The New Global Rulers: The Privatization of Regulation in the World Economy

The New Global Rulers: The Privatization of Regulation in the World Economy

The New Global Rulers: The Privatization of Regulation in the World Economy

The New Global Rulers: The Privatization of Regulation in the World Economy

Synopsis

Over the past two decades, governments have delegated extensive regulatory authority to international private-sector organizations. This internationalization and privatization of rule making has been motivated not only by the economic benefits of common rules for global markets, but also by the realization that government regulators often lack the expertise and resources to deal with increasingly complex and urgent regulatory tasks. "The New Global Rulers" examines who writes the rules in international private organizations, as well as who wins, who loses--and why.

Tim Buthe and Walter Mattli examine three powerful global private regulators: the International Accounting Standards Board, which develops financial reporting rules used by corporations in more than a hundred countries; and the International Organization for Standardization and the International Electrotechnical Commission, which account for 85 percent of all international product standards. Buthe and Mattli offer both a new framework for understanding global private regulation and detailed empirical analyses of such regulation based on multi-country, multi-industry business surveys. They find that global rule making by technical experts is highly political, and that even though rule making has shifted to the international level, domestic institutions remain crucial. Influence in this form of global private governance is not a function of the economic power of states, but of the ability of domestic standard-setters to provide timely information and speak with a single voice. Buthe and Mattli show how domestic institutions' abilities differ, particularly between the two main standardization players, the United States and Europe.

Excerpt

On 28 August 2008, the world financial community awoke to stunning headline news: the Securities and Exchange Commission (SEC), the powerful U.S. financial market regulator, had put forth a timetable for switching to International Financial Reporting Standards (IFRS), produced by the International Accounting Standards Board—a private-sector regulator based in London. SEC-regulated U.S. corporations were to be required to use ifrs, possibly as soon as 2014. Only a decade earlier, the suggestion that the United States might adopt ifrs “would have been laughable,” as many experts expected U.S. standards to become the de facto global standards.

The SEC’s decision to defer to an international private standardsetter is part of a broader and highly significant shift toward global private governance of product and financial markets. What is at stake? Financial reporting standards specify how to calculate assets, liabilities, profits, and losses—and which particular types of transactions and events to disclose—in a firm’s financial statements to create accurate and easily comparable measures of its financial position. the importance of these standards, however, runs much deeper. Through the incentives they create, financial reporting standards shape research and development, executive compensation, and corporate governance; they affect all sectors of the economy and are central to the stability of a country’s financial system.

See, for example, Hughes, “US Set to Adopt ifrs Rule” (2008). the SEC’s proposed “Roadmap to ifrs Adoption” of August 2008 has been elaborated and extended by the February 2010 “Work Plan.” the plan envisages that, after review and confirmation in 2011, it would become mandatory for all U.S. companies whose shares are traded on a U.S. stock exchange to prepare their regular financial statements on the basis of ifrs. This requirement is to be phased in over several years (see chapter 4 for details).

House, “Global Standards Here to Stay” (2005), 72.

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