Thematic blogspot—Global Governance: the importance of regionalism

As economies are (slowly) exiting from the global financial crisis, a re-assessment of the role of international institutions is taking place. This blogspot reviews the current debate.

International institutions are relatively specialized in their activities, and simplifying, the World Bank (WB) focuses on development, the International Monetary Fund (IMF) on macrofinancial issues, the World Trade Organization (WTO) specializes in trade, the World Health Organization (WHO) in health care, etc. Lack of cooperation between institutions could reduce efficiency, in places where they could be complementary as the WB and the IMF on poverty reduction.

Could institutional competition result in better outcomes?

Pros and Cons of Specialization—Specialization encourages effectiveness, accountability and monitoring of institutions, according to the Wilson’s (1989) survey which focused on US government agencies. Hausmann (1996), based on an analysis of the governance of American unions, showed that the success of the cooperative form is closely related to the alignment of the interests of its members, limiting the time spent seeking political compromises. However, externalities from the operations of agencies can give rise to institutional conflicts. Jacquet et al (2000) propose two mitigating solutions: that an agency whose actions could compromise the mission of another, requests its written opinion (follows the recommendation or justifed its refusal) or a more stringent procedures, with recourse to a court of conflicts or a Council of Elders.

Competition between organizations?—Institutional competition could enhance performance, yet is difficult to implement and has some drawbacks. Tirole (2011) stresses the sunk costs and the importance of reputational capital resulting in returns to scale. Building solid governance rests on well-defined missions which makes decisions efficient and promotes its accountability.

Global public goods and global governance

Collective actions and risks associated with high degree of global economic interdependence are emerging as a major motivation for collective international actions and help finding new sources of co-operations. The economic definition of public goods, given by Samuelson (1954), respects two properties: non-exclusion and non-rivalry—justifying public intervention, sometimes at the international level, requiring coordination.

The existence of global public goods—C. Kindelberger (1986) and J. Stiglitz (1995) put light on the question of international public goods. Failure to provide them leads to negative externalities. Economic theory suggests that there are some market imperfections in the allocation and in the production of public goods. Laurence Tubiana and Jean-Michel Severino (2001) gave the example of knowledge, difficulty to access it makes obstacles to economic efficiency. This access is costly, which entails loss of welfare. In a Project Syndicate article, Ban Ki-moon explains how investments in disaster preventions can in return save up 60 times the cost of these investments. Moreover, the President of the World Bank Group published an article to call for a global supervision to solve global health issues.

The coordination of public policy for international public goods raises the question of how a voluntary collective action can be successful, without a higher authority to be present (Cooper, 1985 ; Kindleberger, 1986): under what conditions the players prefer to adopt binding rules for the collective interest rather than to fall into non cooperative strategies. The results given by the game theory in international relations (Krasner, 1973) demonstrates the prevalence of non-cooperative behaviors.

Dani Rodrik (Project Syndicate) explains how the sharp rise in capital inflows has enhanced consumption rather than investment in countries that received them, which make economic volatility and financial crises more frequent. He calls for more cooperation on this topic.

Another important aspect is the equity in the distribution of global public goods. For Kindleberger (1973), the dominant economy creates the system of governance to its own advantage and then forces other nations to accept its rules. Moreover, Grieco (1990) argued that countries seek relative gain and would not negotiate an international agreement if the gains compared to other participating appear to be balanced (Grieco, 1990).

Solutions—To cope with these issues, different types of solutions are possible: complete the markets, create institutions which ensure the decentralized coordination actions or to spread incentives. To finance the production of public goods and to encourage economic actors to internalize the externalities of their actions one solution is to impose taxes or charges. These can be use directly to allocate the production of a public good, or contributing in the fund to produce all indistinct public goods. Heterogeneity of preferences among countries is a difficulty, for example when the taxed state if it has no preference for the global public good targeted, resulting in a greater tax burden than the gain derived from the additional production of global public good.

Regional and global governance organization

A glance at commercial activities underlines the fact that regional trade agreements and the constitution of regional organizations are now an essential modality of international governance (Bergsten, 2001). How can regional institutions and cooperation provide public goods (Esty, Severino, Tubiana)? Cook and Sachs (1999) describe a number of international public goods for which the management at a regional scale seems appropriate, but recognize that reflection remains embryonic.

Siroën (2000) asks what is the most efficient level for providing global public goods (national, regional, or global).

Is regional level a relevant level?—the regional dimension of the externalities associated with the public good is often strong. For instance, wars are more and more numerous and localized, affecting especially the immediate neighbors (Mendez, 1999). Trade flows, the financial or health contagion phenomena, despite the globalization, are largely regional. For Timbergen (1954) and Oates (1972), if there is exclusively regional externalities, switching from regional to global level provides no additional benefit compared to the regional level. On the other hand, Kaushik Basu, chief economist at the WB, explains how poverty has direct costs for developing countries and indirect costs for the advanced world, i.e., a global impact to be dealt with at the international level.

Regional clubs—There are three categories of criticism made to regional clubs. The first aspect concerns the formation of the club. It can create negative externalities on non-members countries which are sometimes facing a domino effect: they adhere to a club they did not want to participate at the origin (Baldwin, 1993). Other countries may not have access to regional agreements they wish to join (Claude, 1968). The second criticism is the fact that the overall level of governance is fragmented or weakened: the formation of the club can divert members to get involved in building an agreement at global level (Wyplosz, 1999). Finally, the constitution of blocks can also increase rivalry by diminishing the global interdependencies between countries (Collignon, 1999).

The benefits of regional clubs are highlighted by Mansfield and Pevehouse (2000). The major argument could be called the « educator regionalism »—providing a learning by doing process for some country policies or practices which will then help to participate in global governance. The « experimenter regionalism » is helpful as regional agreements can be used as precursors for global policies. The last argument is the « electoral part », providing a level where the smaller number of voters facilitates reaching an agreement.

Regional governance, not a perfect solution, will remain a very relevant level in international governance (Lamy, 2000).