1. A new, more Technocratic Financial Governance
A new trend has recently begun to emerge in intergovernmental attempts to manage and regulate
globalization. Technical issues and areas are being identified, and expert network are being fostered
as a flexible and efficient way to manage them. The approach eschews representative institutions in
which power differences among states are obvious. To cite two prominent scholars: 'any emerging
pattern of governance will have to be networked rather than hierarchical and must have minimal
rather than highly ambitious objectives' (Keohane and Nye, 2000). In other words, state-based
institutions of governance which exercise authority over all other actors are being replaced by
'network minimalism' which seeks 'to preserve national democratic process and embedded liberal
compromises while allowing the benefits of economic integration'.(ibid.)
In these arguments is clear the institutionalist and functionalist assumptions which focus on
cooperation rather than power, and on 'getting the job done' rather than on the justice or legitimacy
of the process. Network comprise participants with special technical expertise and material stake in
an issue, such as the chemical, accountancy and financial stability networks.
Where possible, such transnational corporations avoid state or interstate regulation. Instead they
create their own tier of private sector 'governance','standard setting','codes of best practice' or selfregulation (Woods, 2002). Because they are selective, these networks are cohesive, technically
sophisticated and efficient. Their legitimacy in large part depends on the quality of the outcomes
they produce, that is, if they do their job well or not. Results not process matter most, or to express
it in la language of some political scientist, the quality of the outputs matters more than the
democratic input. The present analysis examines the global finance regulation in order to stressing
its actual functionalist tendency.
The first section of the present analysis explains the theoretical approach that I adopt in order to
examine the global finance governance, in particular the presentation of the 'liberal' tradition. The
second section below identifies the form and the concept of the contemporary globalization: in
particular, I adopt Vercauteren's 'theory of three sphere'. The third section presents some useful
definition for 'governance' and 'legitimacy' in order to obtain some theoretic instruments to analyse
the global financial governance. The fourth section identifies the forms and extend of contemporary
financial globalization and reviews the various institutional mechanisms that currently serve to
govern it. Finally, the analysis ends with a conclusion that evidences the technocratic and
functionalist tendency of the global financial governance.
2. The Theoretical Approach
International relations theories attempt to provide a conceptual model upon which international
relations can be analyzed. Each theory is reductive and essentialist to different degrees, relying on
different sets of assumptions respectively. In order to examine the global finance governance I
adopt in this analysis the 'liberal' tradition because is considered the more useful to demonstrate its
The liberal current, inspired of the thought of Emmanuel Kant, is not as well interested by the state
itself as by the objective of peace among the states and the necessary conditions for this aim. In this
perspective, the state is regarded as part of the system, with rules of behaviour allowing the
transformation of the anarchistic relations of the international system into an establishment of a
peace. Security is not the first preoccupation for states and it is not conceived in an offensive and
individualistic manner, rather in a collective perspective ensured by the states community (this is
the UN principle of 'collective security'). Contrary to the 'realism' though, the liberal approach does
not consider the state the exclusive actor of international relations, but the major actor who must
take into account the growing influence of different types of actors (multinational enterprises,
international organizations, etc.). Moreover, the liberal thought underlines the importance of the
influence of state internal factors regarding thestate foreign policies (Vercauteren, 1999).
Since conflict and war are endemic feature of a system of state in which sovereigns seek to
maximize their power (this is the 'realistic' assumption), liberalism holds that it is only through the
governance or transcendence of power politics that the necessary conditions for the promotion and
realization of global peace can be effectively achieved. This argument rests on several
1. First, that reason and rationality are necessary and sufficient requirements for the effective
conduct and management of international affairs. In essence, through the pursuit of selfinterest and rational deliberation, conflicts of interests between states can be resolved or
mediated without recourse to force of war.
2. Second, internationally cooperation is rationally, as well as ethically, preferable to conflict.
Furthermore, growing material interdependence between states and peoples promotes the
necessity for the international regulation of their common affair as well as the rational and
cognitive basis for increased cooperation.
3. Third, international institutions (in the sense of durable set of rules, roles, norms, routines,
and expectations defining appropriate behaviour, thereby encompassing everything from
formal international organizations and international law to informal international regimes)
contribute to peace and word order in two ways: they tame the powerful by creating
international norms, incentives and new patterns of multilateral politics which limit the
scope for power politics; and they also provide mechanisms for preventing or managing
interstate conflict. In brief, international organizations matter.
4. Fourth, progress is possible in world politics in so far as power politics (and thereby war) is
not regarded as an immutable property of the interstate order (as realism presumes) but on
the contrary can be mitigated, if not transcended, through the progressive reform or
domestication of international affairs (the rule of law, universal human rights,
These assumptions assert that the mutually reinforcing dynamics of transnational economic
integration, the diffusion of liberal democracy and the growth of international governance creates
the conditions for an expanding liberal zone of peace in which war increasingly becomes an
irrational or unthinkable instrument of interstate politics (Russet and Oneal, 2001).
