Governance Reform of IEIs

4.1 The Governance Trilemma

There is broad agreement that IEIs need to become: (i) more democratic, (ii) more effective in delivering the public goods expected from them, and, for political reasons, (iii) universal, by accepting all countries that take on reasonable obligations of membership. Unfortunately, these requirements add up to a “trilemma:” achieving any one makes achieving the others more difficult. Major international institutions have succeeded in being at times democratic (responsive to individual members), effective (able to act and adapt), and universal (globally inclusive), but none are generally all three at the same time.

The trilemma is illustrated in Figure 4 [ PDF 48.3KB | 1 page ]. The triangle corner of institutions that are both universal and democratic is populated by several global institutions, including the WTO and the United Nations. These institutions typically fall short on the scale of effectiveness—they have difficulty making and implementing decisions. The corner of democratic and effective institutions is exemplified by institutions such as the G7/G8, but these fail on the measure of universality.³² And the corner of universal and effective institutions is illustrated by the IMF and the World Bank, which can act quickly and decisively, as they did, for example, in the 1997–1998 Asian financial crisis, but do not use open, democratic processes to arrive at decisions.

The tensions captured in the governance trilemma have led to underinvestment in international organizations and a shortage in international public goods. The resources of IEIs have become small compared to those routinely available to governments for financial interventions and to private institutions for speculative investments. (The scale of the new commitments made at the 2009 London Summit is one indicator of this shortfall.) IEIs have also become less responsive to their members—to developing countries in delivering policies on technology transfer and international investment, and to advanced countries in addressing environment, labor, and human rights issues. Over time, the number of international institutions has grown and each has expanded substantially, but the global benefits derived from these institutions have arguably diminished.

4.2 Institutional Families as a Solution

Are there ways to make international economic governance at once universal, democratic, and flexible, that is, to resolve the trilemma of Figure 4? In this paper we explore one possible solution, that of replacing monolithic IEIs with multi-layered decision-making bodies. The architecture might consist of “institutional families,” in which global IEIs act as central institutions that coordinate related, but relatively independent decision-making bodies. This is akin to the concept of “functional federalism” advocated on a national level and in Europe to improve flexibility in the provision of public goods (Casella and Frey 1992).

In the language of club theory, this innovation would seek to reinvigorate competition among smaller clubs to supply services that are not supplied by large ones. These new clubs should be more fluid than the existing ones; for example, entry and exit could be encouraged by a framework that specifically supports limited cooperative arrangements within existing clubs. The new clubs could target new users or subsets of members of old clubs. The key point is that they would produce services that differ from those demanded by the members that dominate decision making in existing IEIs. Will global institutions agree to such innovations? They may, provided that they see significant threats from continued rigidity (as the IMF did in 2008) and benefits from adjustment. Organizations that deliver public goods (and in particular their leaders and staff) typically benefit from their production by gaining funding and influence.

One approach to creating a multilayered decision-making structure is to create mechanisms within established IEIs to enable coalitions to reach agreements on special policy needs. An example is offered by the IMF's General Agreements to Borrow and New Agreements to Borrow to create a platform by willing richer members to provide additional financial resources for countries in need. Another example is found in the Organisation for Economic Co-operation and Development's (OECD) efforts to provide a platform that can be used by interested countries to formulate policies on various issues, ranging from trade credit to investment. A further example is provided by “trust funds” established by groups of countries within the World Bank and regional development banks. These agreements would be subject to rules that ensure the consistency of initiatives with the IEI's overall objectives and operations. But the projects themselves would be designed, managed, and funded by a coalition, perhaps with agreed co-financing from a central facility established for that purpose.

A second approach is to create independent institutions linked to parent IEIs by rules and procedures that ensure global consistency. An example of a similar approach can be found in development finance, where the World Bank acts as a global development bank and the Inter-American Development Bank, ADB, African Development Bank, and European Bank for Reconstruction and Development act as regional development banks. Although there are no set rules to ensure consistency among these institutions—at least for now—the overlapping shareholder governments can help to ensure global consistency. Another example of such a rule is GATT Article XXIV, which establishes conditions for regional trade agreements. But in practice, the WTO has not attempted to build a community of trade agreements using Article XXIV; it has been almost entirely preoccupied with promoting and managing global agreements and negotiations, and has not supported, or even monitored, free trade agreement (FTA) negotiations. A more coherent system would require a balanced approach toward the sub-global and global tracks, and stronger links between them.

Institutional designs that integrate global and sub-global decision making can enhance the provision of public services in at least three different ways. First, institutional families can share infrastructure and administrative functions, such as human and financial resources, lending, contracting, research, and evaluation. The financial track record of an institutional family will also help in accessing capital markets, if needed. Second, institutional families can facilitate new initiatives by reducing the commitment and cost involved in undertaking them—in other words, by facilitating entry into and exit from new areas of operation. New initiatives can start quickly by building on the infrastructure of an existing organization, and old ones can disappear by transferring excess resources to other, continuing functions. Finally, institutional families can improve the coherence of the various services offered by smaller groups by adopting mechanisms that minimize inconsistencies and duplication.

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