For a better global governance states preferences, regulation making and norm formation m a thesis

For a better Global Governance, States’ Preferences, Regulation Making and Norm formation Hoang Thanh Hang Kon Tum - Vietnam BA, National University of Social Sciences and Humanities

ĐẠI HỌC QUỐC GIA THÀNH PHỐ HỒ CHÍ MINH TRƯỜNG ĐẠI HỌC KHOA HỌC XÃ HỘI VÀ NHÂN VĂN

HOÀNG THANH HẰNG

FOR A BETTER GLOBAL GOVERNANCE STATE’S PREFERENCE, REGULATION MAKING AND NORM FORMATION

THÀNH PHỐ HỒ CHÍ MINH - 2008

For a better Global Governance,

States’ Preferences, Regulation Making and Norm formation

Hoang Thanh Hang

Kon Tum - Vietnam

BA, National University of Social Sciences and Humanities – Hanoi - Vietnam, 2003

A Thesis presented to the Graduate Faculty

of the University of Virginia in Candidacy for the Degree of

Master of Arts

Department of Politics

University of Virginia May, 2008

Acknowledgment

My inspiration for writing the thesis comes from the class Global Governance of Professor Evecherri – Gent My special thanks go to him for his valuable time as an instructor in the class and instructor during the time I was writing the thesis

I’ m also thankful for Professor Schwartz for his time and consideration as a reader of the thesis

My thanks go to all Professors in the department I have learned a lot during my two years at University of Virginia

I’m so grateful for my beloved family and their support I also thank my friends for their encouragement and sharing

Hoang Thanh Hang

May 12, 2008 Charlottesville, VA

For a better Global Governance,

States’ Preferences, Regulation Making and Norm formation

Contents

Introduction

Part I: The emerging of global governance as states’ preferences

1 The emergence of Global Governance

2 Global governance as a result of states preferences

Part II: States’ Preferences, Regulations and Norms

1 Institutions, rules making, and norms

2 States’ preferences, regulatory outcomes and norms

Part III: Global governance in Trade

1 Trade Regimes

2 Impact on Developed and Developing countries

Part IV: Financial Global Governance

1 The collapse of the Bretton Woods system

2 The privatization of foreign exchange risk and Global governance as a response to risk

3 Global Financial Institutions and Norms

4 Impact on Developed and Developing countries

Conclusion

References

Introduction

No one doubts the political fragmentation of the world in which we live National states with their own history, culture, language, norms and political systems are still the main actors in international relations However, there have been increasing linkages among national states during the last few decades The process begins with the

integration of national economies into the international economy through trade, foreign direct investment, capital flows, and the spread of technology (Jagdish; 2004) The moving closer and convergence in the international economy challenges the distance and divergence in international politics Or in other words, the growing integration of world markets affects domestic and world politics (Gartzke; 2003)

In the world politics, there is an appearance of global governance to coordinate efforts to solve the problem of international markets and globalization National borders seem not to be an obstacle to international trade and investment In fact, global economy

is defined by cross national networks of production and capital mobility The

development of the international market creates a mutual benefit for every country when integrating domestic markets into the world market But along with the benefits,

economic integration can also cause costs for domestic economies due to international market failure It is beneficial for every country to cooperate to remedy international market failures And there is a need for global governance to provide public goods and remedy the externalities of the international market

The evolution of trade and financial regimes therefore results from the need to provide public goods for international markets International regimes create the focal points for cooperation and for facilitating the cooperation efforts International

institutions, through the process of making rules and norms that coordinate and restrain

behaviors, become the base of global governance Or as Keohance and Nye define

governance is “the process and institutions, both formal and informal that guide and restrain the collective activities of a group” (Keohance and Nye - 2003)

International institutions, with their rule and norms to curtail externalities in world market, become a public good for every country However, power still plays an important role in shaping the outcome of global governance Rules and norms in global governance mainly reflect the interests of powerful countries This damages the legitimacy of the international institutions And in the long run, it will threaten the existence of global governance

