Part I - Global Governance and Politics

1 The Resilience of Private Authority in Times of Crisis

Panagiotis Delimatsis

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1.1 Introduction

Private regulatory bodies, including trade associations of professionals and companies such as banks or big manufacturers, have been part and parcel of the neoliberal orthodoxy premised on the concepts of market competition and an increasingly limited role for the State.¹ Largely unleashed to determine their fate, such close-knit groups have shaped the trajectory of neoliberal globalization.² Yet all governance modes can be vulnerable to specific kinds of failures due to their innate weaknesses in different problem contexts.³ Reliance on private expertise has not prevented regulatory disasters (that is, events of varying scale and scope resulting from the – often unintended and unforeseen – consequences of the design or operation of a regulatory system and its interactions with other systems) in finance and manufacturing from occurring.⁴ Despite the ever-increasing powers that are transferred to such private actors, existing theories fail to explain satisfactorily why their dominance remains largely unaffected by regulatory disasters that they partly cause.⁵

Against this backdrop, this chapter argues that crisis events or other unfortunate regulatory disasters appear to empower such private-driven forces or generate new ones, whereas existing public checks and balances fail to pursue their initial objective. In this regard, we introduce the concept of “free riding of private ordering” to describe this phenomenon and expose this mismatch between costs and benefits of regulatory legitimacy transfer. We believe that this phenomenon is particularly visible in two critical areas of economic activity: manufacturing and finance.

Arguably, we currently witness early signs of a transition from a constellation whereby private bodies serve a role assigned to them by the State (reactive mode) toward a convention whereby private forces create rules that regulate economic activity more assertively, without being affected by regulatory disasters; rather, such crises constitute opportunities to accumulate knowledge and develop the capacity to expect the unexpected, absorb it, and grow (reactive mode). Our main claim is that the continued dominance of private authority through crisis events is premised on the core rule-making activities that such private bodies undertake. The most important of them is the continuous promulgation of voluntary standards that are rapidly prepared, adopted, and diffused to preempt rules by public rule-making competitors. Because of the voluntary nature of the standards but also the underlying potential and properties that allow for grabbing authority located elsewhere, we further introduce the concept of “voluntary economic activism” (VEA). Overall, our objective is to set the foundations for a theory that explains crisis-proof private authority.

The remainder of the chapter proceeds as follows. We draw from the resilience theory in Section 1.2 to unravel the phenomenon of the resilience of private collective action, using examples from the world of finance and manufacturing. We underscore the importance of malleability, flexibility, mutability, and heterogeneity as foundational traits of organizational continuity but also how the role of crises (and crisis management) has been largely neglected in the private governance scholarship. Section 1.3 complements the largely theoretical analysis of organizational resilience by discussing the essential features of the transition we arguably witness regarding the empowerment of private collective action, that is, from a reactive toward a proactive role of private regulatory bodies seeking more authority. Importantly, it describes the contours of a new theory of private collective action. Based on the analysis offered, Section 1.4 sets the foundations for studying the transition to a new era of private ordering and underscores the importance of further research to test the new theory put forward and the hypotheses associated with it. Section 1.5 concludes.

1.2 The Resilience of Private Collective Action

1.2.1 What Makes a System Resilient? Insights from Ecosystems Theory

Resilience is the ability of recovery to the state of equilibrium that a subject would have depending on the risk management strategy it will employ. Resilience in ecosystems can relate to efficiency, control, constancy, or predictability (coined “engineering resilience”). In such, rather static, ecosystems, because uncertainty is low, the focus is on optimal performance. However, resilience can also relate to persistence, adaptiveness, fungibility, variability, and unpredictability (coined “ecosystem resilience”). In dynamic ecosystems, variability and novelty result in high uncertainty. As the latter form of resilience focuses on the interplay between stabilizing and destabilizing properties of a given system, it appears to be the most useful for developing sustainable social orders.⁶

Resilience would emphasize the capacity to absorb stress and reorganize after the occurrence of a disturbance that upsets the equilibrium; thus, it presupposes a phase of growth and accumulation, followed by a phase of reorganization and renewal; a resilient system would survive successfully through these four phases.⁷ Perturbations can lead to a critical point (“a tipping point”) of such a disruptive nature that triggers a paradigm shift, thereby creating a new equilibrium, allowing for the continuation of the system. The occurrence of a tipping point is typically evidenced by the delay of recovery or by the fact that a system has become more vulnerable or fragile to small changes, resulting in critical transitions.⁸ The transition is nonlinear and the new equilibrium reached is not necessarily better or worse.

Resilience would entail flexibility rather than rigidity and persistence rather than collapse.⁹ Overall, it appears that systems are more resilient when they are moderately connected while maintaining high levels of heterogeneity.¹⁰ More generally, a system, subject, institution, or idea is resilient when it can weather episodic or gradual change and emerge closely resembling its former state and functionality after a disturbance.¹¹ Such a process of demonstrating adaptability may entail the change of resilience strategies without changing the fundamental attributes of a given system.¹² This reemergence of a given system into a feasible alternative status would also be efficient from an economic viewpoint.¹³

When applying these theoretical insights to private regulation regimes, we observe that a man-made system like a regulatory system can show its resilience by internalizing any succession of regulatory and governance paradigms (growth and accumulation). This can eventually lead to new constructs of alternative governance (reorganization and renewal), provided that the characteristics of the previous regime remain largely intact. Resilient private systems cannot survive without the idea that underlies them being resilient to shocks. Ideas can show resilience through adaptive processes of metamorphosis (old ideas returning in new guises), absorption (of seemingly contradictory ideas), and hybridization (adaptability in different contexts).¹⁴ This approach would emphasize the heterogeneous and inclusive nature of ideas that aspire to be (or have been) resilient, as long as a connecting factor, even if only loose and remote, could bring them together. This coalescence can be the result of centripetal forces but many times will result from active inclusion management of a strategic nature.¹⁵

1.2.2 The Rise of Private Collective Action to Authority as a Manifestation of Neoliberalism

Much of the governance carried out in the last thirty years has been indirect, delivered via several private rule-making bodies acting as governance intermediaries, be it trade associations; professional bodies; private contractors delivering public services such as transport, health, security, or education; or associations of firms to which the State delegated a given task.¹⁶ The retrenchment of the State that fitted the neoliberal ideological framework proved fertile ground for this development, allowing for market-led governance and the gradual introduction of self-correcting processes, eventually leading to a reconfiguration of the role of the State.¹⁷

Privatization and deregulation of monopolies and later public authority was the inevitable consequence of the coalescence between the economic and the political. Economics (notably the Chicago School and the Law and Economics movement)¹⁸ came to corroborate and justify such a constellation early on by finding that public goods such as regulations can be produced by non-state actors¹⁹ or demonstrating how the use of nonlegal mechanisms such as informal rules and social norms can bring about efficient outcomes in the marketplace.²⁰

These developments would pave the way for the ultimate decoupling of the regulatory function from the executive function. Regulation would merely shift “penholders” to become the very responsibility of the regulatees (often experts in a highly technical and complex field).²¹ Proponents of market-led governance and self-regulation would advocate that a bottom-up approach to authority is more apposite due to expertise and insider knowledge that only the professionals possess.²²

Various resilience-related attributes mentioned above can be identified in the modus operandi of private regulators: malleability, flexibility, and relatively low costs have defined the resilience of private regulators and the ideas they advocate.²³ Private bodies can draft and review rules more swiftly and flexibly than any public authority.²⁴ Norm-making groups can also adapt more quickly in the wake of exogenous shocks, thereby demonstrating their transformative capacity and mutability traits.²⁵ Furthermore, with the proliferation of technological advances that facilitated global exchange of ideas and commercial transactions, new layers of regulation at the national but also the international level would emerge, allowing for the creation of co-regulatory constellations and other types of partnership between the private and the public.²⁶

The evolution of private regulation can be attributed to early successes of self-regulatory patterns. In other words, self-regulation is directly associated with the phenomenon of private regulation in that the former established solid foundations for the evolution of the latter. In turn, the very foundation of self-regulation (and, a fortiori, private regulatory power) is the legal principle of private autonomy, going back as early as the Roman times.²⁷ Self-regulation entails an explicit or tacit transfer of authority to private bodies, which allows them to delineate a sphere of expertise,²⁸ establish conditions for membership, limit competition for the excluded nonmembers (either because they objectively do not qualify or because the incumbents want to maximize their rents), and impose deontological rules of conduct on the regulatees.²⁹ Self-regulation further entails monitoring of compliance with such rules and instituting enforcement mechanisms based on the deterring impact of potential exclusion, transforming compliance into a “normative demand.”³⁰

Private bodies have been key pillars of contemporary regulatory governance.³¹ The emergence of private regulatory regimes has often been the result of a well-functioning, self-contained ecosystem, whereas in other cases it can be enlisted as part of experimental regulatory governance.³² In this respect, professional associations are a good example. Certain associations gained immunity from public interference decades or even centuries ago and established normative principles of professional elitism.³³ These principles are meant to regulate access and pursuit of a given profession in the public interest: they are set out to ensure high levels of consumer protection and service quality. However, other than protecting public interest objectives, professional associations should also protect the interests of their members. This dual mission may lead to undesirable conflicts of interest.³⁴ Additionally, there is always the danger of regulatory capture from within,³⁵ as special interests are well-organized and homogeneous.

The concerns described above may become even more serious, as monitoring and harnessing the behavior of private bodies becomes more complex once private regulation of a given economic activity becomes borderless at the transnational level.³⁶ An interesting feature of these regimes is that procedural requirements become essential due to their reach and type of addressees, impact, and increased level of regulatory tasks that they have.³⁷ Issues of jurisdiction and conflict surface, and, quite interestingly, their complexity nourishes the evolution of transnational regulation, post-national legal authority and private ordering.

Similar concerns apply to co-regulatory constellations. Co-regulation or cooperative regulation in several sectors of the economy is a form of regulation that goes beyond the coercion that State authority can exert. In theory, co-regulatory approaches allow self-regulation, private regulation, and state regulation to come together with a view to optimizing regulatory performance and more efficiently addressing market failures and certain malfunctions.

As a rule, rule-making within such bodies is highly political. Internal politicization can often turn into a battle for internal dominance, which requires an investment of sometimes substantial financial resources and effective representation.³⁸ However, toward the external addressees, a persistent problem has been the high level of immunity from liability that private bodies largely enjoy. Immunity for some is the result of theories of corporation and liberalism that have dominated economic activity over the years. In such a framework, liability becomes an abstraction, scattered in the private regulatory sphere.

1.2.3 The European Example of Private Governance

In the history of European economic integration, the involvement of the private sector is well documented.³⁹ The contribution of private authority proved a key ingredient of European integration, in line with the neofunctionalist approach that essentially characterized much of the evolution of European rapprochement, as exemplified by the New Approach in mid-1980s, the controversial Lisbon strategy and the better regulation initiative at the beginning of the twenty-first century, but also the more recent Europe 2020 flagship initiative. The accumulated technical expertise in private bodies and the adoption of a less top-down regulatory approach rendered their involvement inevitable. The contribution of the “depoliticization” desire and the spread of non-majoritarian regulatory agencies that characterized European integration was equally important.⁴⁰ In this landscape, private regulators have been to date among the most transformative and motivating forces of economic activity in Europe and an essential component of the EU legal order.⁴¹

The Court of Justice of the European Union (CJEU) also played an important role in the creation of a neoliberal normative model for the regulation of markets within the EU. Such a model was based on promoting competition and cross-border market liberalization, thereby giving greater leverage to markets to the detriment of States. The Court adopted a rather agnostic approach as to legal forms and regulatory institutions thereby eroding the role of the State as a monopoly supplier of regulation.⁴² The next step taken by the Court would be to consider private conduct as a potential trigger of violation of the fundamental freedoms, allowing other private parties to challenge such contact, coined as the infamous “horizontal direct effect” of the fundamental freedoms. This adoption of a functional approach to authority was decisive: while the Court’s stance strengthened the European rule of law, it also legitimized authority that was previously elusive and internal to the private parties at issue.

Enrolling private actors in the regulatory process has then been a manifestation of so-called Europeanization, a term aiming to capture the influence of EU law on national practice but also a method that aims to cater for the lack of accountability and legitimacy of European institutions, as it brings to the fore more participatory forms of governance and rule-making.⁴³ However, this process carries with it several risks as noted earlier; identifying and addressing such risks may become less straightforward once the activities by private actors transcend national borders.⁴⁴

From European integration to domestic politics to the development of the global economy, technocracy has flourished within the ebb and flow of European politics, thereby shaping, harnessing, and monitoring economic behavior. In recent times, the intermingling of technocracy and politics⁴⁵ may have contributed to the rise of populism and the antiestablishment movement.⁴⁶ In Europe and beyond, transnational (that is, increasingly international, but non-State-centered) private standard-setting became the norm in central areas of economic activity, including financial services and manufacturing. It is in these two areas of economic activity in particular that global interdependence increasingly manifests itself.

