Does democracy enhance or inhibit good governance?

Does democracy enhance or inhibit good governance? The question sits conspicuously in the minds that gathered on the 15th floor of the School of International and Public affairs at Columbia University on March 4th to launch, The Governance Report 2013.

As enchanting is the view of New York from the floor, equally disquieting is the acceptance of a lack of sound governance measures by some of the most renowned voices in the room. The Governance Report 2013 makes a departure from the otherwise complacent approach towards the issue; the panelists assert impelling arguments for action.

Jan Svejanr, James T. Shotwell Professor of Global Political Economy and Director of the Center on Global Economic Governance introduces each of the panelists and sets the floor for Helmut K. Anheier, Dean of the Hertie School of Governance to elaborate on the details of the Governance Report 2013.

Anheier begins by elaborating on the definition of governance. “Governance is all about how well we manage public problems. From identification of a problem to formation of a policy”, Anheier said.

He further explained that the report has two over arching themes – one deals with the notion of sovereignty and the other with finance. He urged the audience to think as to why so few of today’s global issues are being settled.

“The conditions of governance have changed – becomes clear once we take seriously the notion of interdependence”, Anheier pointed out. “The interdependence has reached a new quality and we still have to catch up with the new reality of a pronounced interdependence of nation states. It is no longer a matter of states alone; it’s a matter of international co-operations, large scale insurance funds, investor funds and NGO’s. There are many more actors involved than have been in the past”, he asserted.

The Governance Report 2013 identifies critical areas in governance and summons urgent action. The first chapter questions the sovereignty paradox and how sovereignty is practiced under these new situations of governance. ‘If you have pronounced interdependence between nation states, the old notion of sovereignty may no longer suffice’, Anheier signaled.

He continued, “There is a cacophony of governance innovations to talk of but hardly any frameworks to accommodate them. A new way of addressing public problems and tracking the performance of government systems lies at the crux of innovation itself. The next crisis is certainly going to come. Are we better prepared or are we as ill-prepared as we were five years ago?”.

Premised on key government requirements of averting the risk of dual markets and state failure while correcting fairness deficits, the report argues for externality management and actively accepting policy interdependence.

Anheier identifies liquidity versus moral hazard; accountability versus effectiveness and domestic politics versus international commitments as the key trade-offs and argues for responsible sovereignty. “This is not to say that governments should give up their sovereignty. It is not to say that the old model is dead and no longer applies. The report argues that you just need to be smarter in the way you exercise it. As an independent state in an interdependent world, you have many more options than you normally think you have for strengthening your own sovereignty”, Anheier explained.

This changes the way innovation is perceived. Which governance innovations can actually contribute? Are we governing ourselves different from the way we were governing ourselves, 10-20 years ago? Raising these pertinent questions, Anheier delves further into a range of innovations at the local, national and international level.

Anheier calls for discovering better ways of vetting and disseminating governance innovations. He uses examples of Chiang Mai initiative, Norwegian Pension Fund, Debt brake, social impact bonds, open government partnerships and mySociety to substantiate his argument for governance innovation. Even if these innovations are put into place, measuring performance is critical and for that, a new generation of governance indicators are needed. Governance readiness, governance performance and innovation capacity are three indicators that the Governance Report suggests.

“We have identified a new system that aims to look at performance across sectors – transnational governance, national governance and city governance. With that we can answer some questions about governance performance”, he stresses.

‘The wider purpose is not to just publish a good report; we want to kick off a debate’, Anheier said, before asking Shanker Satyanath, Associate Professor of Politics, New York University to elaborate on the trade-offs involved in recovering from a crisis.

‘The first trade-off is between liquidity and moral hazard’, Satyanath said. “We need a quick injection of funds to address a crisis. Inevitably, political logic drives who receives money. Giving money has the potential to generate a moral hazard and further distort the recovery”, Satyanath explained.

Accountability and effectiveness; and domestic politics and international commitments qualify as the other two daunting trade-offs. ‘In order to be effective, we need to resolve the crisis very quickly. But how does one combine being both timely and accountable? There should be a global regulator to whom banks should report to but to whom should the regulator be accountable to?’, Satyanath urged the audience to deliberate. Further elaborating on the third trade-off, he said, ‘Politicians understandably want to maximise domestic support but policies focused on a domestic audience will often clash with international commitments and international commitments are needed to prevent the next crisis”.

When the crisis is in full flow there are more incentives to contribute but when the crisis is over, the incentives for co-ordination fail and the incentives for defect become greater. It is this cycle that Satyanath stresses, is critical to break.