Global governance evolves from the existence of global interest and mutual benefit But the fact that the world is still divided by nation states is a constraining force

on the progress of global governance In the words of Kaler and Lake, at this point in history, globalization has not yet produced a fundamental change in the structure of political authority (Kaler and Lake; 2003) States are still the main political authority and responsible for their domestic economy and social stability When entering into global cooperation, each state has its own preferences, which is the result of the struggle and compromise in domestic politics

Every country has good reason to try to establish its own preferences and

standards on global governance and in global markets As Drezner pointed out, economic globalization increases the gross rewards for policy coordination, but does not lessen the domestic adjustment costs that come from regulatory change (Drezner; 2007:32)

Adjustment costs are involved when states change their domestic rules to comply with rules of global market and ensure regulatory coordination in global governance Or to put

it differently, rules create beneficiaries whose interests lay in the status quo (Barton, Goldstein, Josling and Steinberg; 2006) States as the main authority in domestic politics face a demand to protect the interests of domestic actors for both political support and economic concerns And they have good reason to try to use their power and influence to establish their own standards on global governance

Powerful countries with their capabilities are able to establish their own

preferences and standards on the global rule - making process, and therefore decide regulatory outcomes This means adjustment costs will be imposed on others, especially developing countries whose domestic rules and institutions are very different from the global standards Norms adopted by developed countries also diverge from the

developing countries’ norms and practices These norms and practices take time to transform, and involve transaction costs So there is a dilemma between the protection of domestic interests and the need to provide a better public good in global governance

The future of global governance depends on how well it responds to the problem

of globalization and the interests of all its member states Better global governance will

be beneficial to all due to the fact of mutual interdependence and the characteristics of international networks of production and capital mobility But states and states' interests are still a decisive factor in deciding global governance outcomes Better global

governance therefore needs more cooperation among states and more compromise on the costs and benefits of global rules, which are derived from adjustment and transaction costs And incorporating the interest of all member states in rule-making processes decides the legitimacy of international regimes I will argue that because the legitimacy

of global governance regimes depends on the acceptance by member states, the

rules-making process should take into account the interest of all member nations and fairly distribute the cost and benefits among those affected by the regulations and norms The paper is organized in the following order: first, I will mention the relationship between power and outcomes of regulatory and norm formation, then the empirical evidence and history of global governance, and finally, global governance in trade and financial sectors

Part I: The emergence of Global Governance as State’s Preferences

1 The emergence of Global Governance

Global governance is defined as “the process and institutions, both formal and informal that guide and restrain the collective activities of a group” (Keohance and Nye - 2003) This definition correctly describes the fact of daily life that global governance, with its institutions, affects the activity of people and states Global governance emerges with the appearance and new found importance of international regimes that strongly affect the policy or collective actions of nation states around the world But maybe to understand how global governance has its present shape, its past, and future, it is

important to ask why global governance appears and what factors decide its outcome In

other words, governance questions how authority emerges, comes so to be maintained,

and has distributional effects (Kressler; 2007:316) Finding the source of the authority of international regimes is important to be able to construct a better governance for

everyone and to predict its future

With increasing networks of relations around the world, states, people, and markets in different states are intertwined with others on a dense level The process may begin with economic ties that exploit the comparative advantage of different countries

The advance in technology increases opportunities for profit-earning The low cost of transactions created by the advance in communication and transportation can easily connect different places in the world They facilitate producers and capital abundance holders exploiting their comparative advantage by finding the place where their capital can have the highest return Due to the different level of exchange rates and the

difference in the purchasing power of currencies, capital holder can find the place where the least amount of capital can buy the largest amount of input and labor In contrast, places with land, resources, and labor abundance can make more profits when they are invested in and best used