1.2.4 Resilience and Crises

Exogenous shocks such as financial crises, technological disasters, or a pandemic increase the likelihood of non-incremental institutional change at the global level.⁴⁷ Every crisis brings with it urgent calls for a new regulatory paradigm in dealing with a certain area, be it food safety, technology and its use, finance, or accountancy services. Although the global financial crisis of 2008 has thrust policy-making failures into the limelight, such regulatory disasters have been diachronic, albeit with a varying degree of specific configuration, probability (ex ante) and casualties (ex post).⁴⁸

The current scholarship appears to suggest that the State (previously a monopoly regulator) has been transformed into the orchestrator of private regulatory activity. In this setting, the State, via soft influence and other voluntary means, enlists the third party (here, a non-State body) through material or ideational support and nudges it toward governance goals that align to the State’s.⁴⁹ Such enrollment may be beneficial for both sides: whereas the State economizes on resources, the private body at issue increases its legitimacy as the prime collaborator of the State in a given issue area.⁵⁰ Other theories focus on the delegation relationship, suggesting that agency-related challenges shall be resolved by the State as the last resort and ultimate commander; for instance, information asymmetries shall be addressed via transparency-related legislation or disclosure requirements for financial institutions.

If one attempts to apply these theories into practice, it would expect a new era of significant State intervention in case of misuse of delegation or deviation from the pursuit of public policy objectives, thereby upending conventional wisdom about self-regulation and private authority.⁵¹ Arguably, the great return of the State has not really happened as of yet.⁵²

This reveals the need for more theoretical and empirical work on the mechanics of the transformative, motivating, adaptive, and reinvigorating forces of private economic regulation. We suggest that particular focus shall be given to finance and manufacturing, where striking levels of resilience with obvious consumer welfare implications are particularly discernible. Several scholars have previously pinpointed the various conflicts of interest that permeate private regulation, from credit rating agencies⁵³ to professional associations,⁵⁴ label accreditation bodies,⁵⁵ and ICT private standard-setters.⁵⁶ However, in these two areas, private collective action has dominated the field, taking a largely unchallenged pole position despite crisis events.

In addition, in both issue areas, private regulatory activity was translated into an important degree of constitutionalization (which suggests an effort to increase legitimacy but is also indicative of a higher degree of institutional complexity), although this characteristic did not render it crisis-proof. For these reasons, the two fields identified are significant test-beds for the theoretical background of institutional resilience and the role of crises described above.

In what follows, we briefly identify certain illustrative examples. Our modest intention is to instigate further research in the two important issue areas of private standard-setting through the conceptual lens proposed in this chapter, rather than exhaustively present them and confirm our hypotheses.

1.2.4.1 Finance

Private rule-making in finance has flourished in the last three decades, notably after the creation of significant transnational organizations that were established to ensure that capital account liberalization and financial openness would not disturb global financial stability.⁵⁷ Finance is an important area for our purposes, as it not only exemplifies the problem of domestic enforcement in a global economic environment but also the fluidity of authority, whereby public and private regulators and enforcers interact.⁵⁸

In the aftermath of important privatization efforts in the 1980s, financialization became the hallmark of the neoliberal new world order.⁵⁹ Financial services regulation was routinely discussed in international fora where State regulators were absent or simple observers. New rules would be the outcome of joint legal engineering between bankers and independent national central banks in London, New York, or Basel. Many of these rules were initially established as voluntary benchmarks, indeed, as suggestions that a group of like-minded financiers brought forward.⁶⁰ However, they soon became either important benchmarks that companies or financial institutions could not ignore or even mandatory technical requirements referenced in State laws, thereby determining market access to global markets.⁶¹

Two examples from the world of finance are telling for the resilience of financial private rule-making despite crisis events; both relate to the mortgage markets: in the immediate aftermath of the subprime crisis and amidst protests against banking practices, only one small community bank, Abacus, with assets of $282 million – that is a hundredth of 1 percent of the assets of Bank of America – was brought to trial for mortgage fraud in the United States. Securitization, created by lawyers⁶² and once lauded as a source of resilience and stability for financial institutions, continues to be a problem that governments appear to be scratching nothing more than the surface by instituting simple, transparent, and standardized (STS) frameworks.⁶³

The second example relates to the scandalous manipulation of the infamous London Interbank Offered Rate or “LIBOR,” the most important inter-bank interest rate globally that determines the price of multiple financial instruments and contracts, worth hundreds of trillions of dollars. LIBOR used to be administered by the British Bankers Association (BBA), calculated by Thomson Reuters based on data submitted by major London banks.⁶⁴ The BBA is a private organization. It is the leading trade association for the UK banking sector but has a global reach with 200 member banks established in over 50 countries. BBA represents over 80 percent of global systemically important banks. The use of LIBOR has been pervasive: mortgages, student loans, financial derivatives, and other financial products use LIBOR as a reference rate, suggesting that any interference with this benchmark can have negative financial consequences for millions of people.

Revelations about extensive rigging unleashed when evidence was adduced about banks falsely inflating or deflating their rates to profit from trades.⁶⁵ In the aftermath of the scandal, the Financial Services Authority recommended the transfer of LIBOR oversight and governance away from the BBA.⁶⁶ The Financial Conduct Authority (FCA), the offspring of the recent financial reform in the United Kingdom, guaranteed the overall success of the process of transferring the LIBOR administrator. The call for tender resulted in the transfer in 2013 of the LIBOR administration from BBA to the NYSE Euronext Rate Administration Ltd., a UK-based company licensed by the FCA.⁶⁷

Thus, despite the admitted failure of LIBOR oversight by the BBA, which is a private body, LIBOR oversight was entrusted, against all odds, to another private body, NYSE Euronext. NYSE Euronext is a Delaware corporation, although the actual headquarters are in New York. NYSE Euronext was acquired by the Intercontinental Exchange (ICE), an energy-related commodities trading company, in 2012. The ICE Benchmark Administration (IBA) is currently the de facto administrator of LIBOR.⁶⁸ An oversight committee composed of nineteen members oversees IBA. Crucially, only three members of this committee are representatives of regulators: the Bank of England, the National Bank of Switzerland, and the US Federal Reserve. These three representatives merely have an observer status.

An inherent finance-related peculiarity for any regulator is that most financial information is produced privately. Consider, for instance, the mechanics of credit ratings. Credit rating agencies were heavily criticized in the aftermath of the financial crisis and regulations on both sides of the Atlantic attempted to tame conflicts of interest and other governance issues. That aside, however, any public intervention may be unable to introduce mechanisms to substitute for such information produced privately. Likewise, in the case of benchmarks, the participating financial institutions in the calculation of LIBOR possessed private (sometimes constructed) information, which served to standardize and synchronize the otherwise uncoordinated actions of public and private actors by offering a common code.⁶⁹ Despite their integrity and credibility being shaken during the crisis, the channels of financial information largely remain private.

Often, efforts for dominance and intensive lobbying by private bodies lead to strengthening of their regulatory power. For instance, the International Swaps and Derivatives Association (ISDA), a transnational coalition of banks with a crucial role in the over-the-counter (OTC) derivatives market, has managed to maintain and even strengthen the role that its successive Master Agreements have played in OTC transactions. One successful action was to codify the contractual language used by market actors into a Master Agreement (MA), thereby minimizing transaction costs.⁷⁰

Another, more important, victory for ISDA was to successfully lobby for ISDA’s netting rules so that ISDA members are able to net out their positions before the imposition of the judicial stay that would occur in ordinary bankruptcy proceedings. The justification given was that any other solution may increase systemic risk.⁷¹ However, the financial crisis showed that such favouritism – unavailable to other creditors – weakens the incentives of derivatives counterparties for market discipline, as they do not need to cater to counterparty solvency, as the cases of AIG, Bear Sterns, and Lehman suggested.⁷² Despite its role in the financial crisis, ISDA remained the private regulator par excellence in global derivatives contracts: it collaborated with the eighteen largest banks and the FSB for the adoption of the Resolution Stay Protocol, which is yet another indication of the regulatory role that ISDA plays in the derivatives market via its MA.

However, and crucially for our purposes, ISDA managed to remain relevant in the post-crisis landscape by adopting an adaptation strategy that focused on more intensive and swift standardization of key contractual terms for credit default swaps (CDS) and other trading terms for other types of products and processes such as interest rate swaps. Furthermore, through the creation of the CDS determination committees (DC), ISDA has also become the de facto arbiter of credit event questions globally. After the controversy this governance issue sparked, in 2018, ISDA transferred the role of credit derivatives DC secretary to DC administration services, Inc. (DCAS). However, although ISDA no longer participates in the DC process, DCAS is a Delaware-incorporated subsidiary of ISDA.⁷³ In addition, it appears that DCs continue favoring the seller side in the composition of committees, even if a supermajority if required.

If anything, the examples mentioned above exemplify the resilience of private regulatory bodies overtime and the existing difficulties for financial regulators, be it public- or private-driven, to move toward a paradigm shift despite the significant losses from the most recent financial crisis. The inherent complexity of a given industry certainly plays a crucial role in the type, timing, and determination of public intervention. Financial regulators must make regulatory and supervisory choices, as the “human factor” and personal judgment can have far-reaching repercussions on financial institutions. As regulators are risk-averse, complexity of a given industry can lead to limited intervention.

1.2.4.2 Manufacturing

Similar instances can be traced in manufacturing, whereby the proliferation of private standard-setters has grown at a rapid pace in the last three decades. Product safety became the prerogative of private bodies (companies and associations thereof) that have proactively sought participation and influence in setting standards and confirming compliance therewith.⁷⁴ Some of these private bodies, such as the ISEAL Alliance, have built coalitions to also assume a meta-governance role in that they develop codes that govern the conduct of private standard-setters such as the Forest Stewardship Council (FSC) or the Marine Stewardship Council (MSC).⁷⁵

Private meta-governance initiatives in areas such as fair labor (the Joint Initiative on Corporate Accountability and Workers’ Rights or JO-IN), sustainable tourism (the Global Sustainable Tourism Council or GSTC), or organic agriculture (the International Task Force on Harmonization and Equivalence in Organic Agriculture or ITF) and environmental labelling (ISEAL) have gained significant traction in the last two decades.⁷⁶ In practice, however, it is not always easy to distinguish the benign intentions from a strategy of growing dominance that allows occupying the relevant field of meta-governance.⁷⁷

The proliferation of private schemes setting voluntary food safety standards is a recent phenomenon that can be traced back to previous food crises that grew out of consumer wariness of food quality and safety.⁷⁸ As quality and safety became more important and NGOs calling for increased responsibility and accountability by retailers became stronger and more vocal,⁷⁹ the emergence of such schemes that expand the scope of self-regulation was inevitable.⁸⁰ Additional reasons for such emergence were the increased awareness of the importance of brand protection, the need to minimize reputational costs,⁸¹ the possibility for the creation of new markets for certified products,⁸² the growing outsourcing and the global diffusion of the production by supply chains that call for better monitoring, and, a fortiori, standardization as a logical step once best practices at the upstream level that streamline processes have identified.

Voluntary sustainability standards (VSS) specify requirements that producers, traders, manufacturers, retailers, and, increasingly, service suppliers (such as the standards created by the Global Sustainable Tourism Council) may be asked to meet. Such standards may relate to a particular aspect of the production process or be otherwise concerned with various stages until the product reaches the consumer.⁸³

VSS schemes differ on three dimensions: on governance (including the governance arrangements and actors involved, the regulatory mechanisms, and the strategies in place), on the content of standards (social and/or environmental), and the market coverage and potential for growth.⁸⁴ Such schemes have come to the forefront not only because of the breadth of areas that they cover (such as forest management, agriculture, or mining) and the novelty of the criteria they highlight (ranging from social issues to greenhouse gas emissions to the protection of biodiversity) but also because of their organizational resourcefulness and the institutional breakthroughs that they allegedly advance: bottom-up and inclusive, participatory platforms that sometimes bring together State actors, NGOs, trade unions, corporations, and private parties; experimental governance methods; benchmarking and continuous impact assessment reviews.