Ira M. Millstein, Director of Columbia Law School steps into the debate. “We are not going anywhere with this unless, we find a good interconnection between the private sector and the state. Our problem today is not to waste the crisis. Politicians and corporates have not picked up on this crisis. If anything, it is getting worse, not better”, Millstein said, at the outset.

Millstein uses the example of the Asian crisis to stress on the urgency of this interconnection between the corporates and the state. “In the area of too big to fail which is what we are all worried about, we are still in a position of not having solved the problem. We had hoped that one theory would be resolution of failing institutions. The only problem is that it doesn’t work nationally; it can only work internationally”, he added.

Building up on this, José Antonio Ocampo, Professor of Professional Practice and Director of the Economic and Political Development Concentration said, “We cannot simultaneously pursue democracy, national determination and global policy. We have to do one of the three”.

Ocampo spots the importance of enhancing the management of cross-border spillovers and promoting resource and issue orientation. However, he recognises policy interdependence as the most important. While the rise of emerging powers has been a very strong force for change, Ocampo acknowledges that it has made the old powers less willing to share global leadership.

Reasserting the theme of interdependence, Katharina Pistor, Michael I. Sovern Professor, Columbia Law School said, “I wish the authors of the finance chapters [in the Governance report] would have pushed the interdependency issues further. I find financial regulation and the fiscal parts too disjunct. They are clearly interdependent”.

“Interdependencies are manifested not necessarily in horizontal and flat environments. They are manifested in a deeply hierarchical fashion. Some get bailed out and others don’t whether these are states or entities”, she argued.

Pistor stressed that financial markets also have to grapple with deep uncertainty, and when we put uncertainty, liquidity and volatility together, there is a high propensity for a similar crisis to repeat itself. In a system that is spilled on high volatility or liquidity, Pistor speaks of two types of interventions that must be repeated – either we provide new liquidity or we suspend other ways by law.

In reference to the recent crisis, Pistor said, ‘On one hand, we have free capital flows and on the other, we are allocating the responsibility for the liquidity crisis, where the banks are being chartered – for example, subsidiaries. But these are often subsidiaries of parent banks and parent banks, push capital into the subsidiaries to expand credit in the markets that they are operating in. When these subsidiaries go belly up, the host countries have to deal with the liquidity crisis. These kind of structures reinforce the liabilities that rest in different countries of the world, that have to be brought into the political economy of our financial system’.

“We need to focus more on the politics of financial regulation”, Ailsa Roell, Professor of Corporate Finance, School of International and Public Affairs at Columbia University asserted as the mic is handed over to her. “I am going to focus more on domestic policy issues. The international issues concern me but not so much as sovereign issues”, she added.

“The determinants of public policy performance are legitimacy, efficacy and effectiveness. I’d like to focus on effectiveness as defined in that framework. In the context of US financial regulation, there are lots of problems and problems with regulatory capture have never been worse”, Roell pointed out.

Roell uses the example of the Securities and Exchange Commission to elaborate on her argument. ‘So why is the regulator so weak? One is the politics of it. Its budget is subject to congressional co-creation. The SEC should be funded in a different way not directly by Congressional appropriation but by a charge on the industry it regulates’, Roell argued.

In reference to the Basel 3 regulations, Roell speaks of the sovereign crisis. ‘The issue of concern is the impact on bank lending. Not everybody agrees that it is a good idea to tighten these standards so much. The implementation has been delayed and weakened. It is going to shift lending to the shadow banking sector. Shadow banking will rise, which is to say that instead of banks giving loans, we will see hedge funds give funds to emerging markets, securitising them into CDO’s and possibly selling them on. This is an unintended side effect of Basel 3’, Roell explained.

Reaffirming the critical nature of governance innovation, Robert C. Lieberman, Interim Dean, School of International and Public Affairs, said, “Think about innovation as a form of institutional change. This is one of the key problems in thinking about governance in the global context. How do stable institutions, more or less, stable practices, or sets of practices or equilibria, produce enduring and significant policy change or governance change? This is what policy analysts have grappled with in the last generation or so. One to which we don’t have a clear set of answers”.

Lieberman points out that the broader problem is accounting for institutional change. He stresses that the challenge of globalisation means that there is no such thing as exogenous shock anymore. Everything that happens is now endogenous.

“One is the connection between ideas, ideas about change, new policies, new government procedures and structures. But, even the best ideas about how to change practices and how to change governance structures run into sets of practices that privilege or empower particular actors, who have a stake in the old way of doing things. So, any account of governmental innovation, that wants to be general, has to think about this problem. How to take entrenched ways of doing things, or fixed institutions and induce them to change?”, Lierberman asserted making an impelling argument for institutional change.

The report and the discussion leaves everyone with a purpose : to translate their knowledge and understanding of the world to potentially transform the sort of government reforms they would like to see.

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