Coordinate & Conquer: A New Perspective on International ... · Web viewIn any case, the Method of Difference is an accepted, simple, and reliable tool for constructing a comparative

Coordinate & Conquer: A New Perspective on International Regimes

Ilya Shulman Cornell University

Ilya Shulman is currently a senior at Cornell University, where he is a double major inGovernment and Economics. He would like to thank Brian Bow for his outstanding assistance and invaluable mentorship.

Abstract

One consequence of the September 11th attacks was to focus attention on money laundering as a vehicle for delivering funds for terrorism and other crimes. In response, Congress passed the USA Patriot Act containing, among other things, a set of stringent anti-money laundering measures, compounding an already lengthy record of such legislation.

As American policy-makers recognize, to combat money laundering, a concerted international effort is necessary, since money laundering is, by its nature, a transnational phenomenon. Such international effort, however, may not always be taken for granted; it poses a classic collective action problem, which may only be overcome if states establish a framework for international cooperation. Accordingly, I was led to examine the present state of an international anti-money laundering regime intended to further cooperation in combating money laundering. I noticed, in particular, a striking feature of this regime that so far seems to have evaded public scrutiny. While domestically the U.S. appears to have a most exacting approach to curtailing money laundering, its record of compliance with the internationally established standard is nothing short of embarrassing. This result stands out as especially odd, if one takes into account U.S. leadership in creating the international regime and that its subsequent methodology was modeled after the American approach.

Confronted with this puzzling conclusion, I decide to broaden my perspective and look for an answer in regime theory, rather than in an ad hoc rationalizing of U.S. choices. Accordingly, based on a reconceptualized view of international cooperation, I advance a hypothesis that integrates traditional accounts of regime formation with an original analysis of my own, which helps rationalize otherwise overlooked and underexplained phenomena. Specifically, I attribute explanatory power to two factors: “incentive-compatibility” of

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domestic regulation under a certain international regime; and “agreement on means,” or consensus among policy-makers as to which approach to regulation is seen as the most expedient to securing cooperation.

I then proceed to subject this hypothesis to a challenging empirical test, accomplished through the comparative case analysis. In conducting this test, I deliberately restricted considered cases to those replicating, inasmuch as possible, certain features attributable to the money laundering case. Specifically, I consider those cases that arise in financial forays and involve governmental regulation of business. I take up three cases: the anti-money laundering regime, with a close focus on the Financial Action Task Force as its centerpiece; the 1988 Basle Capital Accord; and an abortive regime of information privacy that has yet to assert itself. In all instances, I choose to focus on U.S. regulatory policies so as to control for competing explanations.

Case studies seem to indicate that the proposed hypothesis is correct. In the concluding section of the paper, I make observations with respect to the generalizability and practicality of the evaluated hypothesis.

Introduction

If international regimes did not exist, they would surely have to be invented. 1 – Robert O. Keohane

In recent years, there has been a proliferation of international regimes, summoned to address a wide range of international issues, usually characterized as collective action problems of some sort. For instance, an international regime against money laundering is touted as an illustrious example of international cooperation, of consensual agreements and norms, and another gravestone for an era when direct coercion was the preferred means of attaining collectively beneficial outcomes. In this paper, I contest this view and attempt to engage existing theories of international regimes to gain an understanding not only of preconditions for international cooperation, but also its specific patterns.

Regime structure admits of a plethora of intellectually challenging lines of inquiry. However, some of them are already densely populated by hosts of ingenious accounts. Taken cumulatively, these accounts seem to offer a comprehensive, if not always exhaustive, treatment of a certain narrow subset of questions. At the same time, some lines of inquiry still do appear to have vacant spaces. One such vacancy becomes available once a few of the contemporary regimes, especially those involving complex, multi-dimensional issues, are put under a conservative magnifying glass and their true potential is examined.

