traditions, making such a distinction impossible or, at best, shaky.
Michael Mann (1986) has also observed that socio-spatial networks of power within
societies overlap and intersect.17 Sagers (2007) alleged that the distinction between
private and public law is an illusion: in fact, he claims, both are mere bureaucracies,
while just one (private) “does not have a nominal obligation to the public interest
(p.2).”18 While it may not have an obligation to the public, it can be argued that all
private law is somewhat public19, precisely because all private law affects the public
sphere to some extent.
This is illustrated by various case law precedents, which have highlighted the
inextricable overlap between private and public realms of regulation. For example,
the 1987 Datafin PLC v. Panel for Takeovers and Mergers case20 turned the
decisions of originally self-regulated UK Mergers and Acquisitions Panel into an
institution whose decisions are amenable to judicial review by courts. This is
ultimately because it held significant de facto power that affected individual citizens
Peter Mazzacano, “The Lex Mercatoria as Autonomous Law” (September 27, 2008). CLEA 2008
Meetings Paper; CLPE Research Paper no. 29/2008. Available at SSRN:
http://ssrn.com/abstract=1137629
17 Michael Mann, The Sources of Social Power, Cambridge University Press: 1986, pp.1-34.
18 Chris Sagers, “The Myth of Privatization”, 2007, 59 Admin. L. Rev. 37.
19 Morton J. Horwitz, The History of the Public/Private Distinction, 130 U. PA. L. REV. 1423, 1427-28
(1982).
20 Regina v. Panel on Take-overs and Mergers, Exparte Datafin Plc. And Another Court of Appeal,
[1987] Q.B. 815.
16
9
and the society at large. Alternatively, the 1995 Snyder v. American Association of
Blood Banks (AABB) case21 dealt with negligence setting standards in the US
national blood supply. It considered whether a quasi-governmental AABB qualified
for immunity under private law22, even though it infected the respondent with HIVpositive blood. In this case, the Court used the private remedy of compensation
(liability and negligence), even though the AABB was not a private entity.
Michaels and Jansen (2007) identify numerous competing proposals, offered by
academia, as to how to effectively and legitimately oversee economic interactions in
an economic global terrain transformed by the forces of globalization,
Europeanization, and private authority. The recurrent and opposing discourses of
transnational economic regulation which academics find feasible can be simplified23
and grouped into three general classifications based on their main concepts: (1) the
liberal internationalists’ “world government”; (2) transnational legal science; and
(3) regulatory competition. The liberal internationalist ideal conceives the new
world order as governed by the “world government” – a set of centralized
supranational institutions led by the UN, the WTO, the World Bank, the IMF, the ICC,
the ICJ etc. – which are given supranational powers that exert pressure on national
sovereign states to converge with their norms on various fronts. Such neo-Kantian
world polity assumes the decline of a state authority. Ultimately, it believes that the
solid common platform of “open markets, international institutions, cooperative
security, democratic community, progressive change, collective problem solving,
William and Roslyn SNYDER, Plaintiffs-Respondents v. AMERICAN ASSOCIATION OF BLOOD
BANKS, Defendant-Appellant, 144 N.J. 269, 676 A.2d 1036.
22 Before the adjudication of this case, tort liability typically applied to similar scenarios. Any public
institution was not liable for injuries even if they arise out of negligence. The New Jersey Appellate
Court held that the AABB was not entitled to qualified immunity as a quasi-governmental entity, and
thus excused from owing the plaintiff a duty of care.
23 The scope of this work does not allow for a more detailed, disaggregated literature review. Refer to
bibliography for more detailed academic accounts of global regulation.
21
10
shared sovereignty, and the rule of law”24, would most effectively remedy common
global problems that national-states face. Such a global regulatory model is roughly
evocative of the EU25, where European member states delegate their national
sovereignties to the EU center in exchange for access to the Single European
(“Internal”) Market, which indispensably benefits the economies of the 27 member
states due to increased competition, larger economies of scale, and decreased
market transaction costs, and thereby increased efficiency in resource allocation.
