Governance in an Integrated Global Economy

Powerful as it is, the United States cannot address many of today's gravest challenges without joining hands with governments and citizens of other nations. Infectious diseases know no national boundaries, and combating them has long required governments to work together. Likewise, air pollution can be efficiently reduced only through international cooperation. The financial crises that have rocked various emerging market countries have necessitated international financial rescues. Most immediately, the global terrorist threat compels governments the world over to gather intelligence and apprehend terrorists before they strike, as well as attempt to coordinate necessary diplomatic, military, and humanitarian responses.

All these challenges are increasingly shaped by "globalization"—the increasing integration of economies and peoples of different countries. In some ways globalization facilitates meeting global challenges because integration creates constituencies within countries that want to solve problems at a supranational level. But at the same time, cross-border integration itself is difficult, if not impossible, for governments to manage or govern.

Nonetheless, govern we must—or at least attempt to do so. The time could not be better, therefore, for Brookings to examine—through articles in this Review—how the United States should, or even must, work with other governments to meet challenges that confront us all. Daniel Kaufman has defined governance at the national level as the exercise of authority through formal and informal traditions and institutions for the common good. While the same definition underlies the concept of global governance, its application is much more complex across national borders. In addition, the size and diversity of actors involved are far greater.

Nongovernment actors, for example, play an increasingly important role in economic issues of global concern, as do cross-national standards and codes of conduct. Standards of corporate responsibility in the United States not only affect the operations of our firms at home and abroad but also influence the conduct of business in other countries, particularly those where regulatory capacity is weak. And the private sector, which has traditionally played a strong role in activities relating to the public good in the United States, is becoming a critical player in debates on international economic development and public health policy.

The articles that follow identify some of the most important trends and challenges that require multinational attention, and, where possible, propose strategies for better managing the process. Ann Florini, for example, addresses the issue of standards of cross-border corporate conduct. In the absence of effective international regulation to protect workers, communities, and the environment, she explains, the fight over the place of business in global governance is occurring largely in the realm of corporate codes of conduct—some vague, some specific and subject to external monitoring and verification. Will these codes of conduct work?

Ngaire Woods explores how the structure of government representation in the International Montary Fund and World Bank affects—for the worse—their accountability. Decades ago, when the functions of both institutions were narrow and technical, their accountability was of less moment. But today their work affects huge numbers of people, as well as sectors beyond the economy, in developing countries. Without a major change in governance, the IMF and the Bank may have to be reined in from activities for which they are not sufficiently accountable.

Jean Lanjouw focuses on the costly and bitter decade-long dispute between the pharmaceutical industry and advocates for the poor over patent protection in developing countries. Lanjouw offers an innovative proposal for a patent system that recognizes differences in countries' well-being and, at the same time, encourages the private sector to become involved in creating new drugs for diseases endemic to the developing world.

Thorsten Benner, Wolfgang Reinicke, and Jan Martin Witte explore how technological change and economic and political liberalization have transformed and complicated conditions for international governance. To respond to a wide range of contemporary challenges—the environment, AIDS, corruption—participants from civil society, business, international organizations, and governments are joining forces in an experimental form of governance known as global public policy networks.

Nancy Birdsall posits that while not all the suspicions of antiglobalization activists are warranted, the activists are correct in asserting that opportunities in the global economy are not equal. When the global market works, it often leaves behind those without adequate training and material assets. When the global market fails, it is most costly for the already weak and disadvantaged. Unlike the rich and powerful, the poor cannot design and implement global rules to their own advantage. Birdsall calls for an improved global polity, in which more democratic representation of poor countries in managing the global economy mediates the downside of global markets.

Shang-Jin Wei and Heather Milkiewicz posit that the insider trading and shady bookkeeping that brought down Enron and other big U.S. businesses—and triggered huge losses on Wall Street—also weaken stock markets abroad, decreasing investment worldwide. They advocate close regulation of financial markets to prevent fraudulent and illegal corporate practices.

Michael Kremer and Seema Jayachandran note that in most countries, individuals do not have to repay money that others fraudulently borrow in their name. But citizens of a dictatorship are obligated to repay any and all of their leader's cross-border debts. If they default, they hurt their chances of attracting foreign investment to get their country back on its feet. Kremer and Jayachandran propose ways to discourage lending to such regimes and to relieve citizens of the obligation to repay debt incurred by an illegitimate regime.

Carol Graham and Sandip Sukhtankar explore how the recent financial crises in Latin America have affected the health of the region's fragile young democracies. Surprisingly, they find, using polling data, that despite the bad economic news, the share of Latin Americans who favor democracy over any other system of government is growing. Though often critical of their own government's performance, many of those polled expressed their preference for democracy as a system of government—and distinguished as well between market policies and the way the market is working in their country.

President Bush's plan to add $5 billion to U.S. development assistance and create a new program to help the world's poorest countries presents an opportunity to transform U.S. development policy. Lael Brainard shows how the new program, with aid based on economic performance and good government, could create incentives for poor-country governments to improve both economic policies and governance and to help already strong performers sustain growth and improve investment climates. She also explores the questions that this approach poses for foreign assistance in general.

James Steinberg considers how information technology (IT) can help the world's poorest nations share in the gains of globalization. Early hopes that "wiring the South" would enable developing countries to leapfrog earlier stages of development have been tempered by experience. If IT is to spur growth, it must be part of an overall national strategy for development that brings together all stakeholders—government, the local private sector and civil society, and the donor community.

The articles that follow give readers a quick guide to some of the challenges around the world that require both innovative thinking and international cooperation.