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September 11th fleshed in a brutal light a number of bruising truths. One of them, of course, was the realization that America is not invincible, that its territory is not terra sancta and may be laid waste by terrorism when least expected. As it grappled with shock and pondered where to draw an axis of evil, America also focused on pragmatic questions. In particular, one question that urged an inquiry and response was on the funding that had had to be channeled into the U.S. to make the immaculately planned operation a reality. American policy-makers reasoned that the sponsor of September 11th attacks had to utilize some kind of money laundering scheme, so as to make sure that terrorist money would not be traceable to its origin. Consequently, if this goal met with success, the U.S. anti-money laundering safeguards must be inadequate and have to be strengthened – so as to obstruct future acts of terrorism. Indeed, President Bush hastened to pledge that "all the elements of our national and international power" will be used to "starve the terrorists of funding."2 Accordingly, an array of anti-money laundering measures was included in the USA Patriot Act that introduced some standards and tightened others.

However, to claim that September 11 th was a wake-up call that alerted the U.S. to the scourge of money laundering would be unfair and inaccurate. It was a wake-up call, an especially violent one, yet clearly having precedent. In 1970, “in response to increasing reports of people bringing bags full of illegally-obtained cash into banks for deposit,” Congress enacted the Bank Secrecy Act that contained a set of basic rules, forming a loose regulatory framework.3 Since then, the U.S. has expended considerable effort and resources continuously refining its anti-money laundering regulation, which by virtue of periodic legislative revisions has grown into the complex body of law. In this sense, the Patriot Act was just another story, not the foundation stone.

Realizing that combating money laundering necessarily involves international cooperation, the U.S. has been predictably active in soliciting international support of its endeavor, which after September 11th, became inextricably linked to the War on Terrorism. Again, however, the international effort against money laundering significantly predates September 11th . A number of international instruments, such as United Nations Convention against Illicit Trafficking in Narcotic Drugs and Psychotropic Substances, passed in 1988, recognized money laundering as playing a critical role in facilitating transnational crime. Thus, they sought to codify a set of practices that, if adhered to internationally, would curtail money laundering. In all instances, the U.S. demonstrated an enviable commitment to building an international coalition against money laundering, at times using coercion or a threat of closing its financial space to rogue or unscrupulous states or entities.


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This enthusiasm is not difficult to explain. With its vast and sophisticated financial system, the U.S. has inevitably become a large repository of “dirty money.” As laundered money is overwhelmingly reinvested in crime – drug trade being only one example – the U.S. reasonably fears and wishes to prevent its occurrence on domestic soil. However, attempting to erect a rigid barrier to money laundering in a unilateral fashion is bound to prove futile, since “dirty money” may make an extra stop at those jurisdictions that have lax anti-money laundering rules before venturing back into the United States. Therefore, a meaningful international effort requires not only collaboration among states, but also at least some degree of harmonization of national policies.

One recent step to that end was the creation of the Financial Action Task Force (FATF), which “ha[s] played a crucial role in developing international norms and rules that require financial institutions to adopt minimum levels of transparency and disclosure to prevent financial crime.”4 FATF has in fact gone further than its predecessors in that it has developed a set of concrete, self-contained rules – the so-called 40 Recommendations – that it urged member states to emulate and adopt. It also established a proto-enforcement mechanism to identify cheaters, and shame them into compliance by publicizing a blacklist. Again, the U.S. led others in creating the FATF, initially espoused as a means of preventing laundering of drug money. At the Paris G-7 summit in 1989 that drafted a proposal for the FATF, President Bush Sr. could thus declare:

I was especially pleased to find that my colleagues share our sense of urgency and sense of the importance of the worldwide fight against drugs. Among other steps, we agreed to establish a financial action task force to find new ways to track and prevent the laundering of drug money.5

Accordingly, some years into its existence, the FATF acknowledged U.S. activism by stating that in the U.S., “[i]nternational co-operation has been strongly promoted at all levels, and the U.S. authorities are to be commended on the leadership role they have provided in the relevant international fora.”6 Another testimony to U.S. influence is that the forty Recommendations are modeled after U.S. own approach to anti-money laundering regulation in that they advocate a range of similar techniques and practices.

Against this background, it makes quite a puzzling discovery to find out that the U.S. has a markedly poor record of compliance with the 40 Recommendations. Rather, it appears to prefer exercising individual and unfettered control over its domestic policies, as long as some international framework serves to make other states alert to money laundering and willing to cooperate in its prosecution worldwide. What may explain this odd behavior? How does one gauge this maneuvering between commitment to, and a last-minute withdrawal from, international cooperation? Is there an explanation? And where does one look for it?