The wish for exploiting comparative advantages, the tendency to specialize and increase the economy of scale by which profits can easily be earned, create the status of interdependence among different markets around the world Capital mobility and

networks of production across national borders are the distinguished characteristics of globalization era The interdependence in production and investment leads to the

cooperation and interdependence in politics Firms as individual profit - seekers face collective action problems They need many essential elements of input for production that their own firms can not produce For markets to come to existence there is not only the need to have the demand and supply but also rules to regulate firms' behaviors Markets need regulations and political framework in order to operate They need a stable society and a legitimate authority as a third parties to solve conflicts that emerge in trading activities

A stable social order and a legitimate authority that markets need in order to operate cannot be produced by the market itself It is the product of political processes

and the function of legitimate political representatives In the international relations, states and their governments are considered the political representatives for their people and their domestic politics and markets Firms rely on governments to establish and enforce the rules of the game for economic interactions The emergence of international markets requires these rules and norm The interdependence of the economy creates international efforts to provide regulations and public goods for the world market This requires the cooperation of states around the world to provide rules and regulations They enact their cooperation through international institutions International institutions create the focal points in coordination games and facilitate cooperation In Keohance’s words, in

a world of rapidly growing interdependence, intergovernmental institutional

arrangements are established to correct market failures stemming from asymmetric information, moral hazard risk and uncertainty (Keohnace; 2001)

The existence of mutual benefit in the emergence of international markets makes states prefer to join international markets and international institutions rather than

isolating themselves They create global governance to enhance common benefits and meditate the differences In the words of Duvall and Barnett, Governance has, after all, three overriding objectives: the management of power, the promotion of common

interest, the mediation of difference (Duvall and Barnett; 2005:35) But mutual benefit can not explain the source of authority of international institutions States around the world see potential profits in the world market and want to be a part of international markets and institutions The greater the convergence of the benefit of states the easier to get the cooperation on global governance States' preferences can better explain the source of authority of global governance

2 Global governance as a result of states preferences

The appearance of global governance is the result of the public will It comes into existence because of the consent of people In this case, it is the consent of nation states The Bretton Woods system which set the baseline for global governance was the results

of the agreements of 44 Allied nations at the Bretton Woods Conference after World War

II After WWII, there was a need to reconstruct the world economy and build a new economic order The old world economic order, with its center in London and based on the British currency, collapsed after WWII due to Britain and Europe devastated

economies

The Bretton Woods system's shape and arrangements were decided by the

preferences of states The system was mainly designed by White and Keynes,

representatives for the U.S and British Treasury The system also exists because of the dominant economic power of the U.S after WWII and its ability to offer help to construct the world economy In Frieden’s words, it is U.S that lead the way (Frieden; 2006) The construction programs created economic ties from continent to continent and required the global governance regimes to regulate global economic activities and interdependence

The public will also determined what kind of services the regimes provide The Bretton Wood arrangements were largely adhered to and ratified by the participating governments It was expected that national monetary reserves, supplemented with

necessary International Monetary Fund credits, would finance any temporary balance of payments disequilibria However, as the creditor, the U.S was able to impose its

preferences on those who needed the credits The design of IMF mainly reflects the White's proposals and US preferences

The Bretton Woods Conference also introduced the idea for an organization to regulate trade as part of a larger plan for economic recovery after World War II

However, the International Trade Organization was never brought into existence The Charter for ITO was successfully negotiated But when it is submitted to the US

Congress, it was never approved (Bossche; 2005) So countries agree to maintain GATT

to handle their trade relations In short, IMF, WB, and GATT, the predecessors of WTO come into existence due to the consent of nation states The source of authority of these international organizations comes from the support of nations states The importance of international regimes also comes from the number of its member states

The WTO has 165 members (almost all of the 123 nations participating in the Uruguay Round signed on at its foundation, and the rest had to get membership) So far, only 14 states and 2 territories have no official interaction with the WTO The global component of member states and their diversity is both the strength and weakness of international regimes in facilitating global cooperation The bigger the organizations and the more different their preferences are, the more difficult it is for international

