Introduction

The global economic crisis has refocused attention on the governance of international economic institutions (IEIs), especially the International Monetary Fund (IMF). Although IEIs were invisible in the early stages of the crisis, there is growing agreement that they should be more central in managing and averting crises in the future. The IMF received special attention at the 2009 London Summit, but remains the “third rail” in the politics of many developing countries due to its role in the 1997–1998 Asian crisis. Given the need to restore the IMF's credibility, much recent work¹ has focused on what Edwin Truman has called the “chairs and shares” issues—concrete changes in the IMF's management, staffing, and voting structure. Less acute but also difficult challenges face other IEIs such as the World Bank, the World Trade Organization (WTO), and the Financial Stability Board (FSB).

This study examines IEI reforms from an analytical perspective—based on the theory of clubs—that highlights structural challenges in international economic governance. It identifies a “governance trilemma” that makes it difficult for IEIs to be universal, democratic, and effective at the same time. Reforms in chairs and shares are important, but do not resolve the trilemma and are not likely to make IEIs adaptable to the demands of a rapidly changing world economy. More systemic innovations will be needed.

One promising strategy is to transform current IEIs into institutions (or families of institutions) with a partially decentralized decision-making structure. This could be achieved by allowing smaller groups of countries to make decisions within current institutions (an approach called “variable geometry” in some contexts) or by developing closely linked institutions with different memberships. In either case, some authority would shift from the global to sub-global level. This shift would make international decisions more flexible and accountable, making them more like decisions within countries, which typically involve several layers of government. Specific applications to international institutions will be suggested below.

Such decentralized decision making is not hypothetical; it already exists in some international policy areas and its relative importance appears to be rising. The World Bank is complemented by four major regional development banks and several other multilateral banks. World trade agreements are paralleled by many regional ones. And there are sub-global institutions (or ad hoc arrangements) engaged in macroeconomic surveillance and liquidity support. Recent reforms at the IMF suggest further intriguing changes in how—and by whom—loans are negotiated. All these trends, viewed in the present analytical context, point to more flexible and effective directions of governance.

To be sure, decentralized decisions create new challenges: sub-global decisions need to be made globally coherent in order to act as “building blocks” of a global system. This argues for paying close attention to connections within a decentralized structure. But if successfully linked, a partially decentralized system would help the world's IEIs respond to a wider range of problems more quickly and more effectively. On a global level, IEIs could also focus more sharply on truly global issues.

The value of decentralization rests on its ability to yield public goods that are important to some, but not all, countries. Geographical proximity is one, but not the only, reason for similar preferences for public goods. For example, countries engaged in deep-sea fishing share common concerns related to the oceans and will want to cooperate on arrangements affecting fisheries. Decentralization enhances the productivity of the world's “public goods industry” and relieves the pressure on global institutions to meet sub-global needs. But narrower public goods should not come at the expense of global ones; the institutional framework should have coherent global and sub-global mechanisms as its ultimate goal.

This requires changes in the functions of the existing global and sub-global institutions and, if needed, the creation of new sub-global institutions.

To keep this analysis manageable, the paper focuses on the “big three” institutions (the IMF, World Bank, and WTO) that address macroeconomic stability, development finance, and trade liberalization, respectively. All three institutions were proposed at the Bretton Woods conference in 1944, although the WTO formally came into existence only fifty years later.² We will review criticisms of these organizations and the potential for applying a decentralized decision-making framework to their activities. We will also provide preliminary thoughts on how sub-global bodies may function under the FSB.

In addition to functional institutions, various country groupings (“G forums”) have also become important international actors in recent years. The Group of Seven (G7) (large industrial economies) and the Group of Eight (G8) (with Russia) have been the most active historically, but the Group of Twenty (G20) (G8 plus major emerging economies) has gained prominence as a response group to the global financial and economic crisis.³ These forums play important leadership and coordinating roles, but are not (so far) IEIs with a concrete institutional mission and charter.

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