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This problem, if placed in a somewhat broad perspective, gives rise to a number of puzzles. Rather than embroiling in an ad hoc justification of U.S. choices on how to handle its anti-money laundering policy, a more rewarding and challenging line of inquiry is to cast this problem as an instance of, or attempt at, international cooperation. How do states agree to act in concert and when do they do so? Why does cooperation bear fruit in some instances, yet fail to effect a noticeable change in others?

Generally, theories of international cooperation – or theories of international regimes – are seen as a promising resource in finding answers to questions such as those above. While no single theory is infallible, some have been relatively successful in explaining certain prominent instances of international cooperation, such as NATO or nuclear non-proliferation treaties. However, turning to traditional regime theories offers no immediate or plausible account for the current state of the international anti-money laundering regime. I do not automatically presuppose, however, that this fact should signal an overturn of the existing theories. Instead, I shall test an approach that conceptually differs from that relied upon by the traditional accounts but incorporates them to reach a comprehensive, meaningful result. In other words, I believe that the anti-money laundering case may be exemplary of a distinctive theoretical framework, including a set of independent and dependent variables, which is obscured by the traditional accounts. In particular, I am not satisfied with the conventional focus on regime formation and lack of due attention to regime success. I believe that a valuable and comprehensive theory should be able properly to address both concerns, and maybe even find a common principle bridging them. Accordingly, I focus on cohesive regimes – ones that do not simply come together, but prove durable and last over time.

Developing this intuition, I shall offer a detailed, complex, but ultimately parsimonious, argument, purporting to single out factors responsible for specific patterns of international cooperation. I shall start with the anti-money laundering case and then will seek further instances of international regimes corroborating my hypothesis. Given that the anti-money laundering regime is a specific, and not a random, starting point, and that this fact may impart a certain bias to my findings, I will confine myself to looking for cases sharing a set of core characteristics with the anti-money laundering example. Clearly, this will affect generalizability of my results – this point has to be conceded without much ado. However, without intending to reinvent regime theory, I hope through this paper to accomplish a contribution to it that will embody a new perspective on matters of international cooperation.


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A Schools of Thought AnalysisI. A Brief Introduction to Regime Theory

To construct an explanation of a regime, it is necessary first to develop a systematic survey of the existing general theories of international regimes. In addition to suggesting a starting point for the present inquiry, this exercise will help to grasp what international regimes are, which purpose they serve and how they come to exist. Addressing each of these questions in turn will furnish ground for a discussion of regime theories, focusing in particular on power, interest, and knowledge based explanations of international regimes.7

Definition

With respect to definition, regime enjoys a “strained” consensus, according to which it is said to refer to “norms, rules, and decision-making procedures around which actor expectations converge in a given issue-area.”8 In turn,

“Norms are standards of behavior defined in terms of rights and obligations. Rules are specific prescriptions or proscriptions for action. Decision-making procedures are prevailing practices for making and implementing collective choice.”9

An international regime comprises “norms, rules, and decision-making procedures” that arise in and are appropriate for situations that by nature involve cross-boundary issues. This definition of regime is not unproblematic, however, as it tends to obscure the roles and relative contributions of each of its components.10 Such distinction is hardly a casuistic whim, for it is associated with questions that are quite pragmatic. For instance, it determines what in practice, assuming imperfect conditions, constitutes a meaningful, functioning regime. What is one to conclude of a regime that rests on a universally accepted norm, yet fails to command a perceptible degree of decision-making compliance? This question helps emphasize another distinction that may otherwise be concealed: regimes are not particularistic arrangements designed to target a specific problem; nor are they “mere ad hoc substantive agreements,” rather regimes serve as catalysts for such agreements “by providing a framework of rules, norms, principles, and procedures for negotiation.”11 As is apparent from this stipulation, a discussion of purposes for which regimes are conceived is now in order.