There is no singular tradition of liberal school but, on the contrary, a series of contending
approaches. One approach, directly inspired by Kant's concept of 'perpetual peace' and associated
3. to the US President Woodrow Wilson though , views the state in a democratic point of view.
Democratic form of government is an essential building block of a peaceful international order, so
students as Micheal Doyle see in the expansion of democracy in the world the key for the
international peace (1997).
The promoters of the 'interdependence' theory as Joseph Nye do not dispute on the central role of
the state in the international affairs: they insist on the ever-increasing impact of the (notably
economic) interdependence phenomenon on the international relations. This phenomenon is
considered to be so strong to make the war harmful to the state prosperity. The 'liberal
institutionalism' approach suggests that far from international cooperation being a product of
hegemony or an altruistic motivation on the part of states, it is a rational response to conflict
between states among whom there is considerable interdependence (Keohane, 1984). International
institutions provide important benefits for states since they facilitate the achievement of national
goals while also reducing uncertainly, enhancing trust and generally minimizing the risks of
cooperation. In this respect, international institutions, whether formal organizations such as the
WTO or looser arrangements of international regimes, such as that covering the prevention of
international terrorism or the proliferation of nuclear weapons, 'empower governments rather than
shackle them' (Keohane, 1984, p.13).
Since the original publication of Keohane's theory in After Hegemony in 1984, the world has
witness profound structural change, including the end of the Cold War, unprecedented globalization
with a concomitant deepening of international interdependence, and the global spread of liberal
democracy. In these circumstances, liberal institutionalism appears to have acquired much greater
explanatory power. Accordingly, it is the theoretical approach that I adopt in the present analysis of
the financial global governance.
Definition of Globalization
Any discussion of global governance (and of course of global finance) must start with an
understanding of the changing of international society. Woven into this are the complex processes
known as globalization. Globalization refers to a historical process which transformation the spatial
organization of social relations and transactions, generating transcontinental or interregional
networks of interaction and the exercise of power (Held et al., 1999). Different historical forms of
globalization can be identified, including the epoch of world discovery in the early modern period,
the era of European empires and the present era shaped by the neoliberal global economic project.
These different historical forms of globalization are characterized by distinctive spatio-temporal
and organizational attributes; that is, particular patterns of extensity, intensity, velocity and impact
in global relations, flows and networks, along
side different degrees of institutionalization, modes of
stratification and reproduction. Although contemporary globalisation has elements in common with
its past phases, it is distinguished by unique spatio-temporal and organizational features, creating a
world in which the extensive reach of global relations and networks is matched by their relative
high intensity, high velocity and high impact propensity across many facets of social life, from the
economic to the environmental.(Held and McGrew, 2003)
Numerous simplifying typologies have been developed in order to explain the influence of the
globalization process. Appanui asserts six types or scapes where the different actors are acting:
ethnoscape, mediascape, ideoscape, technoscape, and financescape (1996). It is from this type of
interpretation of a disaggregated international reality that James Rosenau argues the coexistence of
a state-centric system with a multi-centric system: world affairs can be conceptualized as governed
through a bifurcated system – what can be called the two world of worlds politics – one an
interstate system of states and their national governments that has long dominated the course of
events, and the other a multicentric system of diverse types of other collectivities that has lately
emerged as a rival source of authority with actors that sometimes cooperate with, often compete
with, and endless interact with the state-centric system. The dynamics of post-industrialism are
simultaneously fostering centralizing and decentralizing tendencies in global affairs, some of which
4. cancel each other out but many of which progressively circumscribe nation-state and the
international system that they have sustained for several centuries. Analysing the world affairs
development focusing to the guidelines of authority, hierarchy, issue agenda, and systems as they
related to the identity, conduct, and interaction of the actors who produce outcomes, Rosenau
delineates parametric changes in which a new multi-centric world is discerned as challenging,
rivalling, ignoring, and otherwise coexisting alongside – neither superordinate nor subordinate to –
the historic state-centric world. The result is a paradigm that neither circumvents nor negates the
state-centric model, but preserves it in a larger context, one that posits sovereignity-bound and
sovereignty-free actors as inhabitants of separate world that interact in such a way as to make their
coexistence possible (Rosenau, 1990). Viewed in the context of proliferating centres of authority,
the global stage is thus dense with actors, large and small, formal and informal, economic and
social, political and cultural, national and transnational, international and subnational, aggressive
and peaceful, liberal and authoritarian, who collectively form a highly complex system of global
If Appanui stresses the accent on the cultural dimension of globalization, and Rosenau where the
power is, Vercuteren proposes the theory of 'three sphere'. This theory considers global affairs
according to the three principal implications:
the security sphere is manly the field of territorial implications and about external and
internal security of the actors of the international system;
the economy sphere defines the whole process of production until exchange of goods and
services; this sphere is connected with industrial, commercial, financial activities;
the signification sphere is everything participates in the search of the meaning of existence
and the international relation. This is the sphere of the identity and philosophical, political,
religious, cultural, ethnic conceptions, including education/teaching.
