The equivalence principle

David Held and Kevin Young

Although it is increasingly acknowledged that complex global processes, from the financial to the ecological, connect the fate of communities across the world, the problem-solving capacity of existing international institutions is in many areas not effective, accountable or fast enough to resolve global dilemmas. This international governance problem is at the heart of the current global economic crisis. To be sure, the existing system of international financial institutions has enjoyed a measure of success, limiting financial regulatory competition among states in some respects, providing emergency liquidity upon occasion, and strengthening multilateral institutional capacity to react when problems arise. However, the failures of the system are much more striking and underline the need for root-and-branch reforms of the international financial architecture. The following five areas should be given priority in this process of reform:

Strengthen international rules that monitor and regulate financial market activity
The existing system of global financial governance has failed to keep pace with the rate of change in private financial market activity and has proved largely inadequate to predict, moderate, or contain financial instability. Global financial governance must increasingly deal with issues in both the international and domestic spheres, yet due to fragmentation and competition between states, it has been unable to address systemic problems appropriately even when they have been identified. What is more, global economic interconnectedness has meant that the costs of governance failures transcend national borders and are often widely dispersed across extremely vulnerable segments of the world population. Effective global financial governance therefore requires a better balance between the two worlds of financial globalisation: private financial activity on the one hand, and public financial governance on the other.

Expand institutional capacity of existing global financial institutions
Reforms to the system of global financial governance in the years ahead will have to build on institutions already in existence to a significant extent. Indeed, the existing institutions of global financial governance each have significant resources and expertise which could be called upon to address the diverse demands of the G20 summit and beyond. Yet it must be said that the current overall system of global financial governance has failed in a momentous way. Even when systemic problems were identified, proportionate action was not taken. For example, in 2007 the Bank for International Settlements recognised several structural problems with the international financial system, but this recognition remained at the level of research and observation, rather than action.

Provide a clearer division of labour between existing international financial institutions
The existing global governance system is predominantly composed of institutions that were developed in response to specific problems associated with the reemergence of global finance which arose over the last three decades, and have transformed themselves since then to broader purposes. Subsequently, while they can work together on occasion, there is no clear division of labour among the myriad of international institutions that seek to address such global problems: their functions often overlap, their mandates conflict, and their objectives often become blurred.

Ensure more inclusive financial governance institutions
No global reform process can be fully effective if it does not arise from a process that is highly inclusive of developing and developed states. Most current institutions of financial governance have promulgated an exclusionary model of participation when it comes to dealing with problems that are quintessentially global. The IMF, the Basel Committee, and even the Financial Stability Forum, for example, are all are all institutions in many ways driven by the preferences of the G7 countries, yet the consequences of their decisions are not only suffered by member states, but also by the rest of the world. Any reform agenda geared to balancing the two worlds of financial globalisation must therefore simultaneously tackle the divide between the rich countries of the world that have dominated the existing system of global financial governance, and their developing country counterparts that have shared the costs, but have had little hand in shaping it.

Enshrine the principle of equivalence within the reform process
Fuller participation of stakeholders is more than a means to legitimacy. It can also help to underwrite effectiveness. In areas of global governance that seek to protect or promote the provision of a global public good – such as global financial stability and soundness – there are inherent problems when that public good is protected and managed by a minority of stakeholders. The principle of equivalence dictates that the span of a good’s benefits and costs should be matched with the span of the jurisdiction in which decisions are taken about that good. Participatory reform within the existing institutions of financial governance could give a voice to states and non-state actors that have a greater interest in protection against systemic instability, rather than a stake in risk-taking through profitable financial instruments. In this way, instead of limiting participation according to wealth, participation could be guided by a concept of a global commons – not only a shared set of resources, but a shared community of fate, the very basis of contemporary globalisation.

David Held is co-director of the Centre for the Study of Global Governance, and Graham Wallas professor of political science at the London School of Economics and Political Science. Kevin Young is a fellow in global politics, Department of Government, London School of Economics and Political Science.