Nevertheless, the important distinction between the liberal internationalists’
theoretical agenda, and the EU experience, is that European private law’s primary
objective is to serve exclusively the smooth running of the Single European Market26,
whereas the “world government” presupposes regulatory oversight of more than
just the economic realm.27
Majone (1994) has argued that the supranational harmonization of private law in
the EU capitalizes on Pareto efficiency28: the reasoning that member states pool
solely those competencies (and corresponding rules governing such competencies),
which benefit all involved. Liberal internationalists, however, propose a much
broader and loftier ideal of a new world order, in which the “world government”
imposes its norms beyond strictly Pareto-improving spheres, and instead
potentially produces winners and losers by the virtue of power politics.
John G. Ikenberry, “Liberal Internationalism 3.0: America and the Dilemmas of Liberal World
Order”, Perspectives on Politics (2009), 7: 71-87 Cambridge University Press.
25 Michaels & Jansen, 2007.
26 Michaels & Jansen, 2007.
27 Minimally, I have not come across literature that puts formal and specific limits on the spheres that
the “world government” would administer.
28 Giandomenico Majone, The Rise of the Regulatory State in Europe, West European Politics, 17(3),
78-102, 1994; Andreas Follesdal and Simon Hix, “Why There is a Democratic Deficit in the EU: A
Response to Majone and Moravcsik.” Journal of Common Market Studies, Vol. 44, No. 3, pp. 533-562,
September 2006. Available at SSRN: http://ssrn.com/abstract=924666 or doi:10.1111/j.14685965.2006.00650.x
24
11
Transnational legal science implies a distinct, highly unified, new kind of law with
its own raison d’être and competences.29 In the EU context, for example, academics
have proposed an extrapolation of the US federalist model to the EU30, as well as the
creation of a brand new, self-contained, and shared legal frame of reference, sui
generis.31
At the global level, various commercial conventions and treaties (such as the UN
Commission on International Trade Law [UNCITRAL] or the UN Convention on the
International Sale of goods [UNCISG], which were created via transnational
harmonization and by consensus32 of members, fulfilled this role to a certain extent;
however, how effectively they achieved this is still unknown.33
Finally, regulatory competition encompasses a pluralist, decentralized, and nonhierarchical view of private law, which is marked by its independence from the
state and supranational authority, judiciaries, and the academia, and is purely
market driven.34 The argument behind such a mode of transnational regulation –
irrespective of whether at the EU level, or globally – is one of economic efficiency:
specifically, the proponents fear that mainstreamed and unified regulation upsets
the competitive advantage of common market participants vis-à-vis other market
participants.35 Instead, the regulatory competition doctrine proposes that parties
Christoph U. Schmid (1999), “Review article. The emergency of a transnational legal science in
European private law”, Oxford J Legal Studies (WINTER) 19 (4): 673-689.
30 Richard Hyland, The American Experience: Restatements, the UCC, Uniform Laws, and Transnational
Coordination, in Towards a European Civil Code 59 (A. Hartkamp et al. eds., 3d ed. 2004).
31 Jane Jenson and Denis Saint-Martin, “Is the European Union still sui generis? Signals from the
White Paper on European Governance.” In European Union Studies Association (EUSA), Biennial
Conference, 2003 (8th), March 27-29, 2003, page 19, Nashville, Tennessee.
32 Official UNCITRAL website, “Origin, Mandate & Composition of UNCITRAL”, accessed on December
4, 2010, available at: http://uncitral.org/uncitral/en/about/origin.html
33 Michaels and Jansen, 2007.
34 Michaels and Jansen, 2007.
35 Jan Smits (2006), “European Private Law: A Plea for a Spontaneous Legal Order”, in Deirdre M.
Curtin et al. European Integration and Law 55, pp.75-78.
29
12
can opt out of unfavourable rules and/or choose laws applicable to them to ensure
the safeguarding of market efficiency.
