Jack Seddon (St John's College, Oxford)
Professor Louis Pauly gave a presentation to PEFM based on a paper entitled, “Governing Global Risks: The Evolution of Policy Capacity the Financial Sector.” He challenged his audience to think about the emergence of a "transnational prevention state" (transnational prevention arrangements across borders that translate into effective policy capacity). The paper is part of a work in progress for a book with Edgar Grande.
Professor Pauly argued that this policy capacity is already emerging and developing to deal with global risks and uncertainties. It involves three sets of objectives and three arenas of risk politics. The first arena is the technocratic one focused on risk measurement, assessment, and monitoring. The locus of action here may be seen as shifting from formal international organizations to "clubs", like those now engaged in the so-called Basel Process (Basel Committee, IOSCO, IAIS, and FSB). The second arena involves compensation and crisis prevention, where inter-state collaboration and public-private partnerships are most evident. The third arena involves emergency management and resolution, where ad hoc collaboration (at most) among key finance ministries and central banks is at the moment the dominant trend.
Professor Pauly drew on Weberian themes to argue that the "transnational prevention state" operating across these three arenas mainly involves the exercise of effective power that may not yet be fully legitimated. Rational- legal authority was certainly evident when the post-1945 system of collaboration centered on treaty-based organizations like the IMF, but the most serious recent risk-based conflicts and dilemmas seem to have bypassed such organizations, or as in the Euro-crisis, to have only assigned to such organizations a secondary role. Professor Pauly argued that legitimation for recent ad hoc prevention and burden-sharing arrangements may come, but this will only follow the effective long-term resolution of underlying drivers of global risks. The emergent prevention capacities at the global level rest not on the G-this or the G-that, but on national institutions (treasuries and central banks, etc.) and the concerted and mutually-interested deployment of their fiscal and monetary powers. The repeated deployment of these powers, Professor Pauly argued, builds expectations of future action, and his shapes markets that continue to globalize. In the wake of the crisis of 2008, for example, cross-border financial intermediaries continue to expand, and the too-big-to-fail problem has likely been enhanced. Despite obvious moral hazards, those expectations are now hard-wired into integrating markets. Once emergency conditions subsided, it is no coincidence that the policy action moved back to the arenas of risk assessment and prevention, as collaborating prevention states sought to limit those moral hazards without dis-integrating global markets. When markets are next frozen by radical uncertainty, however, the expectation that relevant governments will collaborate will be more entrenched, and this in turn will make ad hoc and collaborative emergency actions more likely.
Professor Pauly used the open seminar, conducted under Chatham House Rules, and the free intellectual environment of Oxford, to push some of the implications of his argument: including the assertion of the emergence of an ad hoc global (and regional within Europe) fiscal capacity and the probable inevitability of a final resolution authority to prevent a future systemic emergency from threatening the prevention state itself. The discussion that followed was naturally animated by these provocative and stimulating themes.
The discussion pressed Professor Pauly on issues such as whether the Bretton Woods institutions are really as secondary as his analysis might be taken to suggest. The actual basis of the global financial architecture, first formed in the aftermath of the Asian financial crisis and then enhanced through great recession, was also the matter of some ambivalence and debate. Some audience members felt the G-20 working through the quasi-political / quasi-technocratic body of the Financial Stability Board (FSB) (formerly the Financial Stability Forum) may not be quite as new or ephemeral as the concept of a transnational prevention state might imply. On the other hand, others seemed to identify a more traditionalist line of thinking in Professor Pauly's account, with the financial crisis being managed by a great power concert bound through a harmony of necessity and interest. While clearly valuing the contribution and ideas, and also naturally reflecting Professor Pauly's choice to push his argument as far as possible, it is fair to say that some in the audience felt that timely and adequate crisis management in the future is less assured than Professor Pauly's framework might suggest. Of course, that sentiment only goes to confirm the importance of the topic that motivates his study. Professor Pauly introduced his subject by saying that risk and uncertainty defines (to a significant degree) the human condition. It should not surprise therefore that it also defined the tenor of the energetic discussion that followed.