The 'three sphere' theory can be used as a synthesis among the different theoretical approaches of
the international relations. The 'realistic' scholarship tends to concentrate on the security sphere, on
the external security of the states; 'liberal internationalism' and the the theory of the
interdependence are interested manly on the importance of the economic sphere and the role of
non-state actors; the 'constructivist' theory is sensible to the signification sphere, particularly to the
identity, ethnic and ideological dimensions.
In the perspective of the three sphere theory, the international relations can be analysed through
the evolution observed in each sphere (e.g. the impact during the XX century of the
communist theory on the international relations),
the existence of interaction among the spheres (e.g. the arm trade reveals the connection
between the economic sphere and the security one),
the relations among the spheres: these relations can be balanced, any spheres dominate the
others, or a sphere can dominates another one. For example, the politic behaviour of
Slobodan Milosevic during the Balkan crisis emphasizes the domination of ethnic
(signification sphere) and military (security sphere) considerations over the economic
interest of Serbia.
Observing the international situation during the Cold War and the rivalry among West and East, we
could see the domination of the security sphere (e.g. the 'arm race', particularly the nuclear one)
and the signification sphere (the importance of the ideologies). Today we can sustain that
5. importance of the signification sphere (the renaissance of nationalism and ethnic discourses after
the Cold War) and the economic sphere.
According to the three sphere theory, the present analysis of the global financial governance insists
on the importance of the economic sphere in the international relations and according to the liberal
thought the focus here is on the role of states and non-state actors in the managing of the
international financial system.
Governance, Global Governance and Legitimacy: Some Conceptual Considerations
Globalisation poses the question of how world affairs are, and should be, governed. At issue is
whether the thickening institutional density, expanding jurisdiction, intensifying transnational
politics and deepening impact of superstate regulation denotes a qualitative – structural- shift in
how global affair and transboundary problems are governed. For many students of international
relations these development represent the evolving infrastructure of a fragile system of global
Smitter defines the concept of governance as 'the best use of limited and available resources'.
Moreover the World Bank definition suggest that governance is
the use of institutions, structures of authority and even collaboration to allocate resources and
coordinate or control activity in society or the economy.
And according to the UNDP's Regional Project on Local Governance for Latin America
'governance has been defined as the rules of the political system to solve conflicts between actors
and adopt decisions (legality). It has also been used to describe the proper functioning of
institutions and their acceptance by the public (legitimacy). And it has been used to invoke the
efficacy of government and the achievement of consensus by democratic means (participation).
With but few exception the word 'governance' is tends to be employed when it is modified by the
adjective 'global'. Otherwise, for any scale short of the global – whether local, provincial, national
or regional – 'government' is usually treated as the entity through which order is sought and goals
framed and implemented. The words 'global' and 'governance' become inextricably linked because
for a long time the world was described as increasingly interdependent, but only since the end of
Cold War have the dynamics of interdependence tended to have consequences that are global in
scope. The problem of global warming, for example, knows no boundaries and reach into every
corner of the globe. Likewise, genocidal policies and practices in Rwanda and Kosovo have been
experienced as challenges to all humankind, as have financial crises and a growing gap between the
rich and the poor in developing countries. As the advent of such situations have accelerated at a
seemingly ever more rapid rate, the notion has quickly spread that interdependence is characteristic
of the world as whole. Accordingly, persuaded that many problems cannot be allowed to fester and
endanger, the well-being of people everywhere, and eager to bring a modicum of order and
direction to the uncertainties and dislocations inherent in the vast degrees of interdependence,
analysts have quite naturally begun to talk of the need for global governance and the processes and
structures that might foster and sustain it.
Both governance and government consist of role systems, of steering mechanisms through which
authority is exercised in order to enable systems of governments can be thought of a structures,
those of governance are social functions or processes that can be performed or implemented in a
variety of ways at different times and places (or even at the same time) by a wide variety of
organizations. To govern, whether as structure or function, is thus to exercise authority. To have
authority is to be recognized as having the right to govern, to issue directives that are heeded by
those encompassed by the directives. Rule systems acquire authority in a variety of ways. These
range from steering mechanism that are structures endowed with authority through constitutions,
by laws and other formally adopted instruments of rule, to those that are processes informally
created through repeated practices that are regarded as authoritative even though they may not be
6. constitutionally sanctioned.
Give the absence of a world government, the concept of global governance provides a language for
describing the nexus of system of rule-making, political coordination and problem-solving which
transcend states and societies (Rosenau, 2000). It is particularly relevant to describing the structure
and the process of governing beyond the state where there exists no supreme or singular political
As analytical approach, global governance rejects the conventional state-centric conception of
world politics and world order. The principal unit of analysis is taken to be global, regional or
transnational system of authoritative rule-making and implementation. At the analytical core of the
global governance approach is a concern with understanding and explaining the political
significance of global, regional and transnational authority structures.