While the juxtaposed academic doctrines as presented above promise an exciting
theoretical debate, they only highlight the serious conceptual and practical
problems of transnational governance in an increasingly-globalized world, and
underline the conundrum of the future of international regulation, in the face of
pressures from global and regional integration. If we grant that the individual
sovereign state’s authority is eroding, or at least is being altered, as a result of
global integration, who ought to legitimately and effectively make and enforce the
rules of the game, beyond the state? In the name of both effectiveness and
legitimacy, how do we configure such a transnational governance structure? Do we
envisage the future of international economic regulation as a set of centralized
supranational institutions, a so-called “world government”, organized
hierarchically, and conditioned by the universal membership of global market
participants, or is there a feasible alternative? The question of the organizational
structure of international economic regulation, following contemporary
developments, are explored in the following section.
IV. Limits to Bureaucratic Planning According to Friedrich von Hayek
“The curious task of economics is to demonstrate to men how little they really know
about what they imagine they can design.”
-
Friedrich von Hayek, The Fatal Conceit: The Errors of Socialism, 1988
Any proposed remedy to the conundrum of contemporary transnational economic
regulatory order must be based on economic efficiency. This is particularly
13
important for future transnational economic regulation, as contrasted to other
international regulatory spheres, such as international criminal law, which lacks the
underlying incentive of tangible economic gains inherent in transnational economic
regulation. Capturing economic revenue and the threat of its loss have greater
potential to drive compliance than the ostensible commitment to universal justice
or to the repatriation of victims, which has been so widely reiterated in statutes,
treaties and criminal law instruments, but so often breached in practice.
The good news is that the proposal for an optimal design of transnational economic
governance can exploit the promise of economic gains to its advantage, as it was
this promise that drew economic agents to the global marketplace in the first place.
As presented in the preceding section (III), the academic discourses around
transnational economic regulation can be grouped into three broad classifications:
the liberal internationalists’ “world government”, transnational legal science, and
regulatory competition.36 These groups obviously differ structurally, and are
underpinned by contrasting legal and political ideologies, and academic affiliations.
Nevertheless, in the literature I reviewed, as well as in the academic debate
identified by Michaels & Jansen (2007), I consistently encountered a failure to
envisage the optimal transnational regulatory system as a function of the nature of
the information that is utilized within the system. The temporal paradigm that topdown bureaucratic calculation is intrinsically one step behind decentralized private
ordering, was first identified by Friedrich von Hayek (1945) in his groundbreaking
work, The Use of Knowledge in Society.
To put Hayekian theory into context, his work was provoked by his scholarly
contemporaries, such as Oscar Lange (1937), who insisted that economic
36
As based on the literature review conducted by Michaels and Jansen, 2007.
14
equilibrium is best maintained by a central planner, who possesses and utilizes a
more superior information set to regulate the market than “any private
entrepreneur could ever have (p. 126).” While, with the massive failure of socialism
on economic grounds, history has proven Lange wrong, it was von Hayek (1945)
who correctly observed that a central planner could never fully and effectively
utilize a giant concentration of historical data on their own in a dynamic, vibrant,
and inter-dependent marketplace.
There are two key reasons as to why a centralized governing entity cannot
adequately foresee and respond to the ever-changing market conditions, which
leads to equilibrium distortions and market inefficiencies, as identified by von
Hayek (1945). Firstly, the information utilized by the planner to make
macroeconomic decisions and adapt to changing market conditions is of an
aggregate, centralized, and static nature, and thereby tends to deviate from
economic reality, and lacks timeliness, accuracy, and parsimony in the environment
of a dynamic marketplace. Secondly, the data is accessed and manipulated by a
single decision-making unit in a top-down manner, which further obscures an
efficient intervention, in the face of highly decentralized economic activity. The
ultimate result of a single entity managing large volumes of data to govern the
market interactions is that the economic equilibrium is affected by any minor
change unforeseen by the planner, leading to infinite disequilibria.