However, food-related crises were not prevented from occurring. From the mad-cow/BSE disease to the food and mouth disease to the horsemeat scandal, crises have shaped the VSS landscape and called for regular changes in the rules of the game. When reviewing more recent crises, the State may maintain oversight, but it remains unclear as to how much control and effective supervision the public authorities actually exercise, as the private regulatory landscape becomes increasingly convoluted and multifaceted (often with retailers playing a dubious role in production, standard-setting, and certification)⁸⁵ and by implication contests the State legitimacy and ability to regulate food safety.⁸⁶

1.2.5 The Role of Crises, Regulatory Disasters, and Tipping Points in Challenging Resilience

Exogenous crises (but also internal heated situations such as intra-institutional conflicts or inter-institutional pluralism and ensuing competition)⁸⁷ that amount to tipping points are opportunities for organisms and systems to test and demonstrate their resilience. A crisis brings disorder with it: it is a moment of – often severe – mutation that leads to a rapid and intense oscillation of a given process or system. It typically is a moment at the interstices of regularity in that it follows the business-as-usual process and time period. Such a critical moment is expected, depending on its severity, to allow for recovery or the establishment of a new status quo. However, it may lead to disruption and the collapse of the system as well, depending on the system’s resilience and internal dynamics.⁸⁸ For the final repercussions of such a critical moment, whether the crisis is endogenous or exogenous is critical. An endogenous critical juncture may follow from an exogenous episode that shakes and raises doubts about the fundamentals, object, and purpose of a given system due to new ideas, revelations about the functioning of the system in a previous period or other new information that calls for a reorientation of the system as a whole.⁸⁹

A crisis is not necessarily a moment of decline for a particular system. Crises can be of a varying magnitude, thereby affecting the choice of the moment of intervention against the disturbance. In that case, internal dynamics and past behavior is a significant variable. Organization studies have identified several characteristics and safeguards that institutions may have to ensure the continuation and recovery of a given system in times of uncertainty. For instance, an important feature of such a system would be its intrinsic value for those attached to it. The more established a system is the lower transaction costs will be (e.g., those relating to enforcement of private norms).⁹⁰ The possibilities that members have to raise their voice and be part of a potential way out of the crisis is another significant variable.⁹¹ Another feature relates to the cultural construction of the institutional preferences in a given system, which may allow taking advantage of an uncertain situation to promote reform and even normative change strategically.⁹² Docility of the actors involved and the system as a whole is also an important trait allowing for the continuous fitness of a given system.⁹³

Whereas actions, decisions, or omissions of individuals may play a decisive role for a crisis to occur, the organizational context where individuals and systems interact and affect each other is important.⁹⁴ Individual responsibility and behavioral bias may be significant in all parts of a failing regulatory chain.⁹⁵ However, focusing on individuals alone may lead to drawing only incomplete lessons from a crisis. Often, inadequate training and skills of senior staff; incentive-related challenges that do not align with the goals of the regulatory system at issue; poor leadership and oversight management; and lack of or inefficient internal communication and coordination channels within and among the relevant stakeholders in the system, including in the vertical axis regulator-regulatee, are common causes that lead to regulatory disasters.⁹⁶

Regulatory disasters and crises are quite significant in understanding institutional dynamics and resilience-related strategies. Yet events of lower scale can also bring about disruptive changes within institutions in the medium run and therefore are worth examining if we are to describe a more comprehensive picture of the complex private standard-setting ecology in manufacturing and finance. Thus, depending on the institutional and organizational context, certain turning points within organizations are decisive moments to test adaptability and change, including regime interaction and disruptions due to State-driven actions.

1.3 Free Riding of Private Ordering

1.3.1 The Initial Rise to Authority

The retrenchment of public authority in recent times is inextricably associated with the ideational continuity and appeal of neoliberalism. Free trade, competition, liberalization, and laissez-faire are essential features of a neoliberal dogma, mediated through law,⁹⁷ which increasingly limits the powers of the State. The latter may focus on greater social obligations, in line with the ordo-liberal ideas that strive for a strong role of the State in certain areas and otherwise a facilitative function when it comes to market governance. As described earlier, this results in the failure of the State to get a handle on private rule-making bodies, also due to intermittent crises and unpredictable episodes, which keep the public-driven entities busy with remedying the consequences of such events. Arguably, this creates ideal conditions for opportunism by private rule-making bodies. In practice, a crisis event allows private bodies to consolidate their autonomy and move forward with proactive usurpation of regulatory power.

Crises, unfortunate regulatory disasters, and broader institutional changes in a given organizational ecology are the triggering points that empower such private-driven forces or generate new ones, whereas existing checks and balances and a rigid approach toward the enforcement of rule of law fail their initial purpose. Such private-driven forces are virtually uncontrollable vis-à-vis their alleged principals, the States. The initial delegation mandate of powers or the enhanced oversight-related responsibilities that the State may have in theory are not sufficient to reverse such a situation. Potential cooperation with the State is not the outcome of orchestration by the State whereby governmental actors steer interactions to improve regulatory performance. After all, orchestration at the transnational level is difficult and costly;⁹⁸ rather, it arguably is yet another expression of a strategy to increase the terrain occupé of private authority. That moment of increasing authority would occur in the wake of intermittent crises when the possibility for opportunism is at its highest, as the State and public-driven entities are in their most vulnerable phase, busy with alleviating the negative impact of such crises.

When delegation of regulatory power backfires, the State takes most of the blame in the public opinion⁹⁹ and acts through extreme instruments such as bailouts or the enforcement of import bans. However, in the meantime, a peculiar organizational progeny evolves apace “in the shadow of the State,”¹⁰⁰ detached from political constraints, which is difficult for the State (in its capacity as principal) to reverse due to substantial network effects that accompany the creation of new governance structures, coordination challenges among their overseers (principals),¹⁰¹ political interferences that call for a light-touch regulatory and supervisory approach,¹⁰² or cognitive constraints that the regulators face and that lead them to inferences that are often skewed by systematic information processing biases.¹⁰³ The fact that such public regulatory and supervisory authorities enjoy policy and bureaucratic autonomy exacerbates such phenomena,¹⁰⁴ as such independence is contained by ideological, operational, and communicative factors.¹⁰⁵

We term the underlying phenomenon “free riding of private ordering” and are interested in the evolutionary process that nourishes private authority in finance and manufacturing activities. Arguably, the use of this theoretical construct has sufficient analytical power to cast new light upon the social processes of authority transformation described in this chapter rather than being a mere example of a trend that it seeks to explain.

Free riding refers to an individual or group that benefits from group actions without bearing the corresponding share of the costs incurred by the group or without contributing any efforts or sources to the beneficial group actions. Typically, free riding is discussed in the political theory but also the trade policy literature to explain intrinsic motivations of political or social groups in influencing (trade) policy formulation.¹⁰⁶ The pioneering work in this field is by Mancur Olson, who revised the prevailing theory at the time, which would preach the virtues of very large groups, to instead suggest that small group size allows for better coordination and more optimal outcomes.¹⁰⁷

The concept of free riding and its features relating to the enjoyment of the benefits of collective action without incurring the costs is particularly appealing for our purposes. We argue that, in the two areas of manufacturing and finance that we study, such free riding has been reactive for the most part. More specifically, it is the result of a process whereby, at the initial stage, private bodies respond favorably to calls for assistance conveyed by the State; these could entail, among others, the creation of hybrid partnerships or engaging in co-regulation.¹⁰⁸ One example among many is the private and hybrid European governance fervor that followed the European Commission’s White Paper on Governance in 2001 – itself a reaction to a regulatory disaster at the time.

For our purposes and according to the vernacular we use here, free-riding has occurred in that private bodies benefited from increased legitimacy without however internalizing the costs of, first, acquiring this legitimacy and, second, regulatory disasters with substantial financial consequences for taxpayers. Typically, in such situations, the State will bear virtually all costs associated with this occurrence (a result of moral hazard that agency creates). This free-riding is even more astonishing if one considers that private bodies are also responsible – at least in part – for such catastrophic events.

1.3.2 The Transition to Proactive Free-Riding

As exogenous crises disturb the balance of distribution of authority to public and private actors, it appears that significant power shifts with potentially long-standing effects take place. We submit that, in recent times, we witness a transition from a phase of reactive free-riding, that is, a process where private bodies were offered authority by the State, toward a phase where private bodies actively seek and claim authority by a worn-out State that is occupied with addressing the effects of a crisis within the society. We argue that proactive free-riding has become a growing empirical phenomenon, which emerges out of several decades of bounded rationality, untested theories of uncontested technical superiority, the ideational flexibility of neoliberal rhetoric, and an increasingly globalized – and stateless – economic activity that domestic laws fail to regulate due to their non-extraterritorial application.

Proactive free riding is VEA’s very manifestation at the transnational level. The success of proactive free riding derives from the core rule-making activities that such private bodies undertake, notably the continuous promulgation of voluntary standards that are promptly prepared, adopted, and diffused to preempt rules by public rule-making competitors and thus ensure increased authority and continuous dominance.¹⁰⁹ Paradoxically enough, this phenomenon is particularly manifested and appears to grow stronger in the wake of regulatory failures and even disasters that raise doubts against the adequacy of the regulatory philosophy in a given field and the aptitude and fitness for purpose of private authority.¹¹⁰ Against all odds, reclaiming authority in that material time comes at a relatively low cost.

More and more, private bodies take advantage of the procrastination of the State, grow stronger, and create norms more assertively in a strategic manner, overriding and even substituting for State powers. Regulatory disasters leave them intact. Rather, such crises constitute opportunities to accumulate wisdom and develop the capacity to expect the unexpected, absorb it, and grow.¹¹¹ Absent organizational hierarchies, formal accountability structures, scrutiny, pressure, and obligation, private bodies enhance their collective memory and identity and eventually use a critical shock to become grow stronger.¹¹²

Proactive free riding results from a lengthy process of volatility and shifting authority in complex regulatory areas where complex adaptive organizations are present. Private power accumulation is a continuous process that starts with the delegation (explicit or tacit) of power and thus the transfer of legitimacy to a private body. Thereon, through rule-making and intensive drafting of standards, the private body accumulates knowledge and builds trust toward its addressees as a reliable interlocutor.

Crucially, whereas the values and objectives of a complex adaptive system of this type are aligned, the characteristics and motivations of the group as a whole are not necessarily homogenous. Rather than this being an inhibitory factor, heterogeneity allows a particular group to overcome distress and adversity, thereby enhancing its resilience. In line with the discussion above relating to and the lessons drawn by the study of resilience of ecosystems,¹¹³ diversity and heterogeneity are important traits for any group that aspires to harness its complexity for its benefit and establish solid foundations for exercising such authority over the long run.¹¹⁴ Such traits appear to equip a given group with sufficient flexibility to be shielded from internal challenges of due process and balance of interests and external attacks of arbitrariness and lack of legitimacy.¹¹⁵

In a given turning moment, the critical transition occurs: the private rule-making body overrides State power and reigns over a regulatory field, thereby slowly creating a new hierarchy; in other words, a different equilibrium and stable state of authority in a system.¹¹⁶

Much of proactive free riding is detached from any particular territory. Such free riding is led by powerful transnational elites that reinforce their independent norm-creating authority and expand the group of these norms’ addressees,¹¹⁷ gradually moving into the creation of legal authority and the production of authoritative collective action. In this emerging constellation, the State and the private bodies are no longer complements but rather substitutes (Figure 1.1).

Figure 1.1. The evolution of free riding on authority

How can one explain the mismatch between the expectations vis-à-vis public supervisory authorities and their lack of action? First, as we argued earlier, it appears that path dependencies and the irreversibility of delegation weakens their leverage. Supervisory authorities often make irrational decisions and adopt similarly irrational processes in their supervisory tasks. Additionally, cognitive biases developed during the interaction with the regulatee negatively affect the enforcement of existing laws and the appetite for decisive and timely action.¹¹⁸ It has been argued that such inaction may be the result of cultural capture, that is, the interaction of supervisors with interest groups that increases industry influence through certain mechanisms.¹¹⁹ Second, on the brink of a crisis, regulators and supervisors are occupied with reflecting on how to address and lessen the effects of the crisis. Eventually, stricter regulations that follow are frivolously enforced or the regulators have recourse to cosmetic changes, a type of indulgent regulation that allows for the maintenance of a system that turns random disruptive advantage to lasting advantage for private bodies.¹²⁰

1.4 An Emerging Agenda toward a New Theory of Private Collective Action

Driven by globalization, the ambitious progeny of transnational VEA seems to be in need of harnessing in the sectors discussed above and under certain circumstances. To do so, revisiting existing theories of private collective action, including the concepts, actors, and processes of private governance in finance and manufacturing in the light of what preceded, offers an exciting vista of the contemporary regulatory landscape in finance and manufacturing. To do so, however, meticulous empirical, longitudinal studies are an important prerequisite for any intervention with an ecosystem that has shown its resilience in multiple occasions.¹²¹ Such studies need to be balanced and contextualized; VEA encompasses not only the type of free riding described earlier but also some of the most creative forces of private nature and rule ingenuity (think of codes of conduct, bylaws, guidelines and recommendations, performance and design standards, and other persuasion-based instruments) for centuries now.