Accordingly, the focus is on the evolving system of (formal and informal) political coordination –
across multiple levels from local to global – among public authorities (states and IGOs) and private
agencies seeking to realize common purposes or resolve collective problems. Although this system
transcends the classic postwar form of multilateralism, it is far from a 'unified global system
underpinned by global law enforcement' (Cable, 1999). It differs dramatically from the concept of
world government in that it does not presuppose the idea of a central global public authority, which
legislates for the common affairs of the humanity. On the contrary, it is defined by diverse sources
of rule-making, political authority and power.
Several observation are made in the literature concerning the institutional architecture of global
1. It is multilayered in the sense that it is constituted by and through the structural
enmeshment of several principal infrastructures of governance: the suprastate (such as the
UN system), the regional (EU, MERCOSUR, ASEAN, etc.), the transnational (civil society,
business networks and so on), and the substate (community associations, and city
2. It is often described as polyarchic or pluralistic since there is no single locus of authority.
This is not to imply any equality of power between the participants but simply to
acknowledge that political authority is decidedly fragmented.
3. It has a variable geometry in so far as the relative political significance and regulatory
capacities of these infrastructures vary considerably around the globe and from issue to
4. The system is structurally complex, being composed of diverse agencies and network with
overlapping (functional and/or spatial) jurisdictions, not to mention differential power
resources and competencies.
5. Far from national governments being sidelined in this system, they become increasingly
crucial as strategic site for suturing together these various infrastructures of governance and
legitimizing regulation beyond the state.(Sholte, 2000)
A central characteristic of global governance is the reconfiguration of authority between the various
layer or infrastructures of governance. This idea is reinforced by what in the study of global
governance is sometimes referred to as the privatization of global regulation, that is, a redrawing of
the boundaries between public authority and private power. From technical standards to the
disbursement of humanitarian assistance and official aid through non-governmental organization
(NGOs), private agencies have become increasingly influential in the formulation and
implementation of global public policy. The International Accounting Standards Committee
establishes global accounting rules, while the major bond rating agencies make critical judgements
about the credit status of governments and public and private organizations around the globe. Much
of this privatized governance occurs in the shadow of global public authorities, but to extend to
which corporate and private interest have captured the agendas of such bodies, like those of the
WTO, the International Organization of Securities Commissions (IOSCO) and others, there is a
7. fusion of public and private power. The current salience of public-private partnership articulates the
expanding influence of private interest in the formulation as well as the delivery of global policies.
Contemporary global governance involves a relation of authority from public to quasi-public, and
to private, agencies.
In conclusion, for the advocates of the global governance perspective, geopolitical management of
global affairs is becoming less plausible and legitimate as the sole governing principle of world
order. In a highly interconnected world of diverse nation-state, in which non-state actors also wield
enormous influences, hierarchical forms of managing global affairs are losing their efficacy and
In fact, the concept of legitimacy is the popular acceptance of a governing regime or law as an
authority. Where as authority refers to a specific position in an established government, the term
legitimacy is used when describing a system of government itself —where "government may be
generalized to mean the wider 'sphere of influence'. According to Robert Dahl, legitimacy is
considered a basic condition for ruling: without at least a minimal amount of legitimacy, a
government will lead to frequent deadlocks or collapse in the long run. This concept can be
translate into the analysis of the global governance. Also the governance must have an amount of
legitimacy and in this historical moment it is clear that the concept of governance is obtaining
more and more legitimacy in respect to the sole intergovernmental principle of world affairs
managing. Notably, legitimacy is based on two pillars: efficacy and inclusivity. Inclusivity
describes the degree to which non-dominant groups are represented in decision-making practices
by participation; efficacy describes the quality of outputs of managing of problems and needs and it
is an economic concept. It is evident that in this moment there is a crisis of the legitimacy of the
state, in particular because its lack of efficacy in different sector of policy making. In the concept
of global governance exist other actors than the state that are more efficient in achieve specific
aims. In other words, state-based institutions of governance which exercise authority over all other
actors are being replaced by 'network minimalism'. These network have more legitimacy because
their efficacy. Their legitimacy in large part depends on the quality of the outcomes they produce,
that is, if they do their job well or not. Results not process matter most and the quality of the
outputs matters more than the democratic input.
The next section identifies the forms and extend of contemporary financial globalization and
reviews the various institutional mechanisms that currently serve to govern global finance. In this
section I explain why global finance matters and, through a functionalist point of view, I explain
how the financial global governance establishes its legitimacy mainly on the efficacy than on the
The Global Character of Finance
Finance is the part of an economy that links saving with investments through a variety of
instruments denominated in monetary values. Finance is the intermediating activity that makes
saving available for investments while generating income from those investments for savers. A host
of mechanisms have developed to connect saving and investments. Many take the form of deposits
in and loans from banks. Other are securities: that is, stocks and debt instruments like bonds, notes
and money market tools.
