Regional Governance as a Building Block for Global Governance

The governance trilemma suggests the need for institutional innovations. One promising solution is to replace monolithic international organizations with a multi-layered decision-making structure, along the lines of “functional federalism” advocated on a national level and in Europe (Casella and Frey, 1992) or the “principle of subsidiarity”¹⁷ in European governance. This would enable universal institutions to become more effective by delegating decisions internally to subgroups with fewer, and ideally more likeminded, members.

Institutional families and decentralization

Decentralization could be achieved within a global organization by enabling coalitions of countries to address specific policy needs. For example, some or all Asian countries could create an infrastructure fund within, say, the World Bank. Projects would be managed and funded by the coalition, possibly with support from a central facility. Mechanisms of this type exist, for example, in ASEAN, which allows some members to opt out of agreements (the so-called “ASEAN minus X” approaches).

Decentralization could be achieved also through independent organizations linked together—and perhaps to a “senior” global organization—by rules and procedures. An example of such rules, albeit little used so far, is GATT Article XXIV, which establishes relationships between regional trade agreements and the global trading system. This solution would create linked hierarchies of global and regional organizations with different ownership structures. The public goods relevant to a region, for example, would be supplied by the appropriate regional unit, as suggested by the principle of subsidiarity. Regionally decentralized decision-making has the advantage of inducing large emerging economies to take leadership in providing regional public goods, even when they are not fully ready in providing global public goods. For example, PRC and India could be interested in providing funding for regional infrastructure development, opening their economies for neighboring economies to promote regional trade and investment, or working to maintain regional financial stability.

This framework is illustrated in Table 2 [ PDF 30.3KB | 1 page ] for the four functional areas considered in this study. We consider each of these families in further detail below.

The institutional families: IMF, World Bank, WTO and FSB

In the area of macroeconomic stability, regional organizations—alongside the IMF—could act as "first responders" in the case of regional threats. This could avert the criticism that the IMF reacts too slowly because it represents the interests of countries outside the region, and it could better internalize spillovers among closely-linked economies. The IMF's European programs implemented in 2008-10 to address the financial crises of Iceland, Hungary, the Baltic states, and Greece represent early examples of this kind of innovation. Takagi (2009) reported that the negotiations with the crisis countries also included major European stakeholders, such as the EU and the European Central Bank (and Nordic governments in the case of the Baltic states). These stakeholders contributed roughly as much funding as the IMF. The new European financial stability facility created to cope with the Greek (and potentially Spanish) sovereign debt crisis had an even larger regional component; euro-zone member countries contributed €600 billion, while the IMF contributed €150 billion. Replicating this pattern in other regions would represent a major innovation in flexibility. In Asia, for example, the Chiang Mai Initiative Multilateralization (CMIM)—and a future Asian monetary fund (AMF) to evolve from it—provides an especially opportune foundation for such decentralized responsibilities. This could also allow the emergence of a new model of Asia's collaboration with IMF as in the case of Europe.

In the area of development finance, regional development banks already exist alongside the World Bank, and the next step is to improve the division of labor between regional and global organizations. Ideally, the World Bank, should focus on global objectives and externalities, such as the Millennium Development Goals, climate change, food and energy security, and epidemics. As a central institution, the World Bank could also provide infrastructure for development finance, including the collection and dissemination of knowledge and research findings.¹⁸ In contrast, regional development banks should focus on regional issues and externalities, such as regional infrastructure connectivity and regional environmental protection. They could also support projects funded and managed by the countries most affected by or interested in them; a good example is the creation of a Credit Guarantee and Investment Facility as ADB's trust fund to promote local-currency bond markets in ASEAN+3 countries (which include the 10 ASEAN member countries plus PRC, Japan and Korea). This would depart from current practice, which requires the majority of members of a widely-owned bank—even in the case of regional development banks—to approve its activities.