Functions

To some extent, the function that a regime is thought to perform is derived from a broader theoretical perspective on regimes in general; thus, each theory is likely to advance its own teleological argument, informed by a power, interest, or knowledge bias. Nonetheless, there is


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a set of irreducible principles common to all three perspectives. In a sense, an international regime is a form of institutionalized cooperation; as such, it draws its theoretical, as well as practical, appeal from its promise to subdue an otherwise Hobbesian state of international relations. 12 In this grim world, a collective action problem stifles individual efforts to overcome a systemic threat or to attain a common good:

“Unless the number of individuals in a group is quite small, or unless there is coercion or some other special device to make individuals act in their common interest, rational, self-interested individuals will not act to achieve their common or group interest.”13

With no assurance of cooperation and assistance, a rational actor will discard an intention to act individually as too costly and disadvantageous, thereby forfeiting a stake in the common good. A regime’s function is to make collaboration an attractive, mutually beneficial alternative to “collective suboptimality that can emerge from individual behavior.”14 In addition, a regime discourages “free-riding”, thereby ensuring that collaboration is a safe bet.

Distinctions of fundamental significance both to regime theory and to this paper’s argument are between collaboration problems and those involving a “common interest,” and between coordination problems, and those arising from “common aversions.” 15 Collaboration, as regime theory approaches it, refers to a concerted effort to pursue a course of action, perceived to be advantageous to all actors. In this situation, actors are concerned with cheating – an attempt by defectors to “free-ride” or to capitalize with impunity on a collective undertaking. Coordination, by contrast, is an effort to avoid a set of outcomes, which all actors associate with undesirable consequences. Coordination, however, “is difficult to achieve when, although... actors least prefer the same outcome, they disagree in the choice of the preferred equilibrium.”16 In this circumstance, it is not cheating that presents a concern, but lack of consensus. However, with both collaboration and coordination, “[i]nternational regimes exist when patterned state behavior results from joint rather than individual decision making.”17

Whether a “wall of separation” exists between collaboration and coordination is not immutable, to be sure. Some regime literature does appear to consider “interests” and “aversions” to be distinct conditions, calling forth separate cooperative responses.18 In this paper, I adopt a different strategy. I argue instead that collaboration and coordination are plausibly construed on a continuum, as corresponding to stages of a single process, rather than unrelated occurrences. This view is persuasive because it avoids a confusion of “interests” and “aversions.” Indeed, both of these are just edges of one sword, since a “common interest” may simply be to subvert a “common aversion.” I will return to this discussion in subsequent sections.

Implicit in its role of securing collaboration and coordination is another function of a regime: supply of information, for it is


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uncertainty that introduces risk and fuels reluctance to cooperate, if no assurance that others will respond in kind is available.19 In addition, a regime could be conceived as a medium communicating to its participants what constitutes “best practice” in addressing a specific aspect of the issue-area in question. In certain instances, a regime develops precisely to “capture” such practices to benefit the parties willing to forgo individual decision making in exchange for access to the know-how of the issue-area.

Origins

An inquiry into regime formation is a precarious exercise, because it is heavily theory-specific. Therefore, with an exception of a few “neutral” remarks, it will be delegated to the respective discussions of regime theories. However, a few general comments are still in place. First, regimes are “human artifacts”, and as mentioned earlier, when they arise, they do so in response to collective goods dilemmas that are “pervasive at all levels of human organization.”20 Second, it is possible to distinguish three patterns characterizing regime formation: spontaneous (mirroring development of soft law), negotiated (corresponding to formalized or “hard” law agreements), and imposed (resulting from direct or indirect coercion by an actor with sufficient leverage to act as a hegemon.) 21 Third, also previously mentioned, a regime may be a product of both formal and informal arrangements – a distinction that, according to Puchala and Hopkins’s study of food and colonialism regimes, has no immediate implications for regime effectiveness.22 Matters of effectiveness aside, this observation dispels a common misperception that associates regime formation with international organizations or formal treaties.23 No such connection need obtain, since a regime may emerge even “where there [was] no treaty, and no controlling executive or legislative act or judicial decision...”24

With this preliminary, if somewhat brisk, discussion of regimes in focus, a stage is set for an analysis of regime theories. Through this analysis, I intend to derive a hypothesis – or at least arrive at a starting point for doing so – that would address and explain not only regime formation per se, but also what contributes to the regimes’ cohesiveness and longevity. As I suggested above, I examine three theories, whose basic explanatory variables are, respectively, power, interest, and knowledge.25