The scale of contemporary finance is quite astounding. The level of transactions often dwarf those
in the so-called 'real' economy of primary production, manufacturing, transport, communications,
etc. For example, the average volume of foreign exchange dealing rose from $15 billion per day in
1973 to $1,490 billion per day in 1998, before dropping to $1,210 billion per day in 2001 (BIS
2001). At today's level it takes wholesale foreign exchange markets just a month to trade the value
of annual world GDP, at some $30,000 billion (UNDP, 2001). In other words, international finance
Finance can transpire in diverse geographical settings. It can be a local affair, for example, with
banks that operate only within only within certain districts or provinces. However, contemporary
8. finance usually unfolds more in a country context, with national money forms, national institutions,
and national financial markets. Meanwhile, international finance occurs when saving and
investments are transferred between one country and another. More recently we have seen the rise
of regional finance with, for example, the creation of distinct regional currencies like the euro in
most of the European Union and the CFA franc covering fourteen countries in West and Central
Africa. Regional financial institutions like the Asian Development Bank and the Euronext
securities exchange have also appeared. Then there is global finance: namely, monetary saving and
investments that flow through world networks. The terms 'globality' and (the condition) and
'globalization' (the trend of increasing globality) mean many things to many people; however, most
will agree that, broadly speaking, 'globalness' involves social connections in a planetary realm. In
other words, global arena can be distinguished from -though it also coexist and interlinks with –
local, national, international and regional spaces. Globality has at least four interrelated aspects:
internationality, liberality, universality and supraterritoriality. With its international quality,
globality entails interaction and interdependence between countries. So global relations involve
intensive cross-border communication, investment, trade and travel. With its liberal quality,
globality is marked by a low level (or even absence) of statutory barriers to cross-border flows,
such a tariffs, foreign exchange restrictions, capital controls and visa requirements. With its
universal quality, globality prevails when objects, symbols and experiences spread to most if not all
corners of the inhabitated earth. Finally, in a feature that has mainly arisen in recent history,
globality connects people in ways that largely transcend territorial geography, for instance, in
respect of telecommunication and global ecological changes. Such supraterritorial links exist with
little if any regard to fixed territorial locations, territorial distances and territorial borders.
Globalization – that is, increasing globality – has marked contemporary finance in all four of these
ways. In terms of increased cross-border financial flows, for example, the world total of bank
deposit owned by non-residents of a given country rose from $20 billion in 1964 to $9,600 billion
in 2001 (BIS, 2001). Concurrently, outstanding balances on syndicated international commercial
bank loans rose from under $200 billion in the early 1970s to well over $8,000 billion in 2001
(BIS, 2001). New borrowings of this kind amounted to $1,465 billion in 2000, as compared with
$372 billion in 1995 and just $9 billion in 1972 (BIS, 2001). In addition, governments and
multilateral institutions like the International Monetary Fund (IMF) and the World Bank have
extended several hundred billion further dollars in official cross-border loans to medium- and lowincome countries. The capital base of the IMF has risen tenfold since the 1960s, to almost $300
billion in 1999.
Must of this increased internalization of finance has gone hand in hand with liberalization. For
example, starting with the USA in the 1974, over 150 states have now removed official restrictions
on foreign exchange movements related to the current account of the balance of payments, in
accordance with Article VII of the Articles of Agreements of the IMF. Many states have also
relaxed (though rarely completely eliminated) capital controls: that is , regulatory limitations on
transfers related to the capital account of the balance of payments (including stock, bonds, shortterm credits, derivatives, foreign direct investments, etc.). In addition, increasing number of states
have lifted restrictions on non-residents holding bank accounts or dealing in securities within their
jurisdictions, thus encouraging the increased cross-border activity mentioned above. Likewise,
more and more states now allow externally based banks, securities houses and insurance companies
to operate within their territory, sometimes on an equal footing with domestic companies.
Universality has also become a widespread feature of contemporary finance. Several national
denominations like the US dollar and the Japanese yen have become universal currencies,
circulating just about everywhere on earth. In addition, the euro and – on a much more limited
scale – the Special Drawing Right (SDR) have emerged through the EU and the IMF, respectively,
as monies with transworld use.
Supraterritoriality is arguably what makes contemporary global finance qualitatively different from
previous eras. For example, electronic transfers now permit huge sums in financial transactions to
be moved instantly between any points on earth. Telephone and computer link permit foreign
9. exchange trading all around the world, directly connecting dealings rooms in London, New York,
Tokyo, Milan, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. Electronic payments
through the Society for Worldwide Interbank Financial Telecommunication (SWIFT), founded in
1977, averaged more than $6,000 billion per day in 2000, linking over 8,000 financial institutions
in 207 countries (www.swift.com). Electronic communications also enable securities brokers
instantly to transmit and execute orders to buy and sell stock and bonds anywhere in the world. In
addition, supraterritorality organization today enable many financial actors to operate
simultaneously across the globe. A number of commercial banks and insurance companies operate
as transworld enterprises with affiliates in dozen of countries.
