Engaging book on the intricate and often confusing field of international finance

Empowering Weak & Oppressed

Abul Fadl

Shawwal 21, 1417 1997-03-01

Book Review

by Abul Fadl (Book Review, Crescent International Vol. 26, No. 1, Shawwal, 1417)

States, Markets and Regimes in Global Finance by Tony Porter. St. Martin's Press, New York, NY. US. 1993. pp.220. Hbk.

The incessant recurrence of international conflict, political rivalry and economic competition in relations among States has led many observers and analysts to conceive of the international system as being intrinsically chaotic and anarchic. According to Tony Porter, however, such a view of the international system is misleading as interstate interactions exhibit ‘a surprising degree of regularity and order’ (p.1).

Porter’s States, Markets and Regimes in Global Finance sets out to cast light on ‘such regularity and order... in global financial markets,’ which are commonly believed to be ‘uncontrollable and plagued by recurring instability’ (p.1). Ultimately, Porter’s analytical study aims to investigate the complex web of relationships that links structural transformations in international financial industries and the changing fortunes of interstate institutions that seek to regulate them. This task is achieved by bringing into focus the evolutionary history and dynamics of the two most significant interstate institutions regulating the international banking and securities industries--viz, the Basic Committee on Banking Supervision, and the International Organization of Securities Commissions (IOSCO)--as well as an array of private international institutions which exert a significant bearing on international financial markets.

Porter adopts the notion of ‘international regimes’ as a theoretical-disciplinary framework for his ambitious scholary enterprise. This notion affords students of international relations a conceptual tool that facilitates their understanding of how international cooperation among ‘mutually distrustful sovereign States’ can be secured and maintained (p.1).

The most dominant and oft-cited definition of ‘international regimes’ is that advanced by Stephen D Krasner--one of the most notable exponents of the regimes’ approach--who states that regimes are ‘sets of implicit or explicit principles, norms, rules and decision-making procedures around which actors’ expectations converge in a given area of international relations.’ (International Regimes, Ithaca, NY, US. 1983). Accordingly, the notion of regimes directs attention to institutions as identifiable practices or patterns of State behaviour which constrict and shape the menu of actors’ choices in a specific area of international activity.

At the outset of his book, Porter takes his readers on an excursion into a plethora of theoretical literatures. The purport of this excursion is to develop a theoretical framework conducive for addressing the central question of the book, i.e, the relationship between industry structures and interstate regulatory institutions. In this context, he reviews the following six traditions of scholarly literature: international relations, economic theory, corporatism, new institutional economics, the analysis of domestic financial markets, and neo-institutionalism. Porter’s review of these literatures, albeit concise, is insightful and perceptive. His ex cathedra observations on the strengths and weaknesses of these scholary traditions, in addition to their adequacy for analyzing the industry structures-interstate institutions nexus, are analytically sound and illuminating.

Drawing upon relevant insights which he gleans from the corpora of these scholarly literatures, the author constructs two alternative hypotheses that aim to illustrate the relationship between industry structures and interstate institutions in the issue-area of international finance. The first hypothesis links the emergence of a strong interstate regime to the existence of fierce atomistic competition in an industry and the lack or weakening of private regimes regulating it. The second hypothesis links the emergence of a strong interstate regime to the existence of ‘highly organized [industries] with oligopolies and strong private regimes’ (p.33). The author, then moves to devise a method for testing the empirical validity of these two contraditory and mutually exclusive hypotheses. This method seeks to assess the degree to which a regime is institutionalized and analyzes changes in industry structures.

Having delineated the methodological topography of his political inquiry, Porter proceeds to test his proposed hypotheses. This test is entwined with an account of the evolution of interstate regimes for regulating international banking and securities industries organized around the Basle Committee and the IOSCO respectively.