II. Theories of International Regimes Power-Based Theories


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All representatives of this category, following a broadly realist tradition, attribute explanatory aptitude to power – which for realists is both an end and a means to an end – and its distribution, with respect to states conceived as rational, egoistic actors.26 Immersed in anarchy that pervades international relations, states resort to “self-help” in order to survive and prosper.27 Critically, however, realism asserts that states, when contemplating cooperation, strive to maximize not only their absolute gains, but also their relative gains. In other words, to assure survival, states must outperform others. As a classic account has it, “driven by an interest in survival, states are acutely sensitive to any erosion of their relative capabilities, which are the ultimate basis for their security and independence in an anarchical, self-help international context.”28 This “relative gains problem” predisposes states against cooperation, in addition to the perpetual concern with “free-riding”, common to all collective endeavors.29

Nevertheless, the power-based approach is still compatible with collective behavior and regime formation. In a realist world, cooperation is possible if it does not infringe on power and is consistent with relative gains logic. This premise underlies a dominant strain of realism – theory of hegemonic stability, which posits presence of a hegemon as a necessary condition for collaboration, because only a hegemonic power is able to afford participation in cooperative arrangements, without defaulting on its relative gains concerns. Other actors accede, as they recognize an opportunity to benefit from cooperation, if only in absolute, rather than relative, terms. The theory of hegemonic stability, as its title suggests, “links the existence of effective international institutions to a unipolar configuration of power in the issue-area in question.”30 This account treats regimes with skepticism perhaps because the continued existence of a regime is fully contingent on the existence and benevolence of a hegemon.31 A hegemon’s leadership may follow either a benevolent or coercive pattern, corresponding to preoccupation with, respectively, absolute and relative gains, and to different ways of sustaining a regime.32 A benevolent leadership affirms a hegemon’s interest, thereby abetting its absolute position, and for this purpose accepts both the responsibility and costs of organizing a regime. By contrast, a coercive leadership focuses on relative gains and thrusts a regime (still conceived as mutually beneficial) to other actors, “taxing” them for their participation.33 This latter perspective is in agreement with the orthodox realist treatment of international relations.

Power-based approach is also applicable to the cooperation versus coordination dichotomy. It does recognize that coordination difficulties may at times arise and enfeeble a regime, even if its basic premise – collaboration – is fulfilled.34 What is at issue, then, is distribution of outcomes that a regime produces. In other words,


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having disposed of a set of collectively suboptimal arrangements, states still need to choose an outcome that will be of greatest utility to all; having agreed to collaborate, they have to coordinate, or reconcile, individual preferences as to how collaboration is to be steered to its goal. To be sure, coordination is likely to be contentious if a regime delivers widely divergent payoffs to its participants. However, if it is at all possible to attain a point of greater utility, without sacrificing collaboration and efficiency, power may be reintroduced (assuming it was power that brought the regime into existence to begin with) to alter outcomes accordingly. In this scenario, power is used “to determine who can play the game in the first place”, “to dictate the rules of the game”, or to alter payoff distribution associated with specific outcomes.35 If a hegemon is persuaded that a certain outcome provides greatest utility, it may compel others to accept it, even if they would never do so voluntarily.36 To sum up, power is applied as a catalyst for both collaboration and coordination; it sets forth a basic framework for collaboration, and then determines how gains from this cooperation will be distributed. An illustration of this scenario is found in the account of the formation of the global telecommunications regime. Drawing on its influence and technological advancement, the U.S. not only put forward a set of rules to govern an international regime, but also went further by recommending a market based approach for that particular regime, in accordance with U.S. domestic preferences. 37

This analysis begs the question, how far do power-based theories go in addressing cohesiveness of international regimes? First, because the United States is undoubtedly preponderant in a wide and diverse range of issue-areas, power – even if falling short of hegemony – must at least be relevant. Indeed, the U.S. played a critical, if not decisive role, in fostering a number of international regimes, quite in accord with realist claims, not only in terms of its capability to exercise coercion, but also in standing to reap a relatively greater benefit from a “better world” made possible by collaboration. Undoubtedly, power assures collaboration by its ability to exclude defectors. Likewise, that the U.S. “was able to secure some movement” toward its favored distribution scheme within the context of global communications regime, adds credibility to claims that power may be instrumental not only as a guarantee of sustained collaboration, but also as a mechanism that assures productive coordination.38 Therefore, power does have a promise to effectuate a cohesive regime – by clearing path for both collaboration and coordination.