As well as financial communications and financial organizations, a number of financial instruments
have acquired a supraterritorial quality that substantially delinks them from a particular locality or
country. For example,in so-called 'eurocurrency' banking, begun in the 1950s, deposits resids in
banks that are located outside the borders of the country that issues the currency the deposit is
denominated in. For example a deposit denominated in US dollar residing in a Japanese bank is a
eurocurrency deposit, or more specifically a eurodollar deposit. The eurocurrency markets is active
for the reason that they avoid domestic interest rate regulations, reserve requirements and other
barriers to the free flow of capital (Butler, 2004). The 1990s also saw the advent of American
Depository Receipts (ADRs) and Global Depository Receipts (GDRs). These instruments bundle
together share of companies in Asia, Latin America and Central and Eastern Europe for trading at
the world's main financial centres. On side of investors, a number of mutual funds, pension funds,
hedge funds and individuals hold global portfolios and trade simultaneously on finance markets
across the world. In this circumstances of supraterritorial communication, organization and
instruments, much of contemporary finance is marked by a veritable global consciousness.
Countless saver, investors, borrowers and brokers think of – and act on – the world as a single field
of financial operations.
In sum, contemporary finance has a significant global character, including substantial
supraterritorial features that were barely if at all evident before the middle of the twentieth century.
Localities, countries and regions are by no means irrelevant in today's banking, securities,
derivatives, and insurance industries: today's finance has not became purely global and notterritorial. However many financial activities are now considerably global, including in ways that
largely transcend territorial geography. As such, they also transcend the traditional scope of the
territorial state and pose considerable challenges for effective governance.
The Authorities Governing Global Finance
Global finance is obviously not 'controlled', in the sense of being ruled by a sovereign world
government on the model of a modern territorial state. Nevertheless, these activities are subject to
considerable if imperfect governance. Recent development in the regulation of global finance
largely conform to general trends in contemporary governance under the influence of globalization.
In other words, states remain key, but they have increasingly adopted strategies of multilateral
management of transworld finance, through a host of interstate, transstate, and suprastate
mechanisms. In addiction, substate actors have begun to figure in the regulation of global finance,
albeit still marginally. Also, regulatory mechanisms based in private sector agencies have gained
substantial significance in the governance of global finance. State are still, on the whole, the
primary actors in the governance of finance under conditions of contemporary globalization. Any
examination of the regulation of global finance must therefore consider the activities of national
central banks, national treasuries and ministries of finance, national securities and exchange
commissions, and national insurance supervisors. In general states have more resources (staff,
founds, technology and legitimacy) to regulate global finance than any other authorities.(Scholte,
Of course some states have figured more prominently and powerfully in the governance of global
10. finance than other. Thus France and the USA have exercised far greater influence than Uzbekistan
and Zambia. Indeed, limited capacity for financial regulation at national level has left many states
in a weak position vis-à-vis global finance. The government of Bolivia has been little match for the
eurobond market, and authorities in the Philippines have enjoyed little room for manoeuvre in
relation to the IMF.
Yet even the best resourced states have not been able to tackle the governance of global finance
alone. The intensely international, liberalized, universal and above all supraterritorial character of
these flows has made it impossible for even the strongest states to handle global finance by
themselves. Thus various networks of intergovernmental consultation and cooperation have
developed in tandem with the accelerated globalization of finance during recent decades. The
following paragraphs elaborate on these features in turn.
Supernational authorities and global finance
A common image of global finance is one in which a set of competitive individual states are
confronted by a vast, fluid atomized set of cross-border financial transactions. These transactions
severely undermine each state’s sovereignty by, for instance, requiring a state to cater to investors’
interests if that state does not want investors to flee or to refuse to come to the territory under its
jurisdiction. Another image modifies this one by recognizing that states vary tremendously in their
power and some states may actively promote globalization of finance since it is seem as in the
mutual interest of the state and those financial firms headquartered in its jurisdiction. Both of these
images are misleading because they underestimate the degree to which international institutions for
regulating global finance have developed over the past quarter century
In part this underestimation is due to the relatively informal character of many of the relevant
institutions. The most important institutions for launching regulatory initiatives are the G7, the
G20, and the various committees housed at the Bank for International Settlements in Basel,
Switzerland. None of these have their own permanent secretariats, nor articles of agreement or
other founding treaties, nor any formal internal division of labour, nor any public mechanism for
negotiating agreements. As such they are quite far from the type of organizational structure that one
conventionally would associate with public authorities. Nevertheless they all possess three features
that have allowed them to contribute much more effectively to the governance of global finance
than is often realized.
