They define ideal global governance as such:

The ideal of global governance is a process of cooperative leadership that brings together national governments, multilateral public agencies, and civil society to achieve commonly accepted goals. It provides strategic direction and then marshals collective energies to address global challenges. To be effective, it must be inclusive, dynamic, and able to span national and sectoral boundaries and interests. It should operate through soft rather than hard power. It should be more democratic than authoritarian, more openly political than bureaucratic, and more integrated than specialized.

The G8 can be seen as the embodiement of such an ideal. They are a symbol of cooperative leadership, provide strategic interataction and can marshall collective energies. They operate through soft-power. However, due to demographic changes, changed in demand in energy commodities and global health challenges, the authors claim that the G8 is not representative anymore.

The first and most important front is to reform the process by which national political leaders come together at the summit or ministerial level to discuss common concerns. [...] Because the only truly powerful group—the G-8 summit—is composed exclusively of rich, industrial countries, mostly from the North Atlantic, there is a “democratic deficit” in the current summit grouping and, as a consequence, a void at the apex of the international system.

Unfortunately,the authors do not acknowledge that cooperation between the G8 and Emerging Economies are using a wide variety of channels. There is extensive cooperation through the BIS-hosted institutions, through the OECD and the FATF, through various governmental summits. The Heiligendamm Process of further cooperation with the O5 is an example of how governance is increased without changing the institutional composition of the summit itself.

In the post-Bretton-Woods-Era, banks and financial instutions have adopted innovative financial instruments to diversify earnings and to hedge against credit and market risk.
[Is this really the case? Wasn't it rather to hedge primarily against exchange rate movements?]
This has led to increased international banking activity and to the rise of multifunctional universal banks. These developments [produced] economic growth and development. But they also made financial institutions more dependent and exposed to systemic risk [...]. [T]hese forces of financial globalisation [led to] efforts to strengthen the institutional framework of financial regulation.

They define Global Financial Governance using three principles (p.15):

• Effectiveness in devising efficient regulatory standards and rules
• Accountability in the decision-making structure and chain of command
• Legitimacy (those subject to international regulatory standards have participated in creating them.

None of these three dimensions are particular to financial markets, so the authors introduce (p. 16) the concept of Systemic Risk, which is an underpricing of risk that spreads through the markets. According to the authors, financial regulation has the task to promote the efficient pricing of risks.

The authors follow (p. 17) the route of Political Economy (especially Douglas North) and Game Theory (especially Robert Axelrod) by looking at the role of institutions in financial regulation. However, in Game Theory and Political Economy, institutions are often defined as “regularities in social behavior” (Axelrod: 1984). Accordingly, international institutions can be defined as “a set of rules that govern the ways in which states cooperate and compete with each other” (Kahler: 1995).

Such a definition would also encompass all kinds of informal or tacit arrangements and agreements. But the authors add a legall dimension to their definition of International Financial Institutions (IFIs). Applying the concept of an institution to the current financial architecture, the authors state “international public- and private sector bodies that are involved in setting standards and rules to govern financial markets” (p. 17) have been created. In other words, the authors use the concept of “institution” dynamically: regularities of behaviour will lead to a set of rules which in turn create a public or private body receiving the mandate to create further rules.

Normally, “global governance” is defined in opposition to “global government”: in the absence of any clear-cut global institutions to act as legislative, executive and judiciary, states create binding international rules. “Global governance” is the process of creating “global institutions” without a “global government”.

The authors however chose to discuss the shortcomings of “Global Governance” in a principal-agent-framework through the “creation and operation of rules at [international] level through the involving transnational and subnational actors” (p. 18). These rules are intended to avoid systemic risk and create financial stability, a “public good [which] will never be provided adequately by the market without regulatory intervention” (p. 18).

Despite their economic background, the authors interestingly seem to have a different notion of “public good” than often used in economic textbooks. Normally, a public good is a non-rival, non-excludable good which means that everybody can have access to it and consuming the good does not diminish the possibility of other users to access it. Yet there are some arguments why financial stability does not necessarily need public regulatory intervention, and even with public regulatory intervention is not necessarily a non-excludable good.

