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Global Governance and the Division of Labor

What responsibility do international institutions have in fulfilling the “social contract”?

May 8, 2007

What responsibility do international institutions have in fulfilling the "social contract"?

Our current international system dates, with a few important exceptions, from the period following World War II.

The structure of international institutions put in place at that time showed a clear and coherent vision that reflected the realities and priorities of that era.

The World Bank was created to mobilize capital to finance reconstruction and development in Europe. The planned International Trade Organization — which later came into being as the GATT and was then institutionalized as the WTO — would create a framework for the expansion of trade through progressive reductions in tariffs and non-tariff barriers.

The IMF would create the international monetary stability needed to allow countries to take advantage of the opportunities offered by a more open international trading system.

The aim of these arrangements was, of course, as much political as economic. It was to create the prosperity that would help guard against the threat of extremism and consolidate trading linkages among countries to make it unthinkable that they would ever go to war again.

So it was natural that these international financial and economic institutions were situated within an overall architecture aimed to deliver peace and security — the UN system. Yet, this neat division of labor has tended to blur over time.

While the World Bank has remained the premier institution for general economic development, a number of other institutions — including the IMF, the United Nations Development and World Food Programs, UNCTAD, the WHO and FAO, to name just a few — now undertake activities with a development orientation.

One could thus be forgiven for holding impression that the international community's objective of promoting development in the world's poorest countries is being implemented in a way fraught with overlap and duplication.

Optimists, on the other hand, could conclude that the expansion in the number of institutions, and the potential for problems of coordination, simply reflects the cross-cutting nature of the international community's engagement in development.

On this view, it is not surprising that once sharply differentiated institutional mandates have begun to blur. A similar weakening of the inter-institutional division of labor is also evident with respect to a much newer area of focus — the work to support better financial market regulation and supervision, which began in earnest after the merging markets crises of the late 1990s.

Despite the relatively recent arrival of financial sector strengthening as a priority on the international scene, there is already a proliferation of institutions active in this area. It starts with the IMF, the World Bank, the Financial Stability Forum and the Bank for International Settlements.

On top of that, governments for their part have added various groupings of national finance ministers and central bank governors, such as the G-7 and G-20, whose participants are devoting ever greater attention to financial sector issues.

Taken together, these examples illustrate in my view a more general need for the international community to take a careful look at the constellation of international governance arrangements.

We need to develop a clear strategy to clarify mandates, disentangle areas of overlap — and avoid duplication of activity.

So we need a debate on what are the right arrangements for member countries to oversee the delegation of authority upward to their international institutions.

However, what is often lost in the detail of these debates is the underlying reason why these arrangements are important — to be effective, institutions need the support of their shareholders.

Both the structure of voting — and the governance systems through which votes are cast and influence is heard — need to create a sense of shared ownership among the members of an institution and "buy-in" to its aims.

Clearly, one of the most important aspects of this is the system of voting by members. And whatever the particular mandate of the institution, the objective of their voting arrangements is the same — to make sure that the institution remains responsive to the needs of the countries who are its members, and in a very real sense are its "owners."

The means by which they achieve this end will depend on the aims of the body. At international financial institutions such as the IMF, a country's influence is based on its relative economic and financial size — rather than a one-country, one-vote model.

The focus of reform here is to make sure that the weights used in these systems of weighted influence are the right ones — and keep pace with developments in the global economy.

In contrast, at institutions with more political mandates, such as the UN, voting arrangements will tend to place more emphasis on the equality of sovereign states.

But of course even here, the realities of asymmetric power need to be accommodated. Witness the veto system in the UN Security Council and the continuing debate over changes to the number and composition of permanent members.

Another dimension to the governance at international organizations is the question of policy leadership. In the private sector, corporate governance principles allocate responsibility between management, a board of directors and shareholders.

There, a wide variety of models present themselves, based on different choices in the trade-off between representativeness versus effectiveness. But throughout the international system, analogous divisions of responsibility are being re-examined.

At one extreme is the Security Council model, where certain powers are reserved by a subset of powerful countries. More inclusive is the model adopted by the IMF, in which decision-making power is wielded by an Executive Board comprising representatives of “constituencies” — 24 for its 185 members. Most egalitarian, of all, but also perhaps the most unwieldy, are the WTO Council and the UN General Assembly, at which all members are represented.

The UN has a board of directors — the Security Council — and a shareholders' meeting — the General Assembly — both in ongoing session, and a CEO in the person of the Secretary General.

The WTO effectively has a shareholders' meeting in continuous session, a Director-General as CEO — but no board of directors.

The IMF has an Executive Board in continuous session, a Managing Director as CEO and Chairman of the Board, an oversight board (the International Monetary and Finance Committee) with suasive power only, and governments as shareholders meeting only annually largely for ratification purposes.

To sum up, we are witnessing a rapidly growing consensus on what constitutes good economic governance. The domestic and international policies required to insure prosperity and stability — and the important role for international institutions in supporting continued improvements in their members' policies. Our challenge is to ensure that the international institutions fulfill that mandate effectively.

Just as governments need to be responsive and effective to fulfill their part of the "social contract" within a national society, the objective for international institutions with economic mandates is to support and maintain an international environment that promotes the attainment of prosperity, security, and social justice in their members.

This, in turn, requires clarification of mandates and improved coordination and coherence between and among institutions. It also requires shared ownership and responsibility by members of these institutions and reformed governance structures to this end.

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