The first feature is the fact that they draw together representatives of the most powerful states and
these states can then work together to implement agreements both within their individual
jurisdictions, and internationally, as through their exercise of their overwhelming joint voting
power in the International Monetary Fund and World Bank. A second feature is that they are
heavily pragmatic and technical and this helps minimize political conflicts as well as fostering a
sense of legitimacy and effectiveness, both among member-states and among actors not included as
members in the institution. A third feature is that these various bodies are integrated in a
hierarchical fashion even if they would prefer to be seen as autonomous of one another. For
instance, in 1999, in the aftermath of the global financial crises of the previous two years, the G7
created, and is able to set the direction of, two important groupings, the G20, consisting of central
bank heads and finance ministers from the G7 and from large emerging market countries such as
China, India, Brazil, and South Africa, and the Financial Stability Forum, consisting of 21 G7
representatives along with representatives from international institutions involved in financial
regulation and four other countries (Australia, Hong Kong, the Netherlands and Singapore). The
G7 considers big strategic questions concerning global financial governance, the G20 considers a
subset of these that are especially relevant to emerging markets, and the FSF considers issues of
coordination on the more technical work of international regulatory officials. Working together,
these intersecting groupings can develop a powerful momentum for policy or regulatory initiatives
which can then be globalized, by implementing new national or extraterritorial rules within their
own jurisdictions, by interacting with other actors bilaterally or multilaterally in other international
11. settings, or by aligning the policies of the other institutions in which they participate with the
policy and regulatory priorities of the G7, G20 and FSF. There are other more formal and universal
organizations that play an important role in the governance of global finance as well. These include
the IMF, the WB, and the International Organization of Securities Commissions (IOSCO). The first
two have become increasingly involved in financial regulation even if this was not originally an
important part of their work. In part their role is providing technical information promoting their
preferred approach to financial regulation, but increasingly they have also incorporated
assessments of compliance with international financial standards and codes into their lending
criteria, thereby creating a powerful lever over countries to which they provide financing. The
“Reports on Observance of Standards and Codes” are surprisingly intensive audits of compliance
by national authorities, conducted by foreign regulators, and frequently made public on national
and IMF websites. IOSCO includes securities markets regulators from around the world. Its most
important committee, the Technical Committee, is like a very informal groupings including the
most important states in an informal, consensus-fostering technically-oriented arrangement.
However the Technical Committee is part of the larger, more formal, and more universal structure
of IOSCO as a whole. Another example of the practical importance of these supranational
arrangements is the current effort at the Basel Committee on Banking Supervision (BCBS), located
at the BIS, to create a new accord with internationally agreed rules on the amount of capital
international banks are required to hold relative to the financial risks they take on. The fact that this
taken so seriously, and the fact that it is taking place at the BCBS and not just in national capitals,
are indications that considerable policy making autonomy has been created at the global level.
Although the BCBS membership is restricted to regulators and central bankers from twelve of the
world’s most financially developed countries, it has been very effective at promoting global
compliance with its recommendations through its links with regional groups of bank regulators,
some of which it helped set up, by inviting selected non-member country representatives to Basel
for consultations, by having its standards incorporated into the work of the FSF, the IMF and the
WB, and by encouraging market actors to use its standards as a benchmark, thereby using market
pressures to encourage compliance.
Private Authorities and Global Finance
There are three main ways that private-sector actors contribute to the governance of global finance.
The first is advocacy, in which they seek individually or through associations to influence public
policy. A second is industry standards and self-regulation, in which industry participants
deliberately seek to create rules governing the conduct of market actors. A third is through routine
business practices in which market or intra-firm interactions, while primarily focused on individual
commercial activities, have an unintended effect on the structure and governance of the industry.
Each of these can be global: either in the source of influence, in the target of influence, or both. In
most cases, associations and other actors engage in more than one of these types of activities
An example of the strengthening of the advocacy function of private authority at the global level is
the growth in capacity of the International Institute of Finance, located in Washington. The IIF was
created by 30 major commercial banks in 1983, in the midst of the debt crisis, in order to
collaborate in the assessment of sovereign risks. Its membership has expanded to 320 in 2002, and
now includes insurance and investment management firms from industrialized and emerging
markets, in addition to most of the world’s major banks. The IIF was somewhat slow to involve
itself in regulatory matters, only establishing its Working Group on Capital Adequacy in 1993, five
years after the first Basel capital accord. By 2002, in contrast, the IIF had become intensely
interested in the work of the BCBS and has become its principal private-sector interlocutor. As the
IIF noted, “given the importance of the issues raised by the reform proposals, the Institute created a
Steering Committee on Regulatory Capital composed of chief executive officers and chief risk
officers from a diverse group of banks among the Institute’s membership to guide the more detailed
12. technical work done by the working groups.”. The IIF had also become the primary voice of the
international banking industry on the broader question of the reform of the international financial
architecture that preoccupied policymakers in the aftermath of the global financial crises of 1997
and 1998. Much of the international advocacy work of private-sector financial actors is carried out
through more informal groupings not unlike those of regulators. For instance the main private
sector response to the problems that emerged with hedge funds in the 1990s, including the near
catastrophic collapse of the massive Long Term Capital Management Fund, was organized by the
Counterparty Risk Management Policy Group (CRMPG), formed in 1998. It included senior
executives from about ten of the world’s top banks. The private sector solution it proposed as an
alternative to regulation was better voluntary standards and best practices in risk assessment and
the solution it was advocating was accepted both by the US government and at the Financial
Stability Forum (Porter and Coleman, 2002). The Financial Leaders Group (FLG) and the more
operational-level Financial Services Working Group (FSWG), were created in 1996 to promote the
liberalization of financial services in the Uruguay Round. The FLG consists of top executives of
leading financial firms and is continuing to advance the goal of commercially meaningful
liberalization of global financial services trade including the issue of the relationship between
domestic regulation and liberalization. The FLG and FLWG have been the primary interlocutors for
the trade negotiators in their relation with the private sector.