To remedy such ineffective economic governance, von Hayek (1945) stresses the
importance of using decentralized real-time information, which is dispersed in an
economic system in an incomplete form, and is communicated by the natural
15
market forces of supply and demand and by the price mechanism.37 Such
information is superior to large statistical aggregates, as it is more easily deployable
in a timely fashion by decentralized market participants who can anticipate and
respond to ever-changing market conditions, and make the corresponding
adjustments to preserve equilibrium and market efficiency.
The Hayekian model points to the link between information and
regulation/governance. If the regulator possesses information which is different
from market participants, it does not provide optimal regulation to maximise
welfare in the global playing field. Therefore, the regulator must establish a
mechanism to extract appropriate information from market participants. It could be
said, consistent with von Hayek (1945) and the neoclassical economic theory, that
because of the informational asymmetries38 that are likely to arise from regulation,
it remains the second-best option, behind a free competitive market.39
The implication of the Hayekian theory for my analysis, however, is that it should
inform the design of international economic regulatory bodies in a dynamic
globalized market. The design and organization of these bodies should regard
informational imperfections and asymmetries as a possible source of global market
failure. Ideally, global economic regulatory institutions should be devised in such
Von Hayek’s (1945) response is somewhat consistent with the Neoclassical Equilibrium Price
Theory – the idea that price mechanism communicates valuable contextual information to economic
agents decentralized in a marketplace, which helps preserve the equilibrium condition.
Simultaneously, it has been alleged that the Neoclassical Equilibrium Price Theory, indirectly points
to the absence of contextual information in the contemporary most dominant equilibrium analysis,
the Neoclassical Equilibrium Analysis.
38 I define informational asymmetries in the current context as informational discrepancies about
market conditions (such as the quantity or price of the output traded) between consumers and
producers, which lead the better-informed side to exploit their superior information at the expense
of the other party, and thereby lead to inefficient resource allocation.
39 That is, in a ‘perfect world’ and under the standard microeconomic assumptions that the market
has perfect information and is perfectly competitive.
37
16
way as reduce information imperfections, exploit economic incentives and reduce
the transaction costs40 of the global market.41
This leads to the problems associated with the liberal internationalist vision of
international economic regulation. The liberal internationalist vision conjectures
international regulatory institutions as a sui generis system of supranational
centralized authorities. Efforts to formulate such a “world government” within the
realm of economic regulation are evidenced by the creation of supranational
institutions, such as the UN, the World Bank, the WTO, the IMF, or supranational
legal codes such as the UNCITRAL and the UNCISG. Hayekian informational
economics theory, however, makes it obvious that the “world government” model is
too stationary and centralized to redress the constantly changing economic needs of
the dynamic global market, and thereby maintain the global economy in a
microbalance, or rough equilibrium.42
It is difficult enough to devise an effective economic regulatory regime within a
national context, and an even more daunting task to effectively govern the needs
and interests of multiple diverse economic systems with their conflicting laws,
opposing modes of national governance (as they were embedded in and shaped by
diverse local institutions43), differences in the protections they offer to economic,
cultural, social and moral interests, and variations in the ways in which jurisdictions
are defined. Such profound divisions across national economic systems highlight the
need for transnational economic regulatory institutions to be highly responsive and
Ronald Coase (1937) first argued that there are transaction costs to using the market, and these
costs can be suppressed by creating an organizational structure, such as a firm, which minimizes the
economic friction caused by the transaction costs.
41 Colin Kirkpatrick and David Parker, “Infrastructure Regulation: Models for Developing Asia”,
Discussion Paper No. 6, published 6 May 2004.
42 Gregory Grossman, “Notes for a Theory of the Command Economy.” Soviet Studies, Volume 15,
Issue 2 (Oct., 1963): 101-123.
43 Mark Granovetter (1985) “Economic action and social structure: the problem of embeddedness”,
American Journal of Sociology, vol. 91, mo. 3, pp.481-510.