Yet, in reality, the reliability of this promise is far from established. It is hardly disputable, however, that a plausible account of regime formation will not be complete, unless it affords power a role. It is also widely held, that the United States, as a model of a powerful state, uses its leverage to extract outcomes that enhance its


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relative standing and reward its contributions to a regime. Where confidence is lacking, however, is in attempting to link power directly to cohesiveness. For example, if all actors are only in perfunctory compliance with a hegemonically established order of “norms, rules, and decision-making procedures”, a regime so constructed is unlikely to make cooperation a truly beneficial or fruitful enterprise; even if it does manage to reduce uncertainty, discourage cheating, and set a focal point for action. In this setting, coordination would still be in deficit, reduced to a mere appearance of itself. However, for this criticism to be justified, it has to face an empirical test, of which I examine in a later section of this paper.

Interest-Based Theories

Interest-based category, or neoliberalism, “has come to represent the mainstream approach to analyzing international regimes.”39 In fact, its tenets are implicit in what was described above as “neutral” aspects of international regimes, suggesting that its theoretical arsenal, if not its conclusions, has become dogmatic for the study of international regimes.40 In a number of ways, it shares its premises with realism, and draws from rational-choice theory to construe states as “self-interested,” “goal-seeking” actors.41 Neoliberalism also finds itself inhabiting an anarchic, “self-help” realist environment, which discourages cooperation and fosters preoccupation with power and survival instead. Unlike realism, however, neoliberalism endows regimes with a capacity to overcome fixation with relative gains, stipulating that effective cooperation and breach of otherwise pervasive uncertainty, both associated with regimes, are a preferred (at least, for a rational actor) strategy. For neoliberalism, regimes are valuable because they offer an indispensable means of collecting and distributing information, slightly raising a curtain over the choices and preferences of the states involved. This process does not make power an irrelevant factor; however, it benefits the states by saving resources otherwise committed to the continuous and wasteful guesswork as to the relative distribution of power.42

In addition, neoliberalism “seek[s] to show that Realism’s pessimism about welfare-increasing cooperation is exaggerated.”43 In doing so, neoliberalism de-emphasizes the impact of power distribution – hence, its move to dethrone relative gains – in favor of “constellations of interest (which are not readily reduced to configurations of power) and prevailing expectations”, both of which shape and are shaped by international regimes.44 Neoliberalism, therefore, postulates that a promise of bridging an abyss between anarchy and cooperation is inherent in a regime and is not dependent on whether there is a hegemonic power to assure that a leap is feasible. States will be driven to international regimes, then, not as a response


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to prodding of a hegemonic power, but as rational actors in pursuit of an arrangement that “can provide information, reduce transaction costs, make commitments more credible, establish focal points for coordination, and in general facilitate the operation of reciprocity.” 45

In other words, regimes clear a path to cooperation by allowing states to concentrate on problem-solving, rather than a likelihood of being cheated. This propensity of a regime to suppress cheating manifests itself in a few distinct ways, according to neoliberalism. First, it is noted that

“Principles, norms, and rules, by their very nature, do not exist apply to a single case only, but to a variety of cases. Individual regimes, on their part, are often “nested” within larger, more encompassing frameworks of international principles and norms. In this way regimes produceconnections or “linkages” between issues...”46

An oft-cited example in this regard is that of international trade:“An agreement among the United States, Japan, and the European Community in the Multilateral Trade Negotiations to reduce a particular tariff is affected by the rules, norms, principles, and procedures of the General Agreement on Tariffs and Trade (GATT) – that is, by the trade regime. The trade regime, in turn, is nested within a set of other arrangements – including those for monetary relations, energy, foreigninvestment, aid to developing countries, and other issues...”47

Second, interest-based cooperative arrangements are capable of casting a “shadow of future,” that is, if future payoffs are perceived – or are presented – as no less valuable than current payoffs, actors will be discouraged from today’s cheating, fearing tomorrow’s retaliation.48 In this way, a degree of uncertainty (“What if tomorrow’s payoff is greater than today’s?”) is turned into a blessing in disguise, and a catalyst of collaboration, rather than its gravestone. “Shadow of future,” therefore, cultivates reputation as a valuable asset for an actor to have.

