Constraints on Governance Reform: Implications of Club Theory

Global organizations face significant challenges in supporting the G20 process and, more broadly, in delivering effective economic and financial governance. This section attempts to analyze these challenges from a deeper analytical perspective—based on the theory of clubs—that highlights the logic of international economic governance.¹⁴

International organizations as clubs

In the language of economic theory, international organizations are clubs—institutions that produce goods that are at least partially non-rivalrous (more than one user can consume their services) and at least partially excludable (users can be denied access to them). The services offered by international organizations—macroeconomic and financial stability, poverty reduction of developing economies, and rules governing global commerce—are critical public goods. Once produced, they are available to any country without significantly diminishing their value to others. The theory of clubs is an important tool for understanding international organizations as well (Fratianni and Pattison 1982 and 2001, and Lawrence 2008).¹⁵

International organizations, as other clubs, provide services that are essential, and under some conditions optimal, and yet cannot be produced privately. They are also subject to the challenges faced by clubs. They are not easily “scaled”; expanding clubs become unwieldy because larger memberships make it harder for them to meet the preferences of all club members. They are also inflexible; charters and super-majority voting rules, designed to insure the interests of a club's charter members, place strict limits on change.

These problems are not apparent when clubs are formed: founding members have common interests and create services to meet common needs, as did the original participants at the Bretton Woods conference. But over time, as a club's membership grows, the interests of members diverge. This creates internal tensions and, eventually, makes clubs unable to meet all members' needs. These problems are compounded by charters that make change difficult.

Implications for necessary reforms

The evolution of the IMF, the World Bank and the WTO roughly confirm the predictions of club theory. As Figure 3 [ PDF 20.2KB | 1 page ] shows, their memberships have multiplied since they were originally founded. Yet governance structures and voting shares have adjusted little. Quotas have been revised several times since they were first set in 1944, but have not kept pace with economic change.¹⁶ As already noted, emerging economies have much smaller voting shares than countries that were among initial or early members. As a result of these issues, international organizations have found it increasingly difficult to carry out their responsibilities.

Specifically, international organizations have encountered three kinds of problems. First, since they have been unable to agree on significant expansions of financial resources, they have become “small” relative to governments and financial markets. The G20 has now stepped in to relieve the funding constraints of the IMF and the MDBs. Second, since international organizations serve many more members, they have undertaken to produce many new services—a process that Lawrence (2008) described as “mission creep”—but do not have the resources or mechanisms to engage in them more than superficially. For example, developing economies want to see a greater focus on development, technology transfer, and international investment, while advanced economies want more attention focused on the environment, labor and human rights. Third, given their growing memberships and wider mission, they have grown distant from certain members, and hence the effectiveness of their operations—e.g. in the Asian financial crisis—has come under wide criticism.

These challenges reflect structural problems. Ideally, international organizations should be universal (globally inclusive) and democratic (responsive to individual members), but they also have to be effective (able to adapt and deliver services quickly). But all three of these goals are very difficult to realize together—yielding a type of “governance trilemma.” Organizations can satisfy two of the three goals, but new structures will be needed to satisfy all three. For example, as Figure 4 [ PDF 21.6KB | 1 page ] suggests, the United Nations (UN) or WTO is a universal and democratic organization, but has difficulty making and implementing decisions. Smaller institutions and forums, such as the G7 or G8, are democratic and agile, but not inclusive. And the “old” IMF was universal and could act quickly—but at the cost of democratic governance.

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Comment(s)

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1. Sritanu Chatterjee
   (posted 12 August 2010 / 12:31:26 PM)
   
   Dear Sir,
   
   The suggestions put forward in the paper are quite pertinent in today's scenario. In a multipolar world, regional institutions will have much bigger and responsible role to play.The paper would be more interesting if the shortcomings or problems of having too many regional institutions had been mentioned. Decentralisation leads to many benefit - increasing bureaucratic efficiency, localisation of knowledge base and global institutions gaining more confidence while taking decisions. But the problem lies in the implementation of the idea. In India, decentralisation or "panchyati raj" started in 1980s. But very few states have been able to implement it properly till date. For some states, it has aggravated the problems. Therefore, I think if more intense thought is given on the idea of implementation then it would expedite the process of formation of regional institutions.
   
   Thanks & Regards,
   Sritanu