The weakness of global rule making
We are moving into a world without an established international order. Yet, we would all like to live in a world where there are globally agreed rules that deter bad behaviour by nations and encourage good behaviour. Most nations in our world are small. Rules limit large nations from unrestrainedly throwing their weight around. They protect small nations. They protect people as well as states.
This blog looks at the three main models for getting international agreements on rules of behaviour.
The analysis suggests that the prospects for a fully functioning rule based international order remain distant.
Three models for global rule making
Three main models for global rule making can be distinguished. The first model involves getting the governments of the world, all the 193 members of the UN, to sign up to formal international treaty arrangements. The second model is organized around professional practitioners and their organizations. The third centres again on governments, but involves much smaller groupings of the ‘like-minded’.
The UN model
The founders of the international system set up at the end of the Second World War had a fairly simple model in mind. The then 51 countries in the world would all participate in the United Nations organization. The UN would itself be responsible for global peace through its Security Council and help coordinate global economic management and achieve global full employment through its Economic and Social Council. At the same time, UN specialised agencies would ensure the flow of trade and capital, lead the fight against food shortages and global health threats, and build a consensus around educational and cultural goals.
While the model has not worked as intended, nevertheless a model of global rule setting and rule keeping in which all governments are represented and participate remains the simplest vision.
Among the unexpected survivors of international organizations from before the Second World War was the Bank for International Settlements (BIS). Originally intended to be wound up after the war, it now lies at the centre of a hub of international organizations that bring together central bankers and financial market regulators, including securities market regulators (IOSCO) and insurance supervisors (IAIS). The hub includes the Financial Stability Board (FSB) that brings together both finance ministers and central bankers of the G20.
There are other similar professionally oriented groups such as the Egmont group, for those gathering financial intelligence on money laundering and terrorist financing, and the FATF with a mission to ensure the integrity of financial systems and housed with the OECD.
The key feature of this world is that the members represent professional practitioners. They bring together expertise based on professional experience with members who face common practical and operational challenges.
The third style of international organization is for like-minded governments. ‘Like mindedness’ sounds vague. But it stands for a high degree of trust between members, a similar outlook on policy diagnosis and approach, and broadly shared values.
The OECD is the leading example. Originally established to administer US Marshall Aid in post war Europe, the advent of the Cold War limited its activities to countries trying to re-establish market oriented democracies. While expanding its membership since then to 36 countries, it has remained a grouping for countries broadly sharing these same values.
Other international groupings that operate on the basis of shared values include the Five Eyes intelligence sharing organization, comprising the US, UK, New Zealand Australia and Canada. The cyber security group for the financial sector set up among G7 members in 2018 represents a more recent example.
In actual practice, these three styles of international rule making overlap. There are no bright line distinctions or watertight compartments. Nevertheless, the distinctions between approaches remain visible and relevant. They provide a point of entry for thinking about the tensions in global rule making.
There are three main sources of tension. The first is around the implementation of rules. The second, is between professional standards and breadth of inclusion. The third is between professionalism and politics.
In order to get political and policy consensus between many different countries or members, there is an incentive for negotiators to reach for generalities that paper over and obscure the differences. Yet, when it comes to the implementation of any agreement, specificity is needed. Agreements need to be monitored and compliance observed. The two incentives run counter to each other.
There are two ways around this dilemma.
The diplomatic two-step
The first way is to engage in a two-step procedure. Step one is about getting a general agreement. Step two is about translating this into a specific program of actions.
This two-step is familiar from international agreements on measures to mitigate global warming. A general ‘framework’ agreement reached at Rio in 1992, was followed by a (failed) attempt to get binding implementing commitments under the Kyoto ‘protocol’ in 1997, which in turn was followed by an agreement based only on voluntary national undertakings in Paris in 2016. The latest international Energy Agency (IEA) report of March 2019 on energy sources and uses shows that implementation remains elusive.
In other areas of international rule making the ‘two step’ can be more effective.
The formal versus the informal
The second way round is to aim, not for treaties, but for statements of agreed principles, or standards, with implementation relying on peer review of resulting practices. Thus, the BIS relies on ‘accords’, IOSCO on principles and memorandums of understanding (MOUs) and FATF on ‘recommendations’ (now numbering about 30) as well as 9 ‘Special Recommendations’.
The choice is partly one of professionalism. Fellow professionals are more likely to be able to reach common understandings with their peers on the standards that need to be followed and to follow similar practices in implementing them.
The choice is also a matter of trust. Governments may not trust each other. Professionals are more likely to trust their fellow peers and practitioners.
Thus, UN bodies tend to opt for the diplomatic two-step, centred on the formalities of framework treaties and conventions, followed by implementing protocols, while professional bodies aim for less formalised agreement on principles and standards, followed by peer reviewed practices.
Reach v. professionalism
Professionally organized international bodies tend to start small among recognized peer organisations. Thus in 1950 the BIS had 18 central bank members, and in 1984 IOSCO had 15 member organizations.
The problem posed by limits on membership is one of lack of reach. Its members want their recommendations and practices to be adopted as widely as possible. The incentive is therefore to expand membership and coverage. Thus the BIS has grown to 60 central bank members, and IOSCO to over 220 organizations in over 110 jurisdictions. The FSB has grown from representing 11 jurisdictions in 1999 to 25 jurisdictions. FATF now represents 36 jurisdictions compared with the original 16.
The question posed by this expansion in membership is how far it is compatible with shared professional standards and practices among peers. For example, it is difficult to reconcile IOSCO’s expanded membership with investor concerns about securities market practices in so many parts of the world. IOSCO has itself recognized the potential problem and established its own assessment committee in 2012 in order to monitor the standards of its members.
Politics versus professionalism
A rather similar issue of a potential conflict with professionalism arises in relation to the political complexion of governments. Authoritarian governments will have no compunction in overruling technocrats and professionals. Thus it is difficult to reconcile the presence of Russia’s Federal Financial Monitoring Service in the Egmont Group when Russia is a leading source of dark money in the world. Equally it is difficult to reconcile the membership of three Chinese regulators in IOSCO (for securities, banking and insurance) when China’s markets remain ‘state led’ and tools of government direction. FATF includes both China and Russia.
The introduction of wolves into a sheepfold rarely has good outcomes either for the sheep or the shepherd.
What lies underneath each of these sources of tension in global rule making are questions to do with the lack of shared values around the world. When values are not shared there is an inevitable lack of trust in implementation, an erosion of professional integrity and an intrusion of political meddling.
This fundamental issue had appeared to resolve itself with the collapse of the Soviet Union and the disappearance of its vision of an alternative form of social and economic organization. It also appeared to be mitigated by China’s expansive economic engagement with the rest of the world, its key position in international supply chains, in international investments, and its resulting self-interest in promoting stable rules of international engagement.
This hope reached its pinnacle of optimism with the attempt in 2009 to establish the G 20 as the steering group for all international economic organisations. It was this hope vested in the G20 that has led to the expansion of membership in groups such as the FSB, FATF and the Egmont Group. Yet,
in the absence of shared values, international rule making will always operate under severe handicap. The G20 is like a football team where some members of the team play to different rules. Goal scoring will be infrequent.
Comity beyond borders
One possible conclusion from this analysis is to accept the limitations of international rule-making as it exists in the world today. Limited cooperation on rule making is better than none. Coexistence is better than conflict.
A different route ahead is to recognize the importance of stronger cooperation between the like-minded. It involves reciprocity between the like-minded and what is known as 'comity'. Despite transatlantic frictions, it is a model that has gained new relevance in building international rules of behaviour. Possibly it is the like-minded who can carry forward the new agenda needed in international rule making.