In a parallel to realism, neoliberalism recognizes that a regime, held together solely by a decision to collaborate, may betray its promise, if coordination – choosing a particular pattern of cooperation – is left unsett led.49 When coordination is at issue, cheating is no longer an imposing concern, assuming that states agreed and are willing to collaborate, eschewing a degree of independent, egoistic discretion. At this point, however, there is still a possibility of discord, if a regime is not based on a common, ratified standard, adhered to by all parties. In that scenario, cooperation will be hollow and meaningless, even if no intention to cheat or “free-ride” is registered or feasible, once collaboration is established. A perfect example is that of aviation language convention:

“Communication between ground and aircraft may be in any mutually convenient language, but there must be a guarantee that communication is indeed possible; finding a language matchup cannot be left to chance. Thus, English is recognized as the international language of air traffic control, and all pilots who fly between nations must speak enough English to talk to the ground.”50


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In this situation, it would not suffice to settle on some language; rather it was imperative to identify a specific language, perceived as an attractive option and a reasonable compromise by all parties concerned. By this reasoning, English is an obvious candidate. Additionally, power is of little, if any, consequence in this case. Clearly, English did not claim consensus because English-speaking actors were able to arm-twist others into compliance.

Still, just as realism kept its faith in power to assure coordination, so does neoliberalism reassert its commitment to regime’s capacity to glean information as a remedy for a coordination conflict. According to this logic, “in complex situations involving many states, international [regimes] can step in to provide ‘constructed focal points’ that make particular cooperative outcomes prominent.” 51 Thus, at least theoretically, neoliberalism does have its version of a roadmap to a cohesive regime, with both collaboration and coordination as destination points.

Whether this roadmap is an infallible guide to resolving coordination conflicts is unclear, however. As realists (who certainly have problems of their own) point out, information and monitoring of behavior may prove insufficient. Even with perfect knowledge as to which benefits are associated with various outcomes, actors may remain indecisive, unable to settle on which outcome will maximize common good.

Knowledge-Based Theories

Knowledge-based, or cognitivist approaches, “stress ideas and knowledge as explanatory variables.”52 They express dissatisfaction with orthodox – power- and interest-based – doctrines as failing properly to address “knowledge-dependence of international behavior.”53 In particular, cognitivism scolds the traditional notion of uncertainty as impoverished, focusing exclusively on patterns of interaction, and disregarding uncertainty stemming from imperfect knowledge of an issue-area in which an international regime is expected to arise. In other words, “poorly understood conditions may create enough turbulence that established operating procedures may break down, making institutions unworkable.”54 When realism and neoliberalism posit, respectively, distribution of power and “constellation of interests”, cognitivism situates ideas and “epistemic communities” as the principal means of their dissemination. The common definition of an “epistemic community” refers to it as

“Networks of professionals with recognized expertise and competence in a particular domain and an authoritative claim to policy-relevant knowledge within that domain or issue-area.”55

An epistemic community, according to cognitivism, is an integral part of an international regime – at least, in those issue-areas in which cooperative policy-making involves a considerable degree of


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complexity. Epistemic community is crucial for a regime’s continued existence, because it addresses itself to the raison d’etre of creating a regime to begin with – that is, it helps dispel uncertainty. Just as hegemonic action is required to remedy the uncertainty of relative gains, and “shadow of future” is intended to offset the uncertainty associated with good-faith cooperation, an epistemic community serves to combat uncertainty inherent in the increasingly complex policy-making mechanisms in a wide array of issue-areas. What earns cognitivism a preferred position is that it concedes a role in alleviating “first-degree” uncertainty that plagues collaboration to power and interest, while employing epistemic communities to deal with “second-degree” uncertainty that other approaches do not even recognize.