In that sense, the authority of international regimes and their significant role result from the agreement of nation states Authority of IOs has its source in the support of nation states Or in Laffey and Weldes’ words, Authority is not a commodity but an attribute generated from social relations (Laffey and Weldes; 2005) Authority requires some level of consent from other actors International regimes with the function of taking care of their member states’ interests become legitimate if they serve the interests of member nations It is the value and people it serves that make bureaucracy, including IOs respected and authorative (Laffey and Weldes; 2005)

To be authoritative, IOs must be seen to serve some valued and legitimate social purpose in an impartial and technocratic way (Laffey and Weldes; 2005) So to have better governance, international regimes should incorporate all the interests of their members into their decisions, rules, and norms As Stiglitz and Charlton said, “so the choice for the world was between a fair agreement reflecting the sentiments of a broad majority of the population in both developed and less developed countries, or of another unfair agreement, reflecting special interests in developed countries” (Stiglitz and

Charlton; 2005)

Part II: States’ Preferences, Regulations and Norms in Global Governance

States’ preferences can also explain the political process of rule making in global governance Mutual benefits stimulate states to cooperate on global governance But that does not mean that they can just join the institutions and they get what they want Mutual benefits only refer to the potential profit, not the real profit How institutions can serve states depends on how well institutions reflect states’ preferences States’ preferences are contained in the rules and norms of institutions States will benefit most when achieving

the establishment of institution and rules that accord to their preferences Among

different preferences of states in global cooperation, which preferences are chosen reflect

the political power and political process In Gilpin’s words, “yet economic

interdependence and the promise of mutual gain have not eliminated the efforts of

nations to advance their own interests at the expense of others and at the expense of overall economic efficiency of the global economy” (Gilpin; 1981)

1.Institutions, rules making, and norms

If governance are the process and institutions, both formal and informal that guide and restrain the collective activities of a group,then rules and norms are the instruments through which institutions guide and restrain the collective activities of a group In order

to answer the question of how institutions play their roles in global governance, one has

to look in to rules and norms By making rules and norms to regulate behaviors people and states, institutions direct the behaviors of people in one direction and against the others They also play the role of policing the process of adopting rules and norms By that ways, institutions govern the behaviors of its member states

Institutions help constrain and facilitate behaviors In North’s words, institutions with their norms and principles shape human interactions that they govern (North; 1990) When institutions are established, they bring stability Institutions also help to link the future with the present by establishing clear expectations (Keohance – Axelrod; 1991) They can bring stability and clear expectation because of their rules By setting rules, institutions send a clear message of what they want their members to do and not to do After reading the rules, member states know what they should do and what they should not Their behaviors and actions are directed by the rules

In that sense, which rules are made and accepted by institutions are important States are the main actors who create international institutions They are also the main actors in formulating the rules and norms for international institutions Which rules and norms states want to establish as universal for all members depend on states’ preferences They also may depend on what they think is good and right But the problem of

generalizing rules and choosing one rule over the others is the rules cannot benefit all This is especially true with those actors whose interests and preferences are so divergent that the same rules just benefit some at the expense of the others

Good rules and norms independent of human intention and human need do not exist People create rules to serve their benefit Rules that allowe certain types of activity will bring both benefits and costs Rules are the result of socially constructed They reflect the intention of human beings Rule making processes involve the distributional conflict (Mattli and Buthe; 2003) Rules define who get what Different choices will differentially privilege different actors (Krasner; 2003) In addition to that, there are the trade - offs in writing rules, the rules no longer assumed to be beneficial to all (Barton, Goldstein, Josling and Steinberg; 2006)

Rules have distributional outcomes, so who gets to decide, how decisions are reached, and the site and nature of authority matters (Mattli and Buthe; 2003) Rules are the instrument of governance How rules are made is important in global governance As Barnett and Duvall put it, the question of governing global social life here is a matter of seeing how the articulations of pariticular discourses come to predominate (Barnett and Duvall; 2005)