The Basle Committee was founded in 1974 by the central bank governors of the member-countries of the Group of Ten (composed of the original ten members: Belgium, Canada, France, Germany,Italy, Japan, the Netherlands, Sweden, the US, and UK; in addition to Switzerland which joined later) in the wake of a series of crises that rocked the banking industry. With a secretariat provided by the Bank of International Settlements, the Committee brings together the Group of Ten members plus Luxembourg. ‘Its initial stated goals were to develop general principles for bank supervision and to improve contacts between bank supervisors’ (p.56).

The Committee has introduced non-binding regulations covering such issues as ‘an international division of responsibility, common principles, mechanisms for information sharing and a decentralized mechanism to force supervisors to comply with common standards’ (p.59). The acceptance of these regulations is not limited to the Committee’s member-countries, however. Three mechanisms allow the Committee to gain acceptance for its regulations among bank supervisors throughout the world.’First is the creation of organizations of supervisors from outside the Group of Ten. Second is the holding of biennial conferences to which supervisors from around the world are invited. Third is the education and training of supervisors’ (p 72).

For its part, IOSCO was set up in 1974 by the World Bank and the Organization of American States to help promote the development of securities markets in Latin America. By 1991 its membership had grown to ‘91 members, including state regulators, self regulatory agencies and international organizations from 60 countries’ (p.111). Throughout its history, IOSCO has played a leading role in the conclusion of a series of bilateral and multilateral agreements and sought the establishment of common capital standards for securities firms. These efforts have fostered ‘cooperation on the regulation of markets through information sharing, standard setting and enforcement’ (p.112).

Porter’s analytical accounts of the life histories of the Basle Committee and IOSCO are followed by analyses of corresponding developments in the structures of the international banking and securities industries. His painstakingly thorough examination not only shows that the interstate banking and securities regimes have gained considerable strength since 1974, but also that this strengthening had been going hand in glove with a heightening of atomistic competition at the industry levels and an erosion of private forms of regulation. Hence, on a number of measures Porter’s analysis supports his first proposed hypothesis, i.e, that the strengthening of the interstate banking and securities regimes was associated with an intensification of competitive pressures and the absence or decay of effective private regimes.

Porter concludes his book with a theoretical and metatheoretical investigation which shows that the link between industry structure and regime formation is causal and not simply correlational. The model of causation established here is inspired by recent methodological developments in political science, namely structuration theory. It restores the primacy of human agency of the equation of political inquiry without sacrificing the role of structures. As such, it takes into account ‘the purposive actions of knowledgeable agents as constrained by institutional capacity and the need to call upon roles as a source of power’ (p.165).

Nevertheless, the author’s analysis suffers from a minor, yet not inconsequential, limitation. Porter has effectively excluded implicit institutional arrangements and underlying rules from the purview of his study. This is rather peculiar given the centrality of implicit arragements to regime analysis which recognizes institutions embedded in and interwoven with the dynamics of praxis. It is especially puzzling since the author acknowledges that ‘regimes can include formally highly organized features such as written constitutions and explicit voting procedures as well as informal features such as tacit understandings, unwritten conventions, and implict power relations’ (p.13).

By confining his interpretive analysis to such ‘physical entities’ as the Basle Committee and IOSCO, the possibility of addressing important regime features whose ethical and other implications are enormous, such as the justice and distributive effects of the present international financial regime as well as its role in perpetuating the uneven global distribution of wealth, is obviated.

Notwithstanding this limitation, States, Markets and Regimes in Global Finance remains a work of weighty scholarship. Porter has written an engaging study of the formation and achievements of the Basle Committee and IOSCO. As the first comprehensive study of these institutional arrangements of its kind, it fills a serious caveat in scholarly literature on international finance. One implication of Porter’s cogent analysis is to dispel the popular image of free and unregulated financial markets as chimerical fantasy advanced by doctrinaire liberal economists. Indeed, anyone interested in international finance, international political economy, international relations or political science will find this book invaluable.

Muslimedia: March 1-15, 1997

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