Based on insights by complexity and resilience theories as well as law and economics and behavioral sciences, our analysis above suggests that certain properties need to be present for a system to reach the tempting stage of proactive free riding: such private rule-making bodies must have at least four types of different capacities: to grow, develop, survive, and renew. Thus, the system at stake should display a certain level of internal energy for activation, that is, available resources, information (for instance, feedback loops), and entrepreneurial and innovative leadership to start growing and invest in structure-building, notably a constellation that is relatively straightforward (for the capacities of the system) to scale. The latter will be the result of experimentation, stable network connections, internal trust-building, and dependencies: all of them important ingredients for the system’s stable foundations.

Furthermore, in order to develop further, the system should be sufficiently self-organized to store information and capital that was acquired in the phase of growth with a view to strengthening its qualitative indicators. The system would also be keen to continued development, which may be crucial for persisting through a crisis event. In the wake of a crisis event (which is inevitable although its scale is unknown ex ante), a system would need to improvise to maintain vital functions. The previous accumulation of resources and innate characteristics of the system structure will allow for leadership (both existing and emergent) to invest effort for the survival of the system, leading to new knowledge, new forms of adaptive capacity, and, ultimately, resilience.

At this stage, modularity (the low levels of interdependence among components, which can still maintain a system’s collective memory); diversity and heterogeneity (in function, in order to allow for leadership to emerge if needed, and in responses, to allow for short-notice varying action); as well as the ability for effective communication, information intermediation, and swift but robust decisions (such as new creation of standards and organizational rules) increases the likelihood of survival through crises. The subsequent renewal phase may lead to a reorientation of the system, drawing on lessons taken.¹²²

It is exactly the moment that proactive free-riding may take place, which, however, depends on several variables, including the strength and determination of the private body when adopting new or modifying existing standards in an expedited manner as well as the strength and determination of the overseer to act upon a crisis event. In practice, one often gets the impression that rational public regulators, overseers, and even judges, constrained by political conditions and boundaries (including demands for swift action by an aroused public), massive uncertainty, bounded rationality and path dependencies, but also awareness of their own ignorance, hand the reins to private parties and hope for the best too often too easily.

Admittedly, the complexity of the two issue areas of finance and product safety we identified earlier does not help paint a candid image of the internal dynamics and the relational fabric of social interactions among the different actors and stakeholders. Both modern finance and food or technological product safety entail some of the most complex dynamics, structures and patterns, and interactive processes. However, whereas private regulatory entities, many times acting in unchartered waters full of uncertainty and risks, fail in their mission, the State and its public agents will rarely exercise coercion vis-à-vis private regulatory bodies and even less reclaim authority to protect the public interest.¹²³ Sometimes, these bodies will struggle to survive and eventually may disappear. However, if such bodies dissolve or lose part of their authority, it is not because of State intervention but rather because they lose in relevance, as new, typically private-driven, contesters emerge, many times internally, with a view to regaining strength.¹²⁴

The new type of VEA that we witness is quite anarchic as much as it is conservative. Just like every evolving entity, its current preferences, structures, mechanics, and methods bear similarities with previous iterations of rule-making activity. However, it also displays innovative characteristics that nourish its resilience and dominance. Low connectivity, high diversity, and possibilities for collaborative learning, as well as strategies of system innovation, smoothened transition, and identity building are important attributes that render private regulatory bodies stable.¹²⁵

The standard-setting activities of these bodies active in the areas of manufacturing and finance are directly related to crises of varying scales that may even lead to regulatory disasters. Safety and innovation in technology-laden products or financial instruments heavily rely on the smooth functioning and stability of such bodies. Arguably, whereas delegation of power contributes to their empowerment, crises allow them to capitalize on certain tipping points that strengthen their status and influence. While existing literature describes the dynamics among standard-setters, it fails to shed light on the possibility for a commonality of mind among actors in a given private regulatory body (or a group thereof) to exploit the weaknesses of the State at times of crisis. Yet it is quite striking that, in these complex ecosystems, periods of crisis were almost immediately followed by intensive, fast periods of expedited standard-setting by private bodies, thereby enlarging the breadth and reach of their output, which would typically come in the form of standards. This new form of antagonistic private ordering deserves closer attention and research, as it may allow for opening the black box of economic governance and the evolution of contemporary private collective action.

1.5 Conclusion

In what preceded, this contribution offered the contours of a new conceptualization of the resilience of private authority, particularly in the aftermath of crises. It argued that existing theories of delegation, orchestration, and private collective action fail to explain satisfactorily the survival of certain private regulatory bodies, notably in the fields of finance and product safety. Rather, the resilience of such bodies needs an alternative explanation that portrays more accurately the innate characteristics, mechanics, and dynamics of certain private bodies active in the regulation and governance of economic activity. In stressing the centrality of the role, the effects of, and the reactions to crisis events, that is, tipping points that call for a paradigm shift in regulatory patterns and modi operandi, the above analysis aspires to recalibrate the study of private governance. The empirical study of crisis events, we argue, is key in understanding the resilience of private governance and may allow unraveling the reasons for an ever-increasing transfer of power to private regulatory bodies. Crucially, the chapter described the contours of a new theory of proactive free riding of private regulatory forces that use regulatory episodes as catalysts for gaining more regulatory power to the detriment of the State.

We hypothesized that the secret for the success of such free riding activity lies at two core features of resilient systems: the first relates to heterogeneity in membership, sources, and crisis responses – conflicting interests that manage to identify common denominators that allow things to keep going for the common (private) good; and the second relates to the core standard-setting activities of such private bodies and the rapidity with which such activities occur in the wake of a regulatory catastrophe in the field of finance or manufacturing and product safety. In that respect, we introduced VEA, yet another strategic effort by private bodies to maintain and increase the terrain occupé of their regulatory power by means of promulgation of voluntary but forceful standards.

2 Between Public and Private Heterarchy in an Age of Intangibles and Financialization

Philip G. Cerny and Rosalba Belmonte

2.1 Introduction

In the twenty-first century, world politics is becoming increasingly multi-nodal and characterized by heterarchy, namely the predominance of cross-cutting sectoral mini- and meso-hierarchies above, below, and cutting across states.

In this context, states are becoming “reactive states” as their capacity for “proactive” policymaking and implementation are eroded. This process is leading to an uneven spectrum of market/hierarchy or public/private de facto policymaking processes and diverse types of “capture” between a range of private actors and meso- and micro-hierarchies, institutions, and processes. The result is the decreasing capacity of macro-states to control both domestic and transnational political/economic processes. At the same time, global regulation is increasingly fragmented, whipsawed between transnational and subnational private special interest groups, leading to potential crises at a complex range of nodes and levels.

The core of this process is the triangulation of (a) the “disaggregated state,”¹ (b) fragmented global governance and “regime complexes,”² and (c) “sectoral (or functional) differentiation” in the international political economy.³ Functional differentiation, which is organized around economic sectors with different “asset structures,”⁴ increasingly cuts across state borders, enmeshing both state and non-state structures and actors in what have been called “third-level games” – political, economic, and social – that transform the nature of the state itself. What new forms of functional differentiation might evolve at global/transnational levels? Global governance (the transnational “political sector”)? Domination by a transnational capitalist class or global markets (the transnational “economic sector”)? Global civil society – or an amorphous “neomedievalism” or “durable disorder”?⁵

It can be argued that economic factors came to be the most significant variable in the consolidation of nation-states. The first industrial revolution transformed the United Kingdom into the first economic superpower. This led other protostates to consolidate in competition with other emerging states on both levels, especially in Europe, where the nation-state system developed and spread its organizational model internationally through innovation, trade, and empire.⁶ More important historically, however, was the second industrial revolution, in which the combination of the consolidation of nation-states and the large factory system in a range of cutting-edge industries led to new forms of international competition.

These developments, both market-based and monopolistic/oligopolistic, gave rise to hierarchically organized state-economic complexes and, indeed, to social and institutional reorganization along the interacting lines of capitalist hierarchies and Weberian bureaucratization. The state, therefore, has nevertheless been seen as centripetal in the evolution of economic and socio-political life⁷. This conceptualization of the state has been dominated not only by empirical state-building processes themselves but also by the perception among mass publics that states, despite their disadvantages, are normatively the best way to organize political life. Furthermore, state-building has long been associated at least since the Enlightenment with notions of progress and modernity, whether liberal, capitalist, or socialist. Debates about the relations between business and politics have centered on this problematic.⁸ In the twenty-first-century world, however, the capacity of states to effectively regulate the world political economy is being eroded from above, below, and cutting across borders. Regulatory authorities are increasingly characterized by private sector–dominated institutions and processes, especially in the financial sector.

2.1.1 Beyond State-Centrism: The Dialectic of Globalization and Fragmentation

A range of diverse governance processes are increasingly integrated into complex, heterogenous ways to other interactive, overlapping, and/or competing processes and institutions – what we elsewhere call “heterarchy.”⁹ Furthermore, globalization itself is all too often perceived to be a structurally homogenizing process, requiring new forms of intergovernmental cooperation or global governance. Dimensions of homogenization are said to include economic globalization, the ideological hegemony of neoliberalism,¹⁰ socio-cultural convergence, technological innovation and change, liberal internationalism and global governance, and the emergence of a particular kind of so-called flat world.¹¹ Normative calls for a world state follow this logic – so-called global governance.

Therefore, in a world that is increasingly characterized by complex interdependence, states, domestic political systems, and public policymaking are vulnerable to cross-cutting and intersecting independent variables they cannot control. In the structural environment of the third (and/or fourth) industrial revolution(s),¹² and the complex forces undermining neoliberal globalization and the state, whether ideological, social, or material, there is also a trend toward developing diverse forms of neoliberalism from the quasi-democratic to the authoritarian.¹³

This structural transformation revolves around the interaction of fundamental technological transformations and the interrelationships of business and politics in an ever-evolving dialectic of globalization and fragmentation.¹⁴ These transformations involve a wide range of economic processes that include information and communications technologies (ICT), new forms of research and development (R&D), the shift of investment from expensive and hierarchical production processes to profit-making through distribution and the embedding of a consumer culture, artificial intelligence, digitalization, the advent of Big Data, the increasing use of algorithms,¹⁵ robotics, the growing vulnerability of labor processes and their replacement by flexibilization of diverse kinds,¹⁶ and the transformation of finance to “financial alchemy,” including increasing dependence on debt and leverage or credit. The businesses that adapt successfully to these changes are crucial in shaping the relations between business and the “reactive state.”

Political agency is therefore no longer defined by interest groups seeking out the levers of state power, because these levers are seen to be largely impotent or politically suspect.¹⁷ Related to this turn from the state is “deterritorialization” or the “poverty of territorialism.”¹⁸ Structural homogeneity between state and society in specific geographical/territorial locations, crucial to the unitary coherence of the nation-state, is being undermined by cross-border linkages.¹⁹ In particular, the kind of strong, secure borders that are supposed to characterize the sovereign nation-state are becoming impossibly porous and in many cases more analogous to fluid, premodern “frontiers.”²⁰ The increasing complexity of this system raises questions about whether this complexity will lead to endemic conflict or a “durable disorder” in which key actors are engaged in various forms of “brokerage” to smooth over the underlying dysfunctionality of the system.

One way to conceptualize these processes is thinking of them in terms of the kind of ongoing process that Rosenau calls “fragmegration”²¹ – the dialectic of globalization and fragmentation in a “postinternationalist” world. The European Union, for example, is in continual structural quasi-crisis, trying to deal centrally with plural tensions between the local and the transnational dimensions. Indeed, the United States has always been characterized by internal socioeconomic division.²² Furthermore, austerity and the erosion of the rights of labor are undermining the mid-twentieth-century social contract on which the welfare state and liberal democracy have been based.²³ Political leaders in unstable states are either engaged in attempting to restore authoritarian repression, as in Russia, China, Egypt, and Turkey, or are ensnared in the breakdown of the political system, as in Brazil, Venezuela, and a range of African countries, leading the emergence of quasi-authoritarian populism, including what has been called “personalist autocracy.”²⁴

Rationalities of marginal utility have transformed statehood itself into a marketizing, commodifying process²⁵. Furthermore, the state has itself become a promoter of financialization rather than welfare or social democracy, prompting the financialization of society itself – replacing decommodifying welfare and public services through austerity and undermining the potential for what has been called the “entrepreneurial state” concerned with providing public goods.²⁶ Nevertheless, the state continues to be the primary provider of welfare programs, and finance cannot do without it either, for a host of public goods rely on finance for credit.

Actors develop and maintain particular institutions and structures over time. Society and polity shape our interactions through people and material processes that connect them.²⁷ They take place through our interactions with the computers, logistics, and groups of people “next” to us in an increasingly intangible world of “capitalism without capital.”²⁸ The process is itself nonlinear and causally complex.²⁹ For example, actors and political processes can only react to price changes that are independently produced by market and institutional transactions, many of which are increasingly automated, and certain sectors like communications and social media require further regulation. What governance levels would be necessary for such regulation? Would it be effective? The United States and the European Union are dealing with this question through different and contrasting approaches, with the European Union paradoxically taking a more comprehensive and centralized approach with one main regulator, whereas the United States has maintained its divided regulatory system among a range of sectorally specific regulatory bodies.

Furthermore, actors’ social positioning shapes their range of possible responses to material processes in multi-nodal fashion³⁰. For example, information and communications technologies that circle the globe also create the potential for backlashes of diverse kinds as awareness of global-level problems, inequalities, and instabilities spreads through our everyday practices. Indeed, business actors are sometimes not only captured by preexisting state-based structures and practices but paradoxically also see them as valid reactions to globalization and transnationalization – what Bohas and Morley call an “anomic mindset.”³¹ The dialectic of globalization and fragmentation thus decenters the state itself by placing it alongside and competing with other social and economic groups and organizations – rather than above the social and below the international.³² Strategic actors are able to mobilize resources, ideologies and mindsets, and knowledge to take advantage of the constraints and opportunities and to pursue their interests. This has led to the consolidation of a range of “extra-state authorities”³³ and regime complexes across a range of institutions and processes including “low-capacity states,” fragmented global governance and oligopolistic, sectorally differentiated quasi-corporatist policymaking and regulatory and policy implementation processes.

These embed the “privileged position of business”³⁴ and transnationally powerful interest groups, including intangible sectors such as ICT,³⁵ banking, and finance, etc., as well as transnational corporations, supply chains, and other linkages transcending and undermining state territorial and economic boundaries. States themselves have sought to benefit from these transformations by sponsoring the competitiveness of domestically located firms, leading to transnational oligopolization and rent-seeking.³⁶ Paradoxically, the state is not shrinking in size, but the “macro-state” is less and less structurally dominant and bureaucratically effective in the face of these meso-state, micro-state, and trans-state apparatuses.

Crucial in this restructuration process are a range of private sector–dominated regulatory agencies. For example, in the derivatives market – the “world’s biggest market” – regulation is provided by such bodies as the International Swaps and Derivatives Association (ISDA), central counterparties (CCPs), trade repositories (TRs), and other bodies dominated by “dealer banks” (the G16), which do not constrain speculative trading, ignoring “calls for bans on derivatives products that were particularly associated with destabilizing speculative trading such as ‘unattached’ (or ‘naked’) CDS contracts [credit default swaps] in which the purchaser does not hold the underlying bond to which the contract is linked.”³⁷ In other words, the only form of regulation that it is possible to institutionalize is dominated by private sector firms and actors. Recent history suggests that the development of an effective global governance structure as a way to reorganize world politics is increasingly unlikely, even moving in the opposite direction.³⁸ Biermann et al.³⁹ refer to the “fragmentation of global governance architectures” as the dominant trend in the twenty-first century.

In this context, the globalization/fragmentation dialectic opens up those processes to precisely the kind of special interests that have been identified in the long-standing critical domestic interest group, elitist, corporatist, and neopluralist literature of the twentieth century⁴⁰. And the proliferating literature on multinational corporations and transnational production chains, the advances of information and communications technologies, and, in particular, the power of quasi-globalized financial markets and institutions⁴¹ demonstrates that global governance itself can be even more vulnerable to whipsawing, bypassing, capture and manipulation, even corruption, than the traditional domestic public policy sphere. Lindblom⁴² refers to this as “the privileged position of business”.

At the core of these processes, furthermore, is the hybridization of the public and the private. Key actors – the more powerful economic interest groups, state actors in particular issue areas, certain NGOs, etc. – have differing and sometimes conflicting interests. In this heterarchical political process, actors depend upon the capacities of real-world, cross-cutting “interest” groups – including both “sectional” (or “material interest”) and “value” groups,⁴³ civil society groups, NGOs, and social movements – to manipulate constraints, to identify and take advantage of opportunities, and to shape new directions through processes of competition, coalition-building, “forum shopping,” or “venue shopping” and the like. What is new, however, are the rapidly evolving transnational linkages among groups in a growing range of overlapping transnational webs of power. The most important movers and shakers are no longer simply domestic political forces, institutions, and processes but transnationalizing ones: whether in terms of economic interdependence; social interconnections, migration, the movement of people, and transnational awareness through world communications and social media; relationships of violence and force (including terrorism); “transgovernmental networks” cutting across governments themselves; problem-solving “epistemic communities”;⁴⁴ technological change from the Internet to a growing variety of human activities; ideological conflict and competition; and a whole range of other deep trends.

Governance itself is therefore being transformed into a “polycentric” or “multinucleated” global political system operating within the same geographical space – and/or overlapping spaces – in ways analogous to the emergence of coexisting and overlapping functional authorities in metropolitan areas and subnational regions.⁴⁵ In the economic sphere, post-Fordist forms of production based on flexibilization have transformed “techniques of industry,” labor markets, finance, and the like, thus leading to a “capitalism without capital.”⁴⁶ The particular shape a transformed international system is likely to take will be determined primarily by whether particular sets of groups⁴⁷ that are able to exploit the structural resources or political opportunity structures available to them take advantage most effectively in a period of structural flux.

Key sets of groups that have in the past been closely bound up with the territorial nation-state and state actors themselves are increasingly captured instead by transnational sectors. These actors do not merely set state agencies and international regimes against each other – a process sometimes called “venue shopping,” “forum shopping,” or “regulatory arbitrage.”⁴⁸ They also cause them to try to network in an increasingly dense fashion with their peers in other states and simultaneously instill them and their transnational private/public links in state elites too. Among the major losers are trade unions and other groups with few transnational linkages and less clout in an intangible economy where labor has become more “flexible” and, indeed, “commodified,” although they are sometimes still in a position to obtain compensatory side payments from national governments.

Operating in such a changing world is leading to new problems of management and control, what Lake has called “the privatization of governance”⁴⁹ and others have identified as the emergence of “private authority” in international affairs. Private actors decide the rules of their conduct and act to ensure order in the markets, facilitate trade, and protect private property.⁵⁰ Institutions and formal processes of global governance do not have the direct sanctioning power that has been at the core of state development in the modern era – especially in the form of Weber’s “monopoly of legitimate violence.” In the meantime, the sovereignty of states is only partially and unevenly pooled through the development of intergovernmental institutions and processes – what authors often refer to as the concept of “soft law.”⁵¹

Significant issue areas, including accountancy, auditing, and corporate governance, have witnessed ongoing negotiation processes among firms; private sector organizations representing particular industrial, financial, and commercial sectors; as well as governments and international regimes, in order to reconcile conflicting standards and move toward a more level playing field. Also, decision-making processes related to many significant issues moved from elective arenas to places presented as politically neutral with the consequence of a loss of political character of such issues and the annihilation of divergences and conflicts within the field of political actions.⁵² Consequently, it is becoming more and more difficult to organize politically effective resistance to globalization as such, especially in the more developed capitalist states, although recent examples of the growth of populism on both right and left has been at the forefront of recent politics.

Furthermore, in an era where states compete to attract foreign direct investment, transnational corporations can make strategic actions independently of the interests of the countries in which they operate. Also, they have an increasing role in law-making processes that they exercise through lobbying activities. Often, they turn to practices of self-regulation, private governance, risk management, and alternative dispute resolution.⁵³ Their resources come from private sources – even if governments very often support transnational corporations (TNCs) through public investments and favorable tax conditions⁵⁴ – and are used to earn profits for a restricted circle of actors that in most cases are involved in private decision-making processes. At the same time, transnational financial agencies operate in several economic-financial fields, including the insurance, accountancy, and risk management sector, affecting the allocation of resources between social groups, national economies, and commercial enterprises.⁵⁵ Indeed, they assume an institutional role consisting in ensuring trust among participants in economic-financial transactions⁵⁶.

2.1.2 Sectoral Differentiation

In this context, different sectors at different levels and organizational structures play differentially powerful roles in this process. Analysts including Gordon,⁵⁷ Piketty,⁵⁸ and Stiglitz⁵⁹ have argued that the third and fourth industrial revolutions have reduced the profitability of the real economy, leaving capitalists fewer alternatives to financial manipulation to gain income and wealth compared to the second industrial revolution era,⁶⁰ leading to growing inequality and economic instability.⁶¹ This process, combined with the increased capacity of transnationally linked financial special interests and pressure groups to lobby and capture state and international policymaking agencies and processes, leads to an uneven heterarchy of the kind we have elsewhere labeled “transnational neopluralism.”⁶² Also, this process includes reorganizing political institutions, realigning political forces and coalitions, reforming policy processes, and restructuring ideological space, thus reinventing the social dimension of politics through new policy and coalition “spaces” populated by a wide range of new and old political actors in both the developed and developing worlds.

These new political processes are therefore differentiated more by sector and issue area than by physical, geographical, or territorial space. They involve a combination of vertical, horizontal, and diagonal restructuring of institutions and policy domains. In purely economic terms, this means that firms with extensive specific assets are more efficiently organized through quasi-monopolistic, hierarchical governance structures.⁶³ The key dimension here concerns the configuration of interests, characteristic of the industry, or activity concerned. There are essentially two aspects of this dimension: the mobility of physical capital and cross-border price sensitivity.

In firms and sectors that are highly integrated or linked into such structures and processes, especially where there is a “world market price” for a good or asset that determines local prices, lobbying pressure from firms in that sector and from industry organizations is likely to be organized through flexible “pentangles” (coalitions that include transnational actors from outside the national “container” and which operate at the transnational level to influence global governance processes) rather than simpler iron triangles.⁶⁴ The politics of key issue areas like financial regulation can play a catalytic role in reshaping global economics and politics as a whole, imposing their particular market and policy structures on other sectors and issue areas too.

2.1.3 Finance and Politics in the Twenty-First Century

Finance plays a unique role in the processes outlined above, and financialization is a key independent variable in the structuration of business-politics relations over the past half century. Unlike the “real economy”, finance is the ultimate intangible sector, because it links and shapes all the others. On the one hand, economic and social progress have required the development of finance and money to grow. In this sense, finance and politics can be seen to be mutually interdependent, with effective policymaking requiring support for the development and institutionalization of finance in order to pursue wider social and political goals and to develop systemically relevant structures and processes, both macroeconomic and microeconomic. Without finance, whether private or public, there would be no economic development. On the other hand, however, the creation of financial instruments and the evolution of financial markets in a range of circumstances can permit finance to become autonomous from the real economy and to develop a dynamic of its own.

However, the contemporary evolution of finance and money since the middle to late twentieth century is unique in history. We will examine three distinct but inextricably intertwined trends and variables that are shaping the relationship of politics and finance today. Together they are making finance more independent, opaque, and disconnected from the real economy than ever.

The first of these structural trends is the restructuring of the world political economy around the transnationalization of special financial interests. The second is the structuration of the financial sector itself through the development of a range of complex financial instruments, especially securitization and derivatives, which disconnect finance from the real economy and therefore from political and social objectives. The third trend involves the wider political context and impact of government and transnational regulation of finance.

This leads to various attempts by the “reactive state” and overlapping and competing transnational “regime complexes” to manage the workings of the financial system in ways that support that system and its market mechanisms. These attempts not only led to the Global Financial Crisis (GFC) of 2007–2008 but also have continued in its aftermath.⁶⁵ In this context, we will consider a range of crucial social and political consequences of what has been called “financialization.”⁶⁶ The evolution of the world political economy is widely seen as increasingly problematic and dysfunctional as a result.⁶⁷ The role of finance in the world economy has been evolving in the general direction of financialization since the 1950s.⁶⁸ There have been several factors driving this process:

• growing trade and pressures on the international system to reallocate capital across borders as a result, with the postwar financial system becoming more flexible and extensive;

• domestic budgetary and other pressures on the postwar welfare state, leading to policies of budgetary belt-tightening and to neoliberal economic policies across various levels and sectors;

• leveraging – of the role of debt – in both the domestic and the international financial systems, including the ideology of “financial inclusion”;

• and the predominance of new financial instruments and institutions like securitization and “shadow banking,” which will be examined more closely in Section 2.1.4.

In the post–World War II period, the internationalization of banks and the increasing flow of financial assets across borders led to pressures for significant structural changes in the international financial system. Most writers focus on the emergence of the Eurodollar market in the 1950s and 1960s, in which a combination of international pressures and the role of domestic institutions – originally involving the Midland Bank in the United Kingdom – led to increasing regulatory tolerance for American financial assets, especially those obtained outside the United States, to be deposited in the United Kingdom, outside the scope of US regulations. This process encouraged and reinforced increasing cross-border financial flows in general, augmented politically as well as financially by the tradition of sterling as an international currency and the historical role of the City of London as an international financial center. In this context, financial firms and institutions developed strategies consistent with the wider process of globalization. Indeed, transnational finance has often been identified as the key independent variable driving globalization.⁶⁹

Furthermore, one of the approaches that several important authors have taken is to apply the theories of Hyman Minsky.⁷⁰ He argued that financial crises are endemic in capitalism because periods of economic prosperity encouraged borrowers and lenders to be progressively reckless. This excess optimism creates financial bubbles and the later busts. Therefore, capitalism is prone to move from periods of financial stability to instability. This is a type of market failure and needs government regulation. It is the flexibility, complexity, and opacity of finance that gives it its strength and significance in controlling and coping with political and bureaucratic processes such as regulation and, in particular, crisis management, especially in the context of the “Great Recession” of the mid and late 2000s.

2.1.4 The Development of Financial Instruments and Institutions

As financial flows expanded in the postwar period and virtually exploded in the 1980s and 1990s and since, financial firms and actors sought to devise new ways of trading on increasingly complex financial markets, moving away from traditional trading processes and structures including established stock and securities markets. This trend required several developments in the nature of the tradable instruments. The first was flexibility – the ability to trade an increasing range of instruments in a growing array institutional and noninstitutional public and private markets and informal quasi-market networks. The second involved the “tradability” of those instruments, namely their widespread acceptance and use in an interconnected range of settings from the local to the global. The third involved widening the range of financial market actors, from financial firms themselves to households and individuals, which has been called “financial inclusion” or “the financialization of daily life.”⁷¹ The fourth has been the restructuring of the overarching financial industry itself into fewer and fewer “SIFIs” – systemically important financial institutions, both controlling the overall process and strengthening special relationships with regulators.⁷² The fifth required the extremely rapid expansion of leverage to finance these developments, rather than redistributing profits or assets from the real economy.⁷³ The sixth has been the doctrine of “shareholder value” capitalism, in which the first priority of all firms is the making of profits that are transferred to shareholders rather than reinvested in a real economy firm’s production and exchange processes that include labor and other “stakeholders.”⁷⁴ The final development, probably the most controversial, has been said to be the consolidation of a new form of rentier capitalism, in which profits are skimmed off by financial elites, impeding rather than enabling growth in the wider economy and leading to increasing inequality.⁷⁵ This final trend is also sometimes said to enable and entrench illegal activities and the rigging of economic and financial outcomes, what Veblen called “sabotage.”⁷⁶ As the result of this set of developments, Sawyer argues that the twenty-first-century financial system is “dysfunctional.”⁷⁷

The financial instruments at the core of the process are not technically new but have been dramatically expanded in the context described above. They mainly involve “securitization” and “derivatives.” Traditional banks, both commercial and investment, operated on the basis of what has been called “originate-to-hold.” In both cases, those banks keep the financial instruments they deal with on their books. In contrast, what have been called “non-bank” financial firms and institutions restructure and sell the instruments they originally “own” in a range of formal and informal financial markets. They transform them into new kinds of securities in a process known as “securitization” and the value of those securities comes from the prices they attract as well as their salability in various formal and informal markets.⁷⁸ Derivatives, in turn, are securities the value of which does not derive from the original securities themselves but from their being based on the market value of these securities themselves when bought and sold. They are, in effect, insurance policies on the prices and market value of the securities from which they are “derived.”⁷⁹

Securitization is a complex process in which the original securities themselves are “sliced and diced” into “tranches,” namely segments created from a pool of securities that are divvied up by risk, time to maturity, or other characteristics in order to be marketable to different investors. Each tranche of a securitized or structured product is one of several related securities offered at the same time but with varying risks, rewards, and maturities to appeal to a diverse range of investors. Different tranches will have different credit ratings, appealing to different buyers with senior tranches for the highest and safest credit ratings, junior tranches for the riskiest ratings, and mezzanine tranches for a generally small intermediate category. Typical investors of senior tranches tend to be conduits, insurance companies, pension funds, and other risk-averse investors. Junior tranches are more risky investments because they are not secured by specific assets. The natural buyers of these securities tend to be hedge funds and other investors seeking higher risk/return profiles.

Tranches allow for the “ability to create one or more classes of securities whose rating is higher than the average rating of the underlying collateral asset pool or to generate rated securities from a pool of unrated assets.”⁸⁰ This is accomplished through the use of credit support specified within the transaction structure to create securities with different risk-return profiles. The equity/first-loss or junior tranche absorbs initial losses, followed by the mezzanine tranches, which absorb some additional losses, again followed by more senior tranches. Thus, due to the credit support resulting from tranching, “the most senior claims are expected to be insulated – except in particularly adverse circumstances – from default risk of the underlying asset pool through the absorption of losses by the more junior claims.”⁸¹ Some tranches are sold and traded separately and some as parts of single, combined securities.

Virtually the whole political economy literature on securitization and derivatives discusses their complexity, opacity, and disconnectedness from the real economy. However, in the context of the free market, neoliberal and deregulatory ideology of national governments, and transnational regime complexes⁸², such financial instruments and processes are still treated lightly and warily by both policymakers and regulators. A crucial part of these developments is the transformation of the financial institutional infrastructure itself. Increasingly important over time is the restructuring in recent years of banking and other financial institutions and markets and the macrofinancial and microfinancial structural shifts involved, adapting ways of doing things from the “shadow” sector in order to compete.

The highly institutionalized commercial and investment banks described above have historically been the core of traditional financial systems and until recently have been highly regulated and insured by governments in order to underpin the stability of the system as a whole. This was particularly true of the US Emergency Banking Act of 1933, which divided up commercial and investment banking and administered them separately. In particular, the act set up the Federal Deposit Insurance Corporation to underpin the commercial banking sector, insuring deposits originally of $2,500, increased over the years to six deposits in different accounts of $250,000, for a total of $1,500,000 in 2011. While these banks are still propped up by the US Government, they have increasingly had to compete with what PIMCO (Pacific Investment Management Company) executive director Paul McCulley at a FED (Federal Reserve System) annual meeting in 2007 called “shadow banks.”

Nesvetailova provides a useful definition of the difference:

While, for instance, traditional banks are assumed to be taking in short-term deposits and converting them into long-term loans, shadow banks do the opposite: they take in long-term savings (e.g. pension fund liabilities) and transform them into short-term savings. If traditional banks take in liquid deposits (e.g. cash and similar instruments) and transform them into less liquid securities, shadow banks do the opposite: through a combination of financial and legal operations they transform illiquid assets (such as mortgages or car loans) into apparently liquid financial securities.⁸³

In other words, shadow banks have not only used securitization and derivatives to make greater profits than is available in traditional banking but indeed have triggered a system-wide change in the nature of finance. The authors cited in this chapter and many others have noted that the way shadow banks have done business over recent decades has forced the reconstruction of traditional banks too. In order to compete, other institutions have to jump on the bandwagon because that’s where the money increasingly goes, creating “long and opaque chains of credit intermediation.”⁸⁴

This is particularly true of what are called “universal banks,” which originate consumer and corporate loans, package loans into asset-backed securities (one of the major dimensions of the securitization process) and what are called “collateralized debt obligations” (CDOs), create over-the-counter (OTC) derivatives whose value are derived from loans, and distribute the resulting securities and other financial instruments to investors. Furthermore, complex financial institutions have used the OTC strategy to maximize their fee income to reduce their capital charges and to transfer the risks associated with securitized loans to investors. Other structural shifts include the setting up of Special Purpose Vehicles (SPVs), Structured Investment Vehicles (SIVS), and other nonregulated, quasi-independent institutions in which to park, especially less profitable or endangered securities the markets for which have slowed or shut down. Regulated banks in effect become shadow banks because they had to restructure and become opaquer and complex in order to compete.⁸⁵

A major consequence of rise and dominance of shadow banking therefore concerns the shift of investing from cash and investment in the real economy to the circulation of the purely financial instruments described above. For example, pension funds have grown dramatically as the result of the shift from defined benefit to defined contribution pensions (the result of the declining power of labor unions in the real economy), along with money market mutual funds (MMMFs), hedge funds, etc.⁸⁶ Thus, there are two tendencies: the accelerating pace of financial innovation and the capture of monopoly-like rents through “‘shrouding,’ or embracing complexity.”⁸⁷ In other words, growing demand for profitable investment increasingly creates more and more supply because of and facilitated by the abstract nature of finance itself.⁸⁸

The future of governance of the financial system has not been resolved and some argue the concerns may be growing and intensifying as regulatory stopgaps unravel. All national governments and regional organizations such as the European Union have considered and even attempted to implement a range of regulatory changes in the financial sector, and all of these have been critically scrutinized and found wanting. Furthermore, the Dodd-Frank Act of 2010 in the United States has been seen as in some ways counterproductive because of (a) maintaining competing regulatory bodies (in the United States) that have different approaches, (b) leaving actual regulation-making to these bodies in the future, resulting in partiality and whipsawing, (c) insufficient transnational convergence,⁸⁹ and (d) limitations on the capacity of the Financial Stability Oversight Council (FSOC) to create policy consistency. Indeed, The Trump Administration engineered a partial rollback of Dodd-Frank in 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act. Finance is the hegemonic sector in the structural transformation of the simultaneously globalizing and fragmenting intangible economy.

2.2 Conclusions

A central debate in the business and politics issue area is whether the growing significance of intangibles in the real economy, along with nonproductive financialization and regulatory arbitrage are (a) crowding out investment in the real economy; (b) whether the “intangible” economy is itself creating new forms of monopolization that do not require the kinds of financial investment characteristic of the nation-state–supported second industrial revolution; (c) leading to greater inequality and political backlashes such as populism;⁹⁰ (d) creating a growing level of over-indebtedness and leverage, from real economy firms to financial firms that will lead to chronic Minskyian crises; and (e) whether nation-state governments are limited to “firefighting” and “bailouts” to salvage national financial systems – that is, the “reactive state” rather than the “proactive state.”

The future of business and politics as the twenty-first century unfolds is thus potentially unstable and increasingly procyclical, with various levels of uneven heterarchical quasi-governance lacking the institutional capacity to shape the system as a public good. While the contributors to this volume show that private actors can exert a positive influence, they also give us reasons to be skeptical about private actors’ ability to deliver public goods. In the context of banking and finance, various authors have diverse partial policy prescriptions. For example, D’Arista⁹¹ argues that financial institutions need stress tests to be based on cash reserves rather than capital requirements; Guttmann⁹² argues for revising the International Monetary Fund’s Special Drawing Rights and giving them a greater international role; and Roos⁹³ argues for the greater use of debt default to tackle overleveraging, especially of sovereign debt. Nesvetailova and Palan⁹⁴ argue that “sabotage” will ultimately be necessary to tame Minskyian tendencies. However, as the proverb goes (variously attributed to at least two dozen people, from Niels Bohr and Yogi Berra to Woody Allen and Confucius): “Prediction is difficult, especially about the future.” The unevenness and complexity of the rapidly evolving system of heterarchy in world political economy is laying the groundwork for future crises at multiple overlapping and interacting levels as the reactive state becomes more and more ineffective at regulating finance – and other sectors – in a “postinternationalist” world.

3 Corporations and the Making of Public Standards in International Law The Case of China in the International Telecommunication Union

Jan Wouters

3.1 Introduction

The present contribution has been inspired by a recent regulatory battle in a specialized agency of the United Nations (UN),¹ the International Telecommunications Union (ITU). The theme is particularly rich to illustrate some fundamental questions underlying the relationship between private and public actors and standards in international law, in particular, issues of corporate capture, democratic legitimacy and accountability, and human rights. It is also, from another point of view, a fascinating tale about the rise of China within the UN system; about how Chinese technology corporations are actively proposing new international standards on a number of issues, including a new internet protocol and rules on facial recognition, through international regulatory agencies like the ITU; and how Western governments, including the European Union (EU) and its Member States, have rallied to counter the Chinese offensive.² While their actions are officially inspired by concerns for the protection of personal data and the privacy of individuals – in other words, by human rights – there are other matters at stake, including the question of corporate influence in public standard-setting bodies, the coherence with existing standards, and, last but not least – and not within the purview of this contribution – the preservation of Western normative dominance.³

We start with situating the recent regulatory battles in the ITU (Section 3.2) and delve subsequently in the other issues: corporate influence in public standard-setting bodies (Section 3.3), democratic legitimacy and accountability (Section 3.4), and human rights (Section 3.5).

3.2 The Battle for Facial Recognition Standards and a New Internet Protocol at the ITU

3.2.1 China’s Choice for the ITU

The ITU is one of the oldest global regulatory agencies.⁴ Originally founded as the International Telegraph Union in 1865 to promote cooperation among international telegraphy networks, the ITU has contributed for more than 150 years to the connectivity, interoperability, and standardization of telecommunications, from the use of the Morse code to satellite communications. As a UN specialized agency since 1947, it has evolved into a unique platform for global public–private partnerships and has firmly embraced the corporate sector and other stakeholders, proudly announcing on its website that its “global membership includes 193 Member States as well as some 900 corporations, universities, and international and regional organizations.”⁵ More accurately, there are two types of members: 193 Member States and the 900 “Sector Members.” Since 1994, Sector Members are allowed to formally participate in the decision-making processes of the ITU and since 1998 they are recognized as having formal rights of participation under the ITU Constitution.⁶ The ITU has three sectors: Radiocommunication (ITU-R), Telecommunication Standardization (ITU-T), and Telecommunication Development (ITU-D). Corporations or organizations may become a member of one or more sectors and may join as a Sector Member or Associate.⁷ Importantly, much of the regulatory dynamics in the ITU starts in “Study Groups,” which are renewed every four years. Each of these Study Groups, in which “thousands of experts representing government, industry and academia” participate, is responsible for progressing ITU work in a specific field of the ITU’s mandate; they develop the technical basis for ITU agreements, standards, and reports. The mandates and leadership teams of each Sector’s Study Groups are decided by the Sector’s respective governing bodies, that is, the Radiocommunication Assembly (RA), the World Telecommunication Standardization Assembly (WTSA), and the World Telecommunication Development Conference (WTDC).⁸ It has been observed by members of delegations to the ITU that ITU standards – which typically take around two years to be developed – “are increasingly written by companies, rather than governments”.⁹

It is in this context that China has displayed a remarkable drive to shape international standards, reflecting “long-standing concerns that Chinese representatives were not at the table to help set the rules of the game for the global Internet.”¹⁰ The country is known for sending the largest delegation to the ITU’s Study Groups, including Huawei and other state-owned enterprises. Huawei itself is said to have introduced some 2,000 new standard proposals to ITU Study Groups on topics such as 5G, cybersecurity, and artificial intelligence.¹¹ More in particular, since the autumn of 2019, through quite a number of its technology corporations, China has been pushing two initiatives in the ITU: (i) a new standard for facial recognition and (ii) a new Internet Protocol (“New IP”). It was the Financial Times that disclosed on December 1, 2019, that a battle was looming within the ITU regarding the shaping of facial recognition standards.¹² The newspaper reported that

Chinese technology companies are shaping new facial recognition standards at the UN … as they try to open up new markets in the developing world for their cutting-edge technologies. Companies such as ZTE, Dahua and China Telecom are among those proposing new international standards – specifications aimed at creating universally consistent technology – in the UN’s International Telecommunications Union (ITU) for facial recognition, video monitoring, city and vehicle surveillance.

Another Financial Times article, of March 2020, discusses China’s attempts since September 2019 to convince ITU delegates of the need to construct an alternative form of the Internet. It explains why the ITU has been chosen for these two initiatives. As a global organization of 193 Member States and one of the oldest specialized agencies of the UN, it is seen as the de facto standards body for telecoms networks:

Standards produced there legitimise new technologies and systems in the eyes of certain governments – particularly those in the developing world who don’t participate in other internet bodies. Ultimately, they give a commercial edge to the companies who have built the tech they are based upon.¹³

It is said that African states in particular tend to follow ITU standards as they do not have the resources to develop standards themselves.¹⁴ Moreover, such standards “are commonly adopted as policy by developing nations in Africa, the Middle East and Asia, where the Chinese government has agreed to supply infrastructure and surveillance tech under its ‘Belt and Road Initiative’” (BRI).¹⁵ Chinese corporations – particularly Huawei, Hikvision, Dahua, and ZTE – supply AI surveillance technology in sixty-three countries, thirty-six of which have signed up to the BRI.¹⁶ It is also known that Chinese corporations are supplying surveillance infrastructure to countries in Africa, including Angola, South Africa, Uganda, and Zimbabwe.¹⁷ It has been observed that

while European and North American businesses participate heavily in the standards bodies such as the Internet Engineering Task Force (IETF), the Institute of Electrical and Electronics Engineers (IEEE), and the 3rd Generation Partnership Project (3GPP), the ITU gives China a chance to leverage its influence in Africa, the Middle East and Asia, where ITU standards are often adopted as policy.¹⁸

While it is often thought that standard-setting organizations like the ITU, the International Organization for Standardization (ISO), or the Electrotechnical Commission (IEC) operate on a mere technical basis with a view to reaching worldwide interoperability, it has been highlighted that their decision-making processes are more political than expected.¹⁹ It is clear that the Chinese government – notably through the upcoming China Standards 2035 strategy²⁰ – is pursuing a strategy of increasing influence in international organizations, particularly throughout the UN system,²¹ and that it is linking this to the offensive interests of its business enterprises, especially in technologically advanced sectors involving 5G, facial recognition, blockchain,²² and AI. China has recently spread its influence rapidly in the most important organizations for technical standards: Zhao Houlin was secretary-general of the ITU from 2015 to 2022;²³ Shu Yinbiao is president of IEC since 2020; and Zhang Xiaogang was president of ISO from 2015 to 2018.²⁴

3.2.2 China’s New IP proposal

In September 2019, Huawei Technologies Co. Ltd. (China), China Mobile Communications Corporation, China Unicom, and the Chinese Ministry of Industry and Information Technology proposed to the Telecommunication Standardization Advisory Group (TSAG) of the ITU to study the radical idea of a New IP, that would replace the current TCP/IP (Transmission Control Protocol and Internet Protocol).²⁵ In its proposal, Huawei asserted that the current IP is unsuited for the development of new digital applications, for which the development of a new protocol is needed. It therefore suggested the Study Groups of ITU-T to start a further long-term research in the then ongoing (2017–2020) and the next (2021–2025) study period.

In the meetings of the TSAG from February 10 to 14, 2020, this proposal (which has been given the new title “New Vertical Communication Networks”) encountered critical reactions from Dutch and United Kingdom internet registries. They argued that internet protocols have been developed in a “bottom up” manner and that relevant work is taking place in the Internet Research Task Force (IRTF) and in the IETF.

In the course of 2020, discussions took place in various ITU-T Study Groups, as they are the ones preparing proposals for new study questions to be decided at the WTSA meeting that was scheduled to take place in Hyderabad, India, from March 1 to 9, 2022.²⁶ The Chinese New IP proposal was discussed in Study Group (SG) 11 (“protocols and test specifications”) and SG 13 (“future networks”). The United Kingdom, the EU, and its Member States objected to the proposal for a variety of reasons. They saw no evidence that the current standardization setting had failed in developing new internet functionalities nor that foreseeable requirements, such as those linked to the development of AI, Augmented and Virtual Reality, or Internet of Things (IoT), risked being insufficiently addressed. They also expressed their preference that new protocols and standards be discussed in the relevant Standards Development Organizations (SDOs)²⁷, in particular in the IETF, where the decision-making process is transparent, bottom-up, and open to all stakeholders (including industry, civil society, and academia), rather than in the ITU, where decision-making is top-down, intergovernmental, and does not involve all stakeholders. Duplicating work at the ITU could lead to higher costs and undermine interoperability. They also expressed the concern that implementing the Chinese proposal for a top-down, incumbent-controlled internet would bring a high risk of fragmentation of the global internet into locally controlled intranets, of decreased network resilience, and could seriously harm the openness of the global internet. This would not be in line with the European vision for the Internet, which is one of a single, open, neutral, free, and un-fragmented network, supporting permissionless innovation, privacy, and user empowerment.²⁸

At an ad hoc meeting of SG 13 on December 11, 2020, around 100 Chinese participants participated, strengthened by Burundi, which on behalf of ten African countries expressed support for the Chinese proposals. They encountered fierce resistance by all EU Member States, the United States, the United Kingdom, Canada, and Japan. At the next plenary meeting of SG 13, it was found that there was no consensus for the project, and the discussion was ended.

3.2.3 China Telecom’s Proposal for Standards on Facial Recognition

China Telecom introduced a proposal for a new “framework standard” through a document entitled “Requirements for face recognition application in visual surveillance” in ITU SG 16 (“multimedia”). Already in the spring of 2020, the European Commission raised a number of important concerns. The draft recommendation foresees the use of face recognition for a wide variety of use cases, for both public and private bodies, for example, to confirm the identity of a suspect, for police checks of identity cards, for criminal fugitives, transport, entertainment, employee attendance, trajectory tracking, etc. However, it does not contain any safeguards for the protection of personal data and privacy of individuals. From a European perspective, such a lack of safeguards is very problematic regarding its compabitility with the EU’s General Data Protection Regulation (GDPR).²⁹ As the draft recommendation cannot be implemented within the EU (and more broadly the European Economic Area, EEA) and could have a negative impact on transfers of personal data of European to third countries that implement this standard, the Commission strongly submitted that it should be considered under the ITU’s Traditional Approval Process (TAP), which applies to all recommendations with policy or regulatory implications, rather than through the Alternative Approval Process (AAP) proposed by China.

The Commission’s concerns, expressed at a virtual meeting of SG 16 in April 2020, were shared by the United States, Canada, and Australia, which also highlighted the very political implications of the draft recommendation and questioned the mandate of the ITU to adopt norms in this field. In a later contribution, Romania added to the concerns by pointing to the specific risks for fundamental rights of facial recognition techniques, arguing that ethical boundaries and principles needed to be defined, setting clear criteria and limits, before standardization could take place. It also referred to serious concerns expressed by other UN entities, such as the Office of the UN High Commissioner for Human Rights,³⁰ pointing to the fact that the ITU is part of the UN family and its values. We will come back to this latter point (Section 3.5).

At the meeting of SG16 of December 14–16, 2000, China Telecom pushed again for the Study Group to consider the proposal and accept the new standard. Twenty EU Member States, the Commission, the United Kingdom, Canada, the United States, Australia, and Japan mobilized and expressed their disagreement. Interestingly, the meeting was chaired by a staff member of China Telecom, who seems to have had difficulties accepting the lack of consensus.

3.2.4 Interim Evaluation

As is clear from the above, the two Chinese proposals concerned have, for the time being, been blocked in the ITU context by a mobilization of Western countries. The latter have become alarmed by China’s tactics, consisting of having Chinese corporations launching at first sight technical proposals in ITU Study Groups that, seemingly, are aimed at pushing through China’s vision on new technologies and the Internet. It can be expected that China will learn from the recent experience and will seek to fine-tune its strategy and approach. The massive investment of resources, including human resources – compare the presence of 100 Chinese participants at SG 13 in December 2020 – the involvement of lobbyists and chairs of Study Groups, and concerted outreach to developing countries, especially in Africa, have made a deep impression on China’s Western counterparts. However, in spite of concerted opposition of Western countries, it can be expected that China and the Chinese corporations and experts concerned will reiterate their proposals – possibly with some minor modifications – at future ITU meetings, capitalizing on their strong presence and influence over other delegations.