And sometimes, though, there is not a “who” but rather a structure and discourse that constitute actors and define what are legitimate practices that steer global activities in particular directionsm(Barnett and Duvall; 2005) So institutions, rule making, and norms all create a structure and shape human behaviors The question of how rules are made and who make them has a decisive role in the global governance As Johnstone pointed out, the legal discourse demonstrates three form of power: its shapes the conditions or terms of interaction among those associated with its practice; it indirectly steers action in

a certain direction; and, when wielded effectively by individual actors, it can directly affect the positions of states (Johnstone; 2005)

Moreover, rule making in the global governance impose costs for member states

Drezner calls this the adjustment costs He said “the transaction costs of compliance with

the rules of global market can be considerable for developing countries bureaucracies… For the developed countries, the costs of adjustment to ensure regulatory coordination would be expected to be small but non – existence” (Drezner, 2007) Markets do not exist

independently outside the state and society Every state already has its own regulations for the operation of domestic markets The integration of domestic markets and global markets requires new rules and change in the domestic markets Those changes involve cost For example, regulatory agreements in areas such as trade facilitation and

competition policy require public expenditure on new laws, systems, administration and enforcement (Stiglitz and Charlton; 2005) And this is particularly true when dealing with international economic institutions, because of the complexities the rules involved

(Drezner; 2007) There are instances where the adjustment costs of states are so high that

noncooperation is the preferred outcome for all (Drezner; 2007) There is the possibility that cooperation in a certain sector brings benefits for one and cost for others

2 States’ preferences, regulatory outcomes and norms

Institutions make rules by aggregating the preferences of their member states As Kahler and Lake said, institutions aggregate the preferences of actors into policies

(Kahler and Lake; 2003) Due to the differences in domestic politics, culture, norms, history, level of development, and internal needs, states have different preferences when coordinating their efforts to provide rules in global governance A developing country in Asia or Africa would like to have a loan without any conditions They would rather use it

as the way they, keep it as long as they want and, pay it back whenever they want than, than have to make the commitment to change a specific domestic policy and pay it back

in time A developing country also prefers the free transfer of technology that they can use to quickly upgrade the economy Countries also have preferences to keep their tariffs while others remove them But that is not going to happen because the preferences of many other countries

Initial government preferences on regulatory standards will vary from country to country due to differences in national economic development and economic history Societies at the early stages of the development curve tend to emphasize economic growth at any price But as they move beyond a given threshold, they begin to emphasize quality of life concerns such as environmental protection and lifestyle issues (Inglehart; 2000) The differences in desirable regulations are a fact in the international regulatory cooperation States’ preferences in regulatory coordination can be derived from the visible adjustment costs that economies face under the prospect of regulatory change

(Drezner; 2007) Any agreement that diverges from the domestic status quo comes with economic and political costs For all states the most preferred outcome is coordination at their set of national standards And because of the adjustment costs, a state’s worst

outcome will is to agree to other countries’ standards but fail to successfully coordinate (Drezner; 2007) The benefits that come from regulatory coordination should vary

according to actors

Every country, as representatives of domestic actors, have to reflect and protect the preferences of their own domestic sectors Domestic factors account for preference formation not the outcomes of international bargaining (Drezner; 2007) Among different preferences from different countries around the world, which preferences are chosen definitely will advantage some and disadvantage others The outcomes of international bargaining decide which rules and norms will be chosen The outcomes of international bargaining depend on the capabilities and position of actors involved in the negotiation It refers to the question who is more able to get what they want Actors with better

capabilities and abilities will more easily achieve what they wish for

The mediation of different interests therefore becomes an important part of

governance Global governance involves taking care of its agents’ interests Agents’ interests are reflected in their preferences Which preferences are chosen in the global governance reveals actors’ power relationships and capabilities Dominant actors have a disproportionate influence in writing the rules of the game (Johnstone; 2005) Great powers are more likely to achieve regulatory coordination at their preferred level of standards because of their market size and the threat of economic coercion In global governance, market size is one form of state power In Barton, Goldstein, Josling and

Steinberg's words, power in trade regimes parallels market power (Barton, Goldstein, Josling and Steinberg; 2006)