40
17
flexible, which their design cannot promise or deliver. Because on such an
enormous scale, the governing economic regulatory institution does not have access
to real-time information dispersed across the global economic marketplace. Rather,
it relies heavily on statistical aggregates to shape its policies and decisions. Such
regulation, coupled with inescapable power politics, is guaranteed to produce
severe economic distortions, which leads to the second major issue of the liberal
internationalists’ doctrine relating to accountability.
All-encompassing supranational institutions and universal economic legal codes are
unlikely to satisfy everyone equally, with the most powerful having the most
influence on the outcomes, based on their interests. The authority balance in the UN
Security Council illustrates my point well: the five permanent members (P5) – the
US, Britain, China, France and Russia – enjoy disproportionate veto power as the
victors of the war fought 65 years ago, regardless of the fact that such power
organization is becoming increasingly obsolete, and the size of the UN has more
than doubled since they grabbed the most powerful ‘chairs’ in the club.
Furthermore, David Rothkopf of Carnegie Endowment for International Peace
argues that economic globalization has produced a new global “super-class” of
businessmen, investors, bankers, and global politicians who steer supranational
institutions, such as the World Bank or the EU, but in the global arena, far from
national electorates44, which makes them answerable to no one.45
In fact, some empirical evidence suggests that nation-states have often been
reluctant to make use of such supranational institutions in practice. Wall Street
looks to the Basel Committee’s rules more than the World Bank’s, and human rights
“The Global Ruling Class: Million Dollar Babies”, The Economist, published April 24, 2008.
Available at: http://www.economist.com/node/11081878?story_id=11081878
45 Anne-Marie Slaughter, “Viewpoint: The Global Governance Crisis”, published in the
InterDependent, The United Nations Association of the USA, 2006.
44
18
lawyers are more prone to invent transnational litigation strategies for domestic
courts than to petition the UN Committee on Human Rights.46 It is unclear whether
this reluctance stems from the distrust of players in the global marketplace, the
presupposed incompetence of the institutions, accountability concerns, or other
perceived or actual transaction costs stemming from the use of supranational
bodies.
According to Anne-Marie Slaughter (2004), a brand new world order of
international governance – already widespread and remarkably effective – has
emerged and established itself, while we were captivated by the illusion of the
“world government”. This new world order has not received nearly as much global
attention, its goals are less pompous, and it is free of the fuss of high politics;
however it has more substance, as it offers promising answers to many critical
international challenges of the 21st century. Slaughter (2004) hypothesizes that the
state has not disappeared, nor is it exactly on the decline. Rather, the state is
disaggregating into functionally different dimensions – both private and public –
such as courts, executive and legislative branches, private regulatory agencies,
bankers, lawyer and activists, and criminals are networking with counterparts
abroad, which generates a clear web of transnational relations: the new
transgovernmental order. These dense networks are facilitated by robust and
repeated interactions among two or more actors which are typically marked by
reciprocity47, while they lack a formal dispute settlement mechanism for resolving
Anne-Marie Slaughter, A New World Order, Princeton University Press, March 2004 (introductory
chapter).
47 Miles Kahler & David Lake, “Economic Integration and Global Governance: Why So Little
Supranationalism?” Paper presented at the annual meeting of the ISA’s 49 th Annual Convention,
Bridging Multiple Divides, Hilton San Francisco, San Francisco, CA, USA, March 26, 2008.
http://www.allacademic.com/meta/p251733_index.html
46
19
problems that may arise during an exchange.48 The transgovernmental order is
based on pooled and informal intergovernmental authority, mutual cooperation,
and the joint responsibility of various national jurisdictions.