There are two main areas in which the private-sector has been active with self regulation and with
setting and monitoring standards. The first is in securities markets, which have a long tradition of
relying on the self-regulatory capacities of stock exchanges. Some exchanges, like the New York
Stock Exchange, continue to carry out this function much as they always have, but with more
international transactions or participants than in the past. Others, like the NASDAQ or the Toronto
Stock Exchange, are organized as firms, without either the cooperative organization or the floorbased face-to-face interactions that facilitate self-regulation in more traditional exchanges and have
created separate firms that provide “regulation services”. Sometimes self - regulatory standards are
created in associations and industry segments in which most business is carried out by phone by a
relatively small number of very big firms, as is the case with the International Primary Markets
Association and the International Securities Markets Association, responsible for self-regulation in
the international bond market, and with the Emerging Markets Traders Association, responsible for
self-regulation in the market for secondary trading of bank loans to developing countries.
The second area of self-regulation and private sector standards is in standards created by third
parties, such as accounting standards or the technical standards created by the multinational firm
SGS. The International Accounting Standards Board (IASB) was formed in 1973 and consists of a
membership of 152 professional accountancy bodies representing more than 100 countries.
Formerly called the International Accounting Standards Committee (IASC), this body has been
working for a quarter century on the creation of global accounting standards. Accounting rules are
a crucial link in all aspects of the governance of global finance since they allow more accurate
monitoring of financial assets and transactions. In May 2000 it completed the International
Accounting Standards (IAS), a set of standards to be used in cross-border stock exchange listings.
The major competing standards are US Generally Accepted Accounting Principles (GAAP) which
are very influential because of their use by the many firms wishing to raise capital in the US
Routine practices often have an impact on the governance and structure of global finance. An
example already mentioned is the creation of electronic exchanges that compete with traditional
floor-based exchanges. In addition to undermining the face-to-face interactions on floors that were
important in traditional self-regulation, the electronic networks also create pressures for regulatory
change by making it easier for foreigners beyond the reach of domestic law to engage in exchange
activities and by increasing competitive pressures with the accompanying demand for more
efficient regulation. More generally one can see an incessant stream of new financial instruments
which, whether they create new risks or not, require updating of regulations (Porter, 2002).
13. Technical Authorities and Global Finance
All the examples of supranational and private activities discussed above are carried out through
highly technical discourses. One might expect that interactions among national authorities in the
G7, the FSF, or the BCBS would be accompanied by traditional bargaining in which an
accommodation among varying interests is sought. This is not the case however—all documents,
rules and justifications are expressed as technically complex but pragmatic adjustments in search of
mutually beneficial increases in efficiency and stability. While power and political interests are
certainly in the background, these very rarely intrude into the language used publicly by those
involved. While the language used behind closed doors will be more likely to include the role of
power and political interests, the fact that these are kept behind closed doors limits their influence.
Most financial regulations require widespread compliance and a clandestine series of threats,
inducements, or ad hoc bargains, will not be very effective in bringing this compliance about.
While technical discourses are produced or reproduced by all private-sector and public sector
actors in global finance, there are numerous bodies that are engaged as their primary focus in
producing such discourses. On the public-sector side, for instance, the Organization for Economic
Cooperation and Development, while hosting some important negotiations on crossborder capital
flows and on tax matters, is primarily devoted to policy-relevant research, including many issues
central to the governance of global finance. However this research is much more than simply
interesting facts and analysis for policymakers to use at their whim. Rather OECD research permits
the simultaneous development of widespread consensus on policy directions and the development
of the standards, practices, and methodologies that are needed to implement those policy directions.
The heavily technical character of this process facilitates both the practical viability of the
proposed solutions and the emergence of shared norms around which actor expectations converge.
A similar role is played by the private-sector Group of Thirty comprised of a very high-level
collection of thirty individuals from the financial sector, the public sector, and academia, who serve
for particular terms.
Even the more micro-level activities of financial market actors involve the conversion of abstract
technical language into routine practices that structure markets. For instance an individual may
have an idea for an innovative new financial contract, but once this becomes widely used and
recognized it can quickly become a huge market that operates relatively independently of any one
actor, and to which all participants must adjust.
There are many examples of the strengthening of supranational, private,and technical authority in
the governance of global finance as well as a high level of integration across these type of
Consistent with the multi-level governance model, public authorities continue to play a leading role
in the governance of global finance but it is clear that are being replaced by 'network minimalism'.
Having utilized a liberal approach and an functionalist point of view, it is evident that in the global
financial governance there is a shift in the direction of a more technocratic financial governance.
The new network is self-consciously selective, bringing together experts from the most important
players in the international financial system, including national authorities responsible for financial
stability in significant international financial centres, international financial institutions, sectorspecific international groupings of regulators and supervisors, and committees of central bank
experts. The components of the global finance network does not represent all countries or regions
of the world. Rather its goal is to coordinate the efforts of various bodies in order to promote
international financial stability improve the functioning of markets. Its legitimacy rests on its
efficiency in achieving its states goals.
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