To Drezner, the size of consumer markets affects the coordination of regulatory standards in two ways First, market power facilitates the use of economic coercion Great powers can use the threat of complete or partial market closure to force recalcitrant states into switching their regulatory standards Second, market size affects actor

perceptions over outcomes Great powers by dint of their market size can alter the beliefs

of other actors over the likelihood of possible outcomes Their standards act as an

attractor, causing other actors to converge to their preferences (Drezner; 2007)

Powerful states also have more autonomy and choice in their actions in regulatory cooperation Because of the size and diversity of their internal markets, great power are less dependent on international exchange as a source of goods and capital (Drezner; 2007) In an open global economy, both great powers and less powerful states build up significant levels of sensitivity (Keohance and Nye; 1978) However, because of their internal markets and diversified set of endowments, great powers possess significantly lower levels of vulnerability than other states in a globalized world They have “go – it - alone” power (Krasner; 2003) And with their go – it – alone power they narrow the choices for less powerful countries in regulatory coordination Rules also affect the distribution of resource sand define the outcome of regulatory coordination

The formation of norms is also important in global markets, especially financial markets In financial markets, supposedly good norms have a big impact on the financial system To Marieke de Goede, money is a fiction, after all worthless paper that acquires value only because a large number of people choose to give it value And because it is

based on faith and confidence, the functioning of money and finance requires strong nodal points of discursive authority supporting that faith (Marieke de Goede; 2006)

So, different from manufacturing and commodities markets, finanical markets are quite different In financial markets, beliefs and faith play an important role Political

support is important in providing the support for currency values The collapse of the

Bretton Woods system resulted in the “privatization of foreign exchange risk” The establishment of global governance in finance involves the high level of developed

countries and the poor representatives of developing countries revealing the disparity in power and the powerful relations in the financial markets The high level of cooperation among developed nations reflects their strong support for their national currencies and the need of developed nations

In short, rules and norms have the distributional outcomes, so who gets to decide, how decisions are reached and, the site and nature of authority matters While there is a mutual benefit from a global coordination, different preferences of different states can affect the outcome of global governance When joining global regimes, states have

different domestic challenges They have different preferences for regulatory cooperation because of their internal needs The preferences of powerful states usually have the biggest impact on how the institutions are designed and on the outcome of global

governance

Part III: Global Governance in Trade

Global governance in trade refers to the process of trade liberalization at the national level and the emergence of authoritative international trade regimes After

WWII, the world was hungry for American products and machines for economic

reconstruction Trade regimes facilitated the product exchange among states The world learned a lesson that when financial collapse cuts the commercial links between societies, all nations will suffer and some will move to seize what they cannot acquire through trade (Rosenance; 1986) GATT/WTO did not open up all borders to trade, but it did remove tariff hikes from the toolkit of leaders in member states (Barton, Goldstein, Josling and Steinberg; 2006) GATT increased commerce by having nations enter into reciprocal and mutually advantageous arrangements directed to the substantial reduction

of tariffs and other barriers to trade GATT and WTO have created a set of both

normative and legal standards for international trade that has diffused widely throughout the globe (Barton, Goldstein, Josling and Steinberg; 2006)

1 Trade Regimes

The history of trade regimes can date back to the idea of the ITO, introduced in the Bretton Woods conferences, as the organization of managing trade relationships among states The treaty was never ratified by the United States Until 1951, when the United States formally abandoned efforts to get the ITO charter through Congress, the GATT (General Agreement on Tariffs and Trade) exited in the shadow of the charter (Barton, Goldstein, Josling and Steinberg; 2006) The liberalization of world trade was the first and probably most important achievement of the Bretton Woods system This took place with the GATT GATT came to be a pillar of the Bretton Woods institutional order (Frieden, 2006)

In April of 1947 representatives of twenty three countries met in Geneva to

bargain over their tariffs (Frieden; 2006) The GATT, unlike the other two Bretton

Woods institutions, was not an independent organization, but rather a forum within which