At the judicial level, for example, more and more courts utilize comparative law
techniques to make domestic decisions. In the United States, two of the Supreme
Court’s most important rulings in 2003 partly relied on foreign law.49 Later, the
Court used foreign law in its verdict that concluded the death penalty was legally
inapplicable to those of less than 18 years of age.50 On the other hand, German,
Canadian, and Israeli Supreme Courts have been consistently looking to US Supreme
Court decisions to reach their own conclusions.51 Such decentralized and informal
judicial networking is in sharp contrast to the idea of a single, supreme global
institution adjudicating from a self-governing supranational standpoint based on a
rigid global code, while being accountable to no one.
The previous example illustrates how transgovernmentalism addresses some
serious glitches in liberal economic internationalism. Its first important advantage
over the “world government” model is that it effortlessly moderates conservative
concerns about the potential defeat of national sovereignty, as well as the loss of
regulatory power in a globalized economy.52 In this sense, transgovernmentalism
meets the demands of individual nation-states for equal ability to influence the
rules of the game, as contrasted to the few powerful that disproportionally influence
rule-making in the top supranational ‘clubs’. Furthermore, to a considerable degree,
Joel M. Podolny & Karen L. Page, “Network Forms of Organization”. Available at SSRN:
http://ssrn.com/abstract=35182
49 Norman Dorsen, “The relevance of foreign legal materials in U.S. constitutional cases: A
conversation between Justice Antonin Scalia and Justice Stephen Breyer”, Int J Constitutional Law
(October 2005) 3(4):519-541.
50 Dorsen, 2005.
51 Slaughter, 2004.
52 Slaughter, 2004.
48
20
transgovernmentalism preserves accountability to the citizens of sovereign states,
as the main actors that engage in international economic decision-making in
cooperation with parallel government actors – constituting democratically-elected
public officials. In terms of efficiency – so central to my analysis – and consistent
with the Hayekian theory presented earlier, webs of decentralized transnational
networks are by design more elastic, flexible and responsive in foreseeing and
preventing international economic problems than centralized, supranational
institutions. Slaughter (2004) also emphasizes that transnational formal and
informal networks are “flexible, fast and more effective than creaky, treaty-based
international institutions (p.32)53”, which “offers something for both sides of the
aisle.”54
V. Concluding Remarks
The present position paper has deployed the argument of Michaels and Jansen
(2007) to conceive the mosaic of problems surrounding international economic
regulation in the era of globalization, Europeanization, and privatization. My
overarching aim in this work was to draw out the implications of these
contemporary developments for the future of transnational economic regulation. In
my proposal, I relied heavily on the neoclassical conceptualization of economic
efficiency, and have insisted that an appropriate design of international economic
regulation should capitalize on economic efficiency. Consistent with my pledged
commitment to efficiency, I then presented the theoretical paradigm that top-down
bureaucratic calculation is intrinsically one step behind decentralized private
Anne-Marie Slaughter, “Viewpoint: The Global Governance Crisis”, published in the
InterDependent, The United Nations Association of the USA, 2006.
54 Anne-Marie Slaughter, “The Real New World Order”, Princeton Foreign Affairs, October 1997,
available at: http://www.princeton.edu/~slaughtr/Articles/RealNewWorldOrderFA.txt
53
21
ordering, as identified by Friedrich von Hayek (1945). I utilized Hayek’s framework
to show that the supranational “world government” model – the solution most
commonly offered by academia, politicians, intellectuals, and the media – is
predestined for failure on the basis of its inherent organizational inefficiency and
unaccountability. Finally, I presented transgovernmentalism, conceptualized by
Anne-Marie Slaughter (2006), as a more viable alternative to global governance, one
that has the aptitude to accommodate the world’s heterogeneity and to swiftly
adapt to the enormously dynamic global market that it governs. Such a model does
not necessarily encompass the supranational unification and conciliation of the
world’s heterogeneity, as many have imagined. A new model of good global
economic governance saves and reclaims choice, the freedom not to consent to the
sweeping vision that globalization and economic integration are predestined, and
intrinsically out of reach of the general public.