Ideas are also of service to coordination problems, in which an incipient regime – forged as a result of successful collaborative arrangement, cemented either by power or information – is threatened by a coordination dilemma, a consequence of conflict over a multitude of available payoff schemes. Knowledge, or technical expertise, is not simply a bonus, but a factor of critical, substantive importance:

“The growing technical uncertainties and complexities of problems of global concern have made international policy coordination not only increasingly necessary but also increasingly difficult. If decision makers are unfamiliar with the technical aspects of a specific, how do they define state interests and develop viable solutions?”56

In this situation, a cognitivist would offer ideas as “a compelling coordinating device”57, not to offset or preempt other factors – such as power or information as antidotes to uncertainty – but to complement them and extend their reach. To explain, a regime may be sufficiently well-entrenched not only to invite collaboration, but also to signal to actors which course of action is associated with greatest benefit to all. However, it is plausible that actors may disagree about the necessary or expedient means to pursue a particular course. In that case, coordination problem would still be unresolved, effectively forestalling development of a regime, and certainly impairing its cohesion. To prevent this outcome, groups of experts, or epistemic communities, and lead actors are called forth to identify and converge on the technical key to coordination. One illustration of this case is an account of negotiation of the Montreal Protocol on Substances That Deplete the Ozone Layer. As I suggested, “[a]lthough the United States played a leadership role throughout the treaty negotiations,” ultimately “the successful coordination of national policy to protect the ozone layer was strongly influenced by the activities of an ecological ‘epistemic community,’ a knowledge-based network of specialists who shared beliefs in cause-and-effect relations, validity tests, and underlying principled values and pursued common policy goals.”58 By elucidating, based on scientific knowledge, a causal linkage between disposal of CFCs and deterioration of stratospheric


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ozone, the epistemic community helped national policies of the regime participants coalesce on a relatively stringent approach to international regulation. To sum up, ideas and knowledge, shaped and formulated by epistemic communities, are of vital importance for technically complex issues that will frustrate policy-making capacity of actors, unless these actors possess adequate expertise.

One aspect of cognitivist thinking that makes it an attractive candidate for the inclusion into an account of regime cohesiveness is its recognition of complexity and its more penetrating interpretation of uncertainty. It does not contest, for example, that power may be a crucial factor or that institutional interaction may invite collaboration by assuring mutual gains or alleviating the fear of cheating. The invaluable and distinctive contribution of cognitivism is its ability to recognize and pursue the multidimensional nature of international regimes by treating the uncertainty at the heart of the coordination problem, while conceding that both power and interest may be adequate to deal with that uncertainty which plagues collaboration. In drawing attention to “epistemic communities” as entities equipped with sufficient technical expertise to be able to confound uncertainty of coordination, cognitivism advances an intuitively appealing argument. In particular, it states that, matters of power and interest notwithstanding, it may be impossible or impractical to coordinate a regime’s operation, unless there is a substantial “epistemic convergence”, or simply speaking, agreement on means of addressing a nagging collective “bad”. In the words of Isaiah Berlin, “Where ends are agreed, the only questions left are those of means, and these... are technical, that is to say, capable of being settled by experts or machines like arguments between engineers and doctors.”59 I contend, therefore, that in comparison with realism and neoliberalism, cognitivism emerges as a more plausible candidate for constructing a comprehensive explanation of differences in regime formation and variation in its properties. However, to confirm this expectation, cognitivism has to survive an empirical test, to which both realism and neoliberalism must also be admitted. I attempt to perform this test through a case study of international regimes.

III. Hypothesis and Theoretical Background

Hitherto, I attempted to conduct a survey of existing theories of international regimes. Admittedly, all three classes of theories – power-, interest-, and knowledge-based – have some potential to contribute in constructing a comprehensive, persuasive, and hopefully realistic explanation of this paper’s problem. In particular, it would, of course, be implausible and dishonest to argue that either realism or neoliberalism offers no guidance to regime formation, as a bulk of empirical research would discredit this conclusion. Cognitivism does


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not claim a sweeping role, and expressly concedes a sizable niche to realism and neoliberalism. As I intimated above, I believe that a proper, searching inquiry into regime formation demands that it be analyzed as encompassing two stages: coordination and collaboration. Of vital importance to this project is coordination within an international regime, rather than collaboration on which it is premised and which it is intended to perpetuate. In other words, I am not so much concerned with whether a given regime at all exists, but whether it faithfully serves its purpose, which is only possible when coordination problem also finds its due resolution. To clarify, I certainly ascribe a great deal of input to collaboration. However, in this paper, I contend that extant regime theