Legitimacy Gaps in the World Economy: Explaining the Sources of the IMF's Legitimacy Crisis

Since the Asian financial crisis of 1997-1998, the International Monetary Fund (the Fund) has been embroiled in an international crisis of legitimacy. Assertions of a crisis are premised on the notions that the Fund's voting system is unfair, that the Fund enforces homogeneous policies onto borrowing member states and that loan programmes tend to fail. Seen this way, poor institutional and policy design has led to a loss of legitimacy. But institutionalised inequalities or policy failure is not in itself sufficient to constitute an international crisis of legitimacy. This article provides a conceptually-driven discussion of the sources of the Fund's international crisis of legitimacy by investigating how its formal 'foreground' institutional relations with its member states have become strained, and how informal 'background' political and economic relationships are expanding in a way that the Fund will find difficult to re-legitimate. The difference between the Fund's claims to legitimacy and how its member states, especially borrowers, act has led to the creation of a 'legitimacy gap' that is difficult to close. However, identifying the sources of the Fund's international crisis of legitimacy allows us to explore what avenues are available to resolve the crisis

Revolving doors and linked ecologies in the world economy: policy locations and the practice of international financial reform

Are rules for the world generated by international organizations' bureaucracies or private authority? Certainly both. This paper questions the utility of a distinction between international bureaucracies and transnational private authority, and points to how actors responsible for governing the world economy move between public and private roles. To help understand this ‘revolving doors’ phenomenon we borrow from Andrew Abbott’s work on ‘linked ecologies’, in which actors within different professional ecologies form coalitions to create alliance strategies in which they can propagate the relevance of their ideas and skills. If successful, an alliance between ecologies can take control of a policy ‘location’ - how a policy problem should be legitimately understood. We examine the benefit of linked ecologies approaches through two case studies of alliances competing for the best way to solve international financial stability issues, drawing upon interviews with practitioners from key international organizations and policy networks

Pragmatic numbers: how the IMF creates policy dialogue for financial reform

Do international organizations generate benchmarks and data as tools for policy enforcement or as tools of knowledge creation? This paper suggests the latter through a case study on the power of numbers in the International Monetary Fund’s (IMF) Financial Sector Assessment Programme (FSAP). While the IMF is typically viewed as an institution that enforces global standards for economic governance through the imposition of quantitative targets (‘numbers’), we suggest that its use of benchmarking tools through the generation of financial data actually serves as knowledge creation tool for policy dialogue. As such, the IMF’s program practices differ from their policy proclamations on the need for universal standards and transparency. Seen through a pragmatist lens, as often found in economic sociology, the IMF seeks to generate ‘learning by monitoring’ with member states within its broader international political and economic constraints. This process must yield to broader principal-agent dynamics in the IMF’s governance structure, as well as tip its cap to private market actors. But it is also not hostage to them. We suggest that the IMF’s use of ‘pragmatic numbers’ within FSAPs demonstrates one method by which an institution seeks to foster learning within an environment of noise and domination

Bringing legitimacy back in to neo-Weberian state theory and international relations

Within international relations one seldom finds discussion of how legitimacy affects ‘state capacity’—a state’s capacity to enact and adapt to domestic and international change. This is especially surprising for neo- Weberian approaches that have viewed state capacity as a major concern for over two decades. And although legitimacy was a key ingredient to Max Weber’s approach to the state, the concept is eschewed or ignored in the three discernible neo Weberian approaches to state capacity. The first two of these approaches, ‘isolated autonomy’ and ‘embedded autonomy’, produce functionalist view of a state which responds to an anarchical international system. The third, ‘social embeddedness’, conceives of the state–society complex as a contested rather than functional space but does not produce a substantive conception of legitimacy. I argue that a reinvigorated conception of legitimacy provides us with a substantive neo-Weberian ‘historicist’ approach that provides a deeper understanding of how both norms and material interests shape the state. This approach is applied to a brief case study of financial reform in the United States and Japan to illustrate that bringing legitimacy back in provides a better means of understanding state capacity

Mediating Private Capital with Public Values: The Everyday Politics of Mortgage Bond Systems in Denmark and the U.S.