22
Bibliography
Andreas Follesdal and Simon Hix, “Why There is a Democratic Deficit in the EU: A
Response to Majone and Moravcsik.” Journal of Common Market Studies, Vol. 44, No.
3, pp.533-562, September 2006. Available at SSRN:
http://ssrn.com/abstract=924666 or doi:10.1111/j.1468-5965.2006.00650.x
Anne Claire Cutler, Private Power and Global Authority, Cambridge University Press:
2003, pp.60-107.
Anne-Marie Slaughter, A New World Order, Princeton University Press, March 2004.
Anne-Marie Slaughter, “The Real New World Order”, Princeton Foreign Affairs,
October 1997, available at:
http://www.princeton.edu~slaughtr/Articles/RealNewWorldOrderFA.txt
Anne-Marie Slaughter, “Viewpoint: The Global Governance Crisis”, published in the
InterDependent, the United Nations Association of the USA, 2006.
Antonio Gramsci, “The Modern Prince”, Prison Notebooks, pp.158-163.
Beerkens, H.J.J.G. (2004), “Global Opportunities and Institutional Embeddedness;
Higher Education Consortia in Europe and Southeast Asia”, Enschende: CHEPS.
Boutros Boutros-Ghali, An Agenda for Peace (New York: United Nations, 1992),
para.17.
Chris Sagers (2007), “The Myth of Privatization”, 59 Admin. L. Rev. 37.
Christoph U. Schmid (1999), “Review article. The emergence of a transnational legal
science in European private law”, Oxford J Legal Studies (Winter) 19(4):673-689.
Colin Kirkpatrick and David Parker, “Infrastructure Regulation: Models for
Developing Asia”, Discussion Paper No.6, published 6 May 2004.
David D. Driscoll, “The IMF and the World Bank How Do They Differ”, the
International Monetary Fund, August 1996, available at:
http://www.imf.org/external/pubs/ft/exrp/differ/differ.htm
Daniel Rodrick (1997), “Has Globalization Gone Too Far?”, California Management
Review, 39(3), pp.29-40.
David Held, Political Theory and the Modern State, Stanford, California: Stanford
University Press, 1989.
David Held, Anthony McGrew, David Goldblatt and Jonathan Perraton. Global
Transformations: Politics, Economics and Culture. Stanford: Stanford University
Press, 1999.
Friedrich A. Hayek, “The Use of Knowledge in Society”, The American Economic
Review, Volume 35, No. 4 (Sept. 1945):519-530.
Giandomenico Majone (1994), “The Rise of the Regulatory State in Europe”, West
European Politics, 17(3), 78-102.
Gregory Grossman, “Notes for the Theory of the Command Economy”, Soviet Studies,
Volume 15, Issue 2 (Oct. 1963):101-123.
23
Jan Smits (2006), “European Private Law: A Plea for a Spontaneous Legal Order”, in
Deirdre M. Curtin et al., European Integration and Law 55. pp75-78.
Jane Jenson and Denis Saint-Martin, “Is the European Union still sui generis? Signals
from the White Paper on European Governance.” In European Union Studies
Association (EUSA), Biennial Conference, 2003 (8th) March 27-29, 2003, page 19,
Nashville, Tennessee.
Joel M. Podolny & Karen L. Page, “Network Forms of Organization”. Available at
SSRN: http://ssrn.com/abstract=35182.
John G. Ikenberry, “Liberal Internationalism 3.0: America and the Dilemmas of
Liberal World Order”, Perspectives on Politics (2009), 7:71-87, Cambridge University
Press.
Joseph A. Schumpeter, Capitalism, Socialism and Democracy, New York: Harper,
1975 [orig.pub.1942].
Mark Granovetter (1985) “Economic Action and Social Structure: The problem of
Embeddedness”, American Journal of Sociology, vol.91, mo.3, pp.481-510.
Malcolm D. Evans (ed.), International Law, Second Edition, Oxford University Press,
2006.
Michael Mann, The Sources of Social Power, Cambridge University Press: 1986, pp.134.