3.3 Corporate Influence in Public Standard-Setting Bodies

The developments detailed in Section 3.2 may raise eyebrows from the viewpoint of the integrity of the standard-setting process in international organizations.³¹ How can it be that corporate actors, such as powerful Chinese tech giants, have such an impact in the standardization work of the ITU? To be fair, there has always been a huge corporate role – directly or indirectly, openly or discretely – in the elaboration of technical standards by international organizations. Büthe and Mattli have observed that the key to successfully setting standards in such organizations is that governments and business corporations from their countries (often through domestic standard-setting bodies) “speak with a single voice.”³² For a long time, these organizations have been used by Western countries to exert and perpetuate their normative influence.³³ While the close intertwinement between the Chinese government and Chinese businesses may work particularly in China’s advantage, Western countries have also been teaming up with their businesses. In essence, China presents a case of what Büthe and Mattli call high “institutional complementarity”:

firms operating in a hierarchical and coordinated domestic system are likely to win because their system fits more naturally with the global structure, where a single regulator is the clear focal point. Such a domestic system enables a country’s stakeholders to speak with a single voice and in a timely fashion on the global stage …. High institutional complementarity implies that the interaction between domestic and global institutions is smooth and easy, yielding decisive strategic benefits to the firm in terms of effective interest representation in global rule-making and timely information.³⁴

Nevertheless, the question arises whether decision-making processes in public international organizations should not provide for a number of safeguards in this respect. The UN and other multilateral organizations and processes have been accused of “corporate capture” in a number of instances. The latter concept includes not just policy and legislative interference by corporations but also “revolving door” practices where corporate employees act as (or are part of a team of) government representatives in multilateral processes and forms of economic diplomacy where States prioritize corporate interests.³⁵ Cynically, such corporate capture has apparently also been nurtured by the

growing dependence of multilateral institutions on private funding, product of governments’ failure to pay their ordinary contributions to multilateral institutions, their earmarking of funds for issues that advance their (and their corporations’) interests and falling tax revenues/public funding during the era of neoliberalism.³⁶

The problem is definitely more widespread than the ITU, and it is not within the purview of the present contribution to come up with overarching suggestions to tackle it. It is nevertheless interesting to point to recent work of the OECD in this respect, which has engaged in a thorough exercise to map best practices in the standard-setting work of international organizations (IOs), including regarding stakeholder engagement.³⁷ The 2021 OECD report “Compendium of International Organisations’ Practices: Working towards More Effective International Instruments” acknowledges that such engagement constitutes a valuable tool to make international instruments more trusted, implemented and complied with, and to strengthen their ownership. However, it adds to this:

many IOs continue to face significant challenges in engaging with relevant stakeholders in a meaningful and inclusive manner, and reconciling transparency and effectiveness of discussions in the development of international instruments. Stakeholder engagement can be resource intensive, and IO staff may encounter difficulties in investing the necessary time and human capital …. Like in domestic rulemaking, there is a risk of capture of the engagement process by those who have sufficient resources to exert influence.³⁸

While the OECD report contains valuable examples of the practice of various international organizations regarding their engagement with stakeholders, both of a non-decisional and decisional nature, it concludes that, “despite the undeniable efforts of a large majority of IOs to engage more systematically with stakeholders, their practices in terms of mechanisms, openness and frequency of consultation vary widely from one organisation to another” and that “few IOs have developed a whole of organisation policy or strategy for stakeholder engagement to date, mapping their stakeholders and defining objectives and key steps to engage them and manage risks.”³⁹ It looks like the ITU is in urgent need of such a “whole of organization strategy.” This can not only help avoiding cases of capture but also strengthening the legitimacy of new standards, as Buhmann has righthly argued:

the inclusion of non-state actors that are the potential holders of new duties, whether (soft law) responsibilities or (hard law) obligations, offers a risk of capture if the process is not carefully designed and managed, but also a possibility for support and output legitimacy, if it is well designed and managed. Participation in a process is important for participants to perceive their needs and concerns addressed, but participation must be equalized in regard to access and power in order to avoid the risk of capture and illegitimacy due to or actual or perceived imbalance.⁴⁰

3.4 Democratic Legitimacy and Accountability

It has almost become an evergreen to raise the question of the democratic legitimacy of international standard-setting processes, both within intergovernmental organizations and within private rulemaking bodies.⁴¹ But the examples above of recent regulatory battles in the ITU, in which Chinese technology corporations with the support of China have aggressively tried to have new international standards accepted on internet protocol and facial recognition must touch a raw nerve with democracy watchdogs, from parliamentarians to journalists.

In the more general debate on the legitimacy of international standards, a traditional distinction has been made between “input legitimacy” and “output legitimacy.”⁴² This contribution will not enter into that discussion but submits that nowadays legitimacy should be preferably understood as “democratic legitimacy” and that the democratic character of a norm makes it legitimate.⁴³ Democracy is indeed considered a most important framework of analysis for assessing the legitimacy of a norm – whether global or local, public or private.⁴⁴

As argued in an earlier publication,⁴⁵ democracy may be successfully conceived at the global level by promoting a link between regulation and public deliberations rather than relying on fixed social, institutional, or procedural preconditions.⁴⁶ This democratic link can be fruitfully thought of in terms of public accountability. Where regulatory authority is exercised by a governing entity and not by the people directly – as is the case when international organizations or private bodies issue global standards – democracy is ultimately concerned with the connection of such governing entity with the group of people that it intends to govern.⁴⁷ This democratic connection can be achieved through mechanisms of public accountability. The democratic character of a governing entity and of the rules it produces is a function of its accountability to the “public.”⁴⁸

This raises the following questions in relation to ITU standards: (i) what is the “public” and what is its role? and (ii) what does “accountability” concretely mean?

As to the public, it is submitted that, in a global context, it should not so much be considered as a “global demos” but rather in a deliberative-democratic sense, which must not necessarily be territorially defined or linked with particular nation-states but may be approached from a more functional point of view. The relevant public associated with a governing entity and its norms may be identified in relation to a particular issue, on the basis of an “affected” criterion.⁴⁹ A public in relation to a particular issue would encompass the circle of persons affected by that issue and by its being regulated, which are often called “stakeholders.” In an area such as internet protocol and facial recognition, such public will be extremely wide: it includes internet users of all kinds, both individual citizens, businesses and other private actors, as well as governmental actors, consumers, producers, and so on. The enormous size of the so-defined public leads to important problems of identification, representativeness, or feasibility in designing democratic governance processes.⁵⁰ Whereas those problems are real, they are not insoluble (especially in regard of the progress of information technologies), and in any case, they should not be used as excuses to disregard the public’s entitlement to democratic accountability in global governance.⁵¹

Turning to “accountability,” it has often been exclusively considered in a retrospective dimension, where it designates a relationship in which an actor – in our case the general public – may require that another – for example, a governing entity – render account of its activities and impose a cost on them as the case may be. In the democratic discourse, such views of accountability emphasize the control exercised by the public on governing entities.⁵² In democratic societies, the people must be able to control those who govern them,⁵³ and this may be achieved in many ways, following different channels.⁵⁴ This view of accountability is retrospective because it logically presupposes that the governing entity has already acted, or issued, and/or implemented norms before control may be exercised, and it tends to be sanctions- and redress-oriented.⁵⁵ However, for the purposes of this contribution, a more extensive view of accountability is advanced, by adding a prospective dimension to the retrospective one. While the retrospective conception focuses on the governing entity “rendering account” of its activities to the public, the prospective dimension insists on the necessity for the governing entity to “take into account” the preferences, interests, and concerns of the public in making government decisions and issuing public norms, through appropriate means. This side of accountability emphasizes the responsiveness that a governing entity must show to the public’s concerns.⁵⁶ It is most effectively achieved by means of mechanisms of inclusive participation,⁵⁷ which can take many forms, such as voting procedures to adopt particular rules (directly or through representatives) or public notice and comment procedures prior to making a decision.

In light of the foregoing, public accountability in democratic governance can be defined as the relationship of a governing entity to its public according to which the former must allow inclusive participation of the latter in its governing activities, in order to take account of the public’s preferences in making government decisions, as well as the relationship according to which the public is entitled to control and sanction a posteriori the governing entity for the way it has conducted its government functions (rule-making, rule-implementation, rule-enforcement, rule-interpretation). If such an accountability relationship is effective between the governing entity and the public, the norms issued by the governing entity for the purpose of regulating issues of concern to the public should approximate what is called “democratic” and hence have good chances of being viewed as legitimate.

Again, trying to operationalize responsiveness and control in very technical global governance regimes such as ITU standards on internet protocol and facial recognition may lead to practical problems given the sheer size and diversity of the public. In this respect, much attention is presently given to the incremental formation of a vibrant and variegated “global civil society,” for the explicit purpose of participating in the governing of the global public space.⁵⁸ In various domains, global civil society organizations, most importantly nongovernmental organizations (NGOs), have been quite successful in generating debate and in participating in the establishment of truly global sets of norms, either of a public or private nature.⁵⁹ The question is, however, the extent to which, and the ways to find out whether, such civil society organizations, through their participation in, and oversight of, global public deliberations, effectively represent the public at large.

Accountability, to function effectively, also needs other supporting principles to be put in place. Transparency is one of them and can be defined as the level of access enjoyed by the relevant public to information about, from, or concerning the governing entity and its activities. Without access of the public to such information, participation will be meaningless, and control will be curtailed.⁶⁰ This is why transparency is a major stake in struggles for increased accountability in global governance, even though it should not be understood as a component of the notion of accountability itself, as is sometimes done, but rather as an enabler of accountability.⁶¹ Another principle that is crucial for deliberation in global governance, as well as for retrospective control thereof, is that of stating the reasons for making a government decision.⁶² Stating reasons allows shedding light on the deliberative dynamics, and on the arguments at play, and makes the control of the norm and of the governing entity more objective.⁶³

The considerations developed above may be considered rather abstract. It is submitted, though, that they are essential in order to ensure the democratic legitimacy of global standard-setting practices, whether of an intergovernmental or private nature. It will require further in-depth research to apply them to, and effectuate them practically in, the ITU and other SDOs. As the recent developments in the ITU detailed in Section 3.2 narrate, there is a great practical need to do this.

3.5 Human Rights

While traditionally, the ITU’s work stood far off from human rights,⁶⁴ it has been rightly observed that in recent years, as the organization has become increasingly involved in internet governance and online communications, the link between its decisions and the human rights of end users have become much more obvious.⁶⁵ However, an important concern about ITU standard-setting processes is that they do not involve a human rights screening:

There are virtually no human rights, consumer protection, or data protection experts present in ITU standards meetings so many of the technologies that threaten privacy and freedom of expression remain unchallenged in these spaces …. When it comes to facial recognition [these standards are] extremely dangerous from a human rights perspective.⁶⁶

For that reason, it has been asserted that

the ITU, as a technical standards setting body, is not an appropriate forum for discussing privacy, which is ultimately a human rights issue. Other bodies have far greater expertise on privacy, and a much clearer mandate to discuss it: the UN Human Rights Council, Human Rights Committee and Special Rapporteurs, to name but three. If the ITU were to start determining what national laws, policies and regulations related to privacy looked like, this would be a real cause for concern, particularly given the restrictions on the rights to privacy that exist in many of the states which make up the ITU.⁶⁷

As Romania indicated in the discussions regarding China Telecom’s proposal for a new standard on facial recognition (Section 3.2.3), as part of the UN family, the ITU should uphold the fundamental values of the UN, including the respect and promotion of human rights. There is a strong legal argument to support this thesis. In 1947, the UN and the ITU concluded a cooperation agreement, which made the latter a specialized agency of the former. Article IV of this agreement explicitly obliges the ITU to allow for the submission of formal recommendations from the UN “having regard to the obligation of the United Nations to promote the objectives set forth in Article 55 of the Charter” and to enter into consultation with the UN on such recommendations.⁶⁸ In Article 55(c) of the UN Charter, the UN is tasked to promote “universal respect for, and observance of, human rights and fundamental freedoms for all.” One may submit that the ITU, as a member of the UN family, is bound to respect and promote human rights but also that there may be a case for the UN’s ECOSOC to develop recommendations about the need for integrating human rights concerns in all regulatory processes in UN specialized agencies, including the ITU, with possibly an important consultative role for the UN High Commissioner for Human Rights.

3.6 Concluding Remarks

If it had not been for the Financial Times’ repeated coverage (Section 3.2), the larger public and academia would probably not have heard about the recent regulatory battles regarding standards for facial recognition and internet protocol that have been going on in the ITU. This finding by itself is rather worrying: global normative power plays are taking place in UN agencies on issues that deeply affect the daily lives of peoples around the world, and most of us are not even aware of it. In this chapter, we situated these recent regulatory battles in the ITU and developed a number of reflections regarding the need to scrutinize the risk of corporate capture, the need to better safeguard democratic legitimacy and accountability, and the need for a stronger scrutiny of such regulatory processes from a human rights point of view.

It is said that the EU and its Member States have recently decided to upgrade their capacity and representation in ITU meetings, having been alarmed by the initiatives of China and Chinese corporations. It is one of the lesser known fallouts of Brexit, as in the past the EU relied strongly on the United Kingdom’s participation in ITU bodies. All of this constitutes a wake-up call. Apart from a deeper and more proactive engagement by Western governments in the work of the ITU, there is clearly a need for a much wider reflection on how to enhance the democratic legitimacy and accountability of its regulatory processes and on a more critical engagement with the role that powerful corporations play within those processes, whether or not in sync with their national governments.