In the area of trade liberalization, global negotiations under the auspices of the WTO have stalled, while regional agreements continue to proliferate. Remarkably, there is no link today between these tracks, which should ideally coalesce into larger, even global, agreements. The WTO would have much to offer in the crafting and administering regional trade arrangements, ranging from analytical services to dispute resolution. A link between regional and global processes could address the challenge of making regional FTAs more multilateral-friendly, for example, by using standard approaches to address vexing issues such as rules of origin. In Asia, wide-ranging discussions are underway concerning the formation of an Asia-wide FTA, possibly by connecting complex, overlapping Asian FTAs into one simplified FTA. With Asian FTAs unified, it would be also easier for Asian economies to negotiate trans-regional FTAs with North America (say, through the Asia-Pacific Economic Cooperation forum) and Europe (say, through the Asia-Europe Meeting), providing a path to global integration.¹⁹

In the area of financial system stability, the global financial crisis has highlighted the need for an international framework for monitoring, regulating and supervising the cross-border activities of systemically important financial firms, products and transactions. The FSB has been tasked with establishing such a framework and coordinating the authorities charged with implementing it. In collaboration with the IMF, it is also charged with providing early warning of macroeconomic and financial risks and proposing actions to remedy them. The same issues are being addressed in Europe by a new European Systemic Risk Board, which will oversee macro-prudential regulation and supervision, and by a European System of Financial Supervisors for banking, insurance, and securities markets. A similar structure should also be developed in Asia. An important first step would be to create an Asian financial stability dialogue (AFSD)—to be participated by finance ministries, central banks, and financial market regulators and supervisors.²⁰ Its task is to strengthen cross-border financial supervision and regulation at the regional level, thereby promoting Asia's financial stability, assisting longer-term financial market development, deepening and integration, and establishing standards for governance and transparency. Such an institution could play valuable roles by translating FSB initiatives into a regional context and then helping to implement them.

Regional institution building in Asia

How would Asian institutions figure in such a decentralized approach? The region has relatively few institutions of economic governance compared to other regions, aside from the Asian Development Bank. But promising seeds exist.

In the area of macroeconomic stability, the CMIM, which encompasses US$120 billion in a multilateral swap agreement and links 80% of its lending to IMF programs, could well evolve into an AMF once the IMF-link is reduced to zero.²¹ For this purpose, the new ASEAN+3 Macroeconomic Research Office, scheduled to open in early 2011 should become an independent, professional secretariat, capable of creating environments for effective regional surveillance. Asia is well positioned to handle regional financial crises, given its large foreign exchange reserves. If Asian institutions—an AMF and an AFSD—took on these regional responsibilities, then the IMF and FSB could focus more attention on global risks, which should eventually become their primary concern. That work would involve surveillance of systemically important economies (the US, the EU, and the Asian region) and multilateral consultations to promote global stability.

In the area of development finance, the ADB is already quite strong. Moreover, having secured a general capital increase of 200%, it is now ready to scale up its funding to further support economic development, social progress and other initiatives. It is also helping to develop regional financial markets, including local-currency bond markets, and provides catalytic support for infrastructure investment.²² ADB's expanding role, in turn, would allow the World Bank to focus more of its resources on truly global public goods.

In the area of trade, the seeds of a single Asia-wide FTA have been also planted. Building on ASEAN integration, so-called “plus one” free trade agreements have now been implemented between ASEAN and PRC, Japan, Korea, India, and Australia & New Zealand. Official studies have been launched for a PRC-Japan-Korea free trade area. Two region-wide FTA proposals are on the table, including an East Asia Free Trade Area (EAFTA) among ASEAN+3 countries, and a Comprehensive Economic Partnership for East Asia (CEPEA) among ASEAN+6 countries (which include all ASEAN+3 countries plus Australia, New Zealand and India). In terms of economic welfare for Asia and the world, the CEPEA is preferable to the EAFTA, but political economy considerations may dictate that an EAFTA be formed first (Kawai and Wignaraja, 2010).

In the area of financial stability there is no obvious seed for the proposed AFSD, but it is widely recognized that stronger consultations are needed among Asian financial authorities. The AFSD could be built on existing processes—meetings of the ASEAN+3 finance ministers (called the Economic Review and Policy Dialogue) and the central bank governors (called the Executives' Meeting of Asia-Pacific Central Banks, or EMEAP)²³—by involving the region's financial sector supervisors and regulators. Since the newly established FSB does not embrace all Asian economies, the AFSD would play a critical role in regionalizing global decisions and providing regional inputs into the global process.

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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