Three Pathways to Global Standards: Private, Regulator, and Ministry Networks

The following post comes to us from Stavros Gadinis of University of California, Berkeley Law School.

Scores of governments around the world have chosen to introduce international standards as domestic law, even though they were not legally obliged to do so. The drafters of these standards are not sovereigns or international organizations, but transnational regulatory networks: informal meetings of experts from various countries, some with government affiliations, and others without. Networks have puzzled scholars for years. Fascinated by the institutional novelty of the network phenomenon, some theorists praised their speed, informality, and lack of hierarchy. Others were not so enthralled. They were concerned about the influence of interest groups or the weight of big countries. This debate has examined both the inputs to the network phenomenon—preferences—and the outputs—global coordination—but has not discussed the mechanism: how do we get from preferences to standards? How do these networks come together, what is their strategy for their success? My new study, Three Pathways to Global Standards: Private, Regulator, and Ministry Networks, seeks to open up the black box of network standard setting and analyze these mechanisms. It proposes a new theoretical framework that distinguishes among private, regulator, and ministry networks, and presents empirical evidence that illustrates why these three network types appeal to different countries for different reasons.

The starting point for this theory is a key characteristic that earlier accounts have overlooked: the lawmaking powers of network participants in their respective domestic legal orders. Some networks connect exclusively non-state actors, who must convince governments to get on board with their reform agenda. Other networks consist of regulators, who have powers to adopt new rules as far as these rules fall within their statutory mandate. And still other networks rely on executive officials directly accountable to elected leaders, who can use their government position and political leverage to push forward broad legislative overhauls linking multiple issue areas. The differences between these three actor types, this study argues, provide the basis for a systematic account of transnational networks.

To start, private actors have no policymaking powers under domestic law, and thus must convince institutional players who have such powers—regulators, legislatures, or executive branch officials—to adopt their standards. Private actors’ strongest card in such an effort would be the validation of their standards by markets. To obtain markets’ approval, private networks encourage firms to follow their standards voluntarily and seek to gain a positive market endorsement. Once one country adopts the standards as law and gains a regulatory advantage, policymakers in competitor countries follow suit in order to avoid falling behind. Thus, I hypothesize that standards created by networks of private market participants spread more readily among countries whose national industries are in competition with one another.

To gain markets’ endorsement, private networks design their drafting process and internal structure accordingly. Private professionals with a long career and an established reputation formulate the standards, while practitioners who follow the standards voluntarily provide feedback to the network, which fine-tunes its standards accordingly. By excluding governments and regulators from their drafting process, private networks build a reputation as technocratic a-national standard-setters, rather than instruments of a specific government or regulator.

In contrast with private actors, national regulators have significant policymaking and enforcement powers that are directed at overseeing a specific sector, such as securities, or addressing a specific policy concern, such as environmental protection. Regulators enter an international network in order to build channels of cooperation with foreign authorities. The key appeal of entering such a network lies in reciprocity: for example, regulator A undertakes to assist regulator B by conducting enforcement actions in its territory on B’s behalf, on the understanding that B will similarly undertake actions in its territory on A’s behalf, if that need ever arises. But given the wide variation of regulatory frameworks in different countries, regulators within the network should make sure that any new entrants are able to reciprocate. Thus, I argue that regulators’ standards are more likely to spread among countries whose regulators have the necessary institutional capacity to make good on the promises they make.

Because networks of regulators encourage sharing institutional capabilities among their members, their institutional arrangements foster cooperation in a community of peers. Upon joining the network, participating regulators send representatives to work closely with each other in various committees responsible for drafting proposals for standards. These proposals receive approvals from collective organs with the participation of all network members. The network fosters members’ sense of community by organizing technical assistance programs, where regulatory officials share their experiences and train their colleagues in enforcement approaches.

While national regulators’ powers are constrained by statute to a specific sector, executive branch officials are in charge of a government apparatus that extends across multiple sectors, and even has the power to bring under its oversight activities that were previously unregulated. Moreover, ministries can achieve their goals by utilizing means of pressure available to states. For example, they can condition foreign aid or military assistance on joining the network. For these reasons, I argue, members’ influence and power relations form the pathway through which these networks’ standards spread around the world. Powerful countries will exercise their influence not only to promote the expansion of their network, but also to structure relationships within it. These countries will take the lead in the drafting process and will be the ones whose views—and votes—carry the most weight within the network. In contrast, peripheral states will be confined to a secondary role.

This study offers two types of evidence. First, three case studies provide a deeper look at the characteristics of each network type. Accounting provides an example of a private network, the International Accounting Standards Board (IASB), established by professionals to draft the International Financial Reporting Standards (IFRS) for publicly traded companies. Securities regulators have formed their own network, the International Organization of Securities Commissions (IOSCO), which has promoted cross-border cooperation standards through its Multilateral Memorandum of Understanding (MMOU). Finally, ministry executives have joined forces to fight money laundering and terrorist financing, creating the Financial Action Task Force (FATF) whose 40 Recommendations have been widely adopted.

Second, quantitative evidence shows that the mechanisms of standard promotion illustrated in the case studies are consistent with the distinct patterns through which each network’s standards spread around the world. This study uses a dataset that covers all jurisdictions worldwide and employs methods that quantify how each new entrant affects the appeal of the network for each country that remains outside. Specifically, the dataset includes 191 countries over a 22-year period (1990-2012). The results indicate that one country’s decision to join a set of international standards affects other countries’ decisions in distinct ways, depending on the type of network.

The full study is available for download here.

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