Quasi-public institutions are significant but unsung players in the contemporary international financial order. What can be understood as quasi-public institutions (QPIs) have been created by states or private associations to provide a means of mediating private capital with public value, typically attracting domestic and international investment in order to foster and further a domestic agenda that has strong support from the broader population. As such they fit awkwardly with common perceptions of the international political economy as dominated institutions that reflect either state or market interests. QPIs do both and have emerged as institutional responses to domestic crises that then go on to have a role in shaping the world economy. QPIs that issue collaterized securities from mortgage credit, be they public or private in origin, reflect this institutional form given that their purpose is to bring together private capital and public value. This purpose also makes QPIs sensitive to everyday politics, given that they were created to reflect a broad social purpose rather than only elite interests. This article discusses the development of QPIs for mortgage bonds in a liberal market economy, the U.S., and a coordinated market economy, Denmark. I suggest that QPIs’ values have been challenged by de-regulatory and re-regulatory trends in recent decades. I suggest that QPIs call upon us to question how we identify actors in the international financial order as either public or private, and the importance of everyday politics in fostering institutional innovations that have significant knock-on effects for the world economy

Legitimacy Gaps and Everyday Institutional Change in Interwar British Economy

Who drives domestic institutional change in the face of international economic crisis? For rationalists the answer is powerful self-interested actors who struggle for material gains during an exogenously generated crisis. For economic constructivists it is ideational entrepreneurs who use ideas as weapons to establish paths for institutional change during crisis-driven uncertainty. Both approaches are elite-centric and conceive legitimacy as established by command or proclamation. This article establishes why domestic institutional change in response to international economic constraints must be legitimated by non-elites and how their everyday actions alter policy paths established in crisis. This is illustrated by re-examining a case frequently associated with punctuated equilibrium theories of crisis and institutional change: interwar Britain. In contrast to conventional explanations, I argue that the "legitimacy gap" between elite and broader public understandings about how the economy should work informed institutional experimentation during the 1920s and 1930s and fertilized the "Keynesian Revolution" of the 1940s

Policy Change in the Bank for International Settlements

The Bank for International Settlements (BIS) is the premiere international institution for the regulation of the world’s financial system. Originally established to handle German reparations payments, the BIS’s contemporary role is to provide global standards for prudential bank regulation and to facilitate information sharing among a range of state and non-state actors. While privately incorporated and underwritten by its member central banks, the BIS is fundamentally a service provider with quasi-non-governmental organization, ‘quango’, status. This paper traces the evolution of this unique international quango, stressing the development of the Basle Accords of 1988 and 2004, and how the BIS uses informal and formal networks of elite policymakers to create a normative consensus that compensates for its lack of formal enforcement mechanisms

Three Fevers and Two Tonics from Historical Sociology

Much of the literature in political economy seeks to capture an essential insight into the evolution of political and economic systems to provide a foundation for policy advice. This article suggests that attempts to nut out the kernels of change often restrict rather than expand policy imagination. Three "fevers" are identified as involved in the narrowing of policy imagination and two "tonics" are offered to widen it. The three fevers are: 1. viewing the present as natural; 2. seeing history as overtly path dependent; and 3. viewing history as driven by "Great Men". These fevers limit our capacity to see political, social, and economic changes that do not conform to conventional theories, as well as distorting our understanding of how the contemporary world works. What policymakers want, more than prediction or recitation of conventional theories, is context to understand how policy can be implemented. Historical sociology provides a way to generate information about contextual constellations through two "tonics": intentional rationality and social mechanisms. With the assistance of these tonics, historical sociology widens political economy's policy imagination

Resolving the International Monetary Fund’s Legitimacy Crisis

Since the Asian financial crisis of 1997-1998 the International Monetary Fund (the Fund) has been embroiled in an international crisis of legitimacy. Assertions of a crisis are premised on the notions that the Fund’s voting system is unfair, and that the Fund enforces homogenous policies onto borrowing member states and that loan programs tend to fail. Seen this way, poor institutional and policy design has led to a loss of legitimacy. But institutionalised inequalities or policy failure is not in itself sufficient to constitute an international crisis of legitimacy. This article provides a conceptually-driven discussion of the sources of the Fund’s international crisis of legitimacy by investigating how its formal "foreground" institutional relations with its member states have become strained, and how informal "background" political and economic relationships are expanding in a way that the Fund will find difficult to re-legitimate. The difference between the Fund's claims to legitimacy and how its member states, especially borrowers, act has led to the creation of a "legitimacy gap" that is difficult to close. However, identifying the sources of the Fund's international crisis of legitimacy allows us to explore what avenues are available to resolve the crisis