The authors definition of “financial system” clearly shows the ambiguity of having to use a different understanding of a public good. They define a financial system (p. 20) through:

1. the extent of intregation of relevant financial sectors
2. the scope and design of financial regulation and legislation

The authors would hopefully agree that in this sense of financial governance, financial stability becomes a public good for a certain financial systems that are defined through integration and legislation. Global financial governance is providing a public good of financial stability through global integration and global legislation (for instance by setting standards).

In the traditional meaning, a public good does not necessarily need public intervention or regulation, it can be provided by markets if some market participants are willing to bear the costs. In fact, throughout modern history, financial stability has been provided by market participants as often as by governments. For instance, before the introduction of the US Federal Reserve Bank, large banks such as JP Morgan acted as Lender of last ressort when other systemically important banks were threatened to fail.

Financial stability is also not “non-excludable”. Even in globalized financial markets financial stability can be restricted to certain legislations. Admittedly, financial stability needs to provided on the global level to be effective because contagion mechanisms can undermine the efforts of creating zones of financial stability. Financial stability is not a black-and-white-public good, which can only be provided or not provided. Financial stability can be provided to a certain degree, and the choice of degree excludes certain actors in the financial systems.

In the paper, he focuses mostly on the participation of developing countries in the International Government Organisation, but he also gives some interesting definitions on some key words which often appear in global governance discussions.

Global economic governance and types of actors

Global economic governance is the set of norms and institutions along which rules are generated to manage the global economy.

He focuses on four types of actors in Global Economic Governance

• intergovernmental organizations (IGOs)
• states
• non-governmental organizations (NGOs)
• businesses.

Secession, Veto and Opt-Out

The secession right is the right for a state to quit the organization and hence free itself from any obligations and rights.

The opt out right is the right not to implement decisions of an IGO while remaining member of it.

The veto right is the formal right for individual states to veto an organization’s decisions.

Confederations and federations

Weak confederations are IGOs in which member-states have an opt out right but no veto rights. States may not be forced to follow a global rule but they may not prevent others from adopting it for themselves.

Strong confederations have a veto-right but no opt-out right. States may prevent a rule from being adopted, but once adopted, they must all follow it. Strong confederations have therefore the advantage of discipline but the disadvantage of inflexibility, and are best suited for relatively small groups of states with a common sense of purpose.

Federations are IGOs in which states have neither opt out nor veto rights, and hence are forced to follow rules that they do not approve whenever they find themselves in minority.

Statutes, culture, reality

Jabocs also makes the interesting distinction between statutes, cultures and reality. His remarks on the influence of the G7 and other international organisation in the field of standard setting are very interesting:

Global economic policy involves numerous “codes and standards” emanating from the Bretton Woods institutions, the G7, the OECD, the BIS, the FSF, and some UN agencies, as well as from international professional associations (i.e., global business).

Many of these organizations, particularly in the financial area, are selective clubs of Northern states that function with a strong culture of consensus. The global regulations they develop are all subject to opt out rights, and indeed they are often not even enshrined in treaties.

But there is a strong peer pressure among Northern states to actually comply with them, supported by pressure from global business but also from domestic business since, as mentioned earlier, economic isolation from global norms can hurt domestic enterprises.

These organizations can therefore arguably be described as strong confederations.

States that are not members of these exclusive clubs are also expected to embrace the regulations they generate, but they benefit from a real opt out capacity. Many of them exercise that capacity, but others adopt codes and standards to comply with IMF conditionality or because of pressures from credit rating agencies or other private financial actors.

It is so far the most comprehensive review of the International financial architecture. John Eatwell, one of the authors, is using the book for advocating strongly for a World Financial Authority. In the light of recent turmoils in the financial markets, the books focus will help to reassess the proposals made for reform of financial regulation.

An interesting story is the cover of the book. It shows the painting “The Two Tax Gatherers” (ca. 1540) by Marinus van Reymerswaele. Superficially, the painting would fit the topic of the book because it shows two people counting money.

On the other hand, Flemish Renaissance painters often sold their paintings to the same people they mocked for their greediness and desire for money: wealthy merchants and traders. Maybe unintentional the authors of the book are also mocking those which are supposed to read the book: financial regulators.