Miles Kahler & David Lake. “Economic Integration and Global Governance: Why So
Little Supranationalism?” Paper presented at the annual meeting of the ISA’s 49th
Annual Convention, Bridging Multiple Divides, San Francisco, CA, USA, Mar 26, 2008,
http://www.allacademic.com/meta/p251733_index.html
Morton J. Horwitz, The History of the Public/Private Distinction, 130 U. PA. L. REV.
1423, 1427-28 (1982).
Norman Dorsen, “The relevance of foreign legal materials in US constitutional cases:
A conversation between Justice Antonin Scalia and Justice Stephen Breyer”, Int J
Constitutional Law (October 2005) 3(4):519-541.
Official UNCITRAL website, “Origin, Mandate & Composition of UNCITRAL”,
accessed on December 4, 2010, available at:
http://www.uncitral.org/uncitral/en/about/origin.html.
Oskar Lange, “On the Economic Theory of Socialism: Part One”, The Review of
Economic Studies, Vol.4, No.1 (Oct., 1936):53-71.
Oskar Lange, “On the Economic Theory of Socialism: Part Two”, The Review of
Economic Studies, Vol.4, No.2 (Feb., 1937):123-142.
Paul Q. Hirst and Grahame Thompson, Globalization in Question: the International
Economy and the Possibilities of Governance, Cambridge: Blackwell, 1996.
Peter Mazzacano, “The Les Mercatoria as Autonomous Law” (September 27, 2008).
CLEA 2008 Meetings Paper; CLPE Research Paper No. 29/2008. Available at SSRN:
http://ssrn.com/abstract=1137629.
24
Ralf Michaels, “EU Law as Private International Law? Reconceptualizing the
Country-of-Origin Principle as Vested-Rights Doctrine”, 2 J. Priv. Int’l L. 195, 238-42
(2006).
Ralf Michaels and Nils Jansen, Private Law Beyond the State? Europeanization,
Globalization, Privatization” (2007). Duke Law School Faculty Scholarship Series.
Paper 78. http://lsr.nellco.org/duke_fs/78
Regina v. Panel on Takeovers and Mergers, Exparte Datafin Plc. And Another Court
of Appeal, [1987] Q.B. 815.
Richard Hyland, The American Experience: Restatements, the UCC, Uniform Laws, and
Transnational Coordination, in Towards a European Civil Code 59 (A. Hartkamp et al.
eds., 3d ed. 2004.)
Ronald H. Coase, “The Nature of the Firm.” Economica, New Series, Volume 4, Issue
16 (Nov. 1937): 386-405.
Share The World’s Resources, retrieved on November 16, 2010, available at:
http://www.stwr.org/globalization/neoliberalism-and-economicglobalization.html
Sol Picciotto and Ruth Mayne, Regulating International Business: Beyond
Liberalization, London: Macmillan, 1999.
Steven Vertovec & Robin Cohen (eds), Conceiving cosmopolitanism: theory, context
and practice, Oxford: Oxford University Press, 2002.
Thomas L. Friedman, The World is Flat: A Brief History of the Twenty-First Century.
New York: Farrar, Straus and Giroux, 2005.
Thomas L. Friedman, Lexus and the Olive Tree, New York: Farrar, Straus & Giroux,
1999.
“The Global Ruling Class: Million Dollar Babies”, The Economist, published April 24,
2008. Available at: http://www.economist.com/node/11081878?story_id=110878
United Nations, Charter of the United Nations, 24 October 1945. I UNTS XVI,
available at http://www.unhcr.org/refworld/docid/3ae6b3930.html [accessed 13
November 2010].
“Who Runs the World? Wrestling for Influence”, The Economist, published July 3,
2008. Available at: http://www.economist.com/node/11664289
William and Roslyn Snyder, Plaintiffs-Respondents v. American Association of Blood
Banks, Defendant-Appellant, 144 N.J. 269, 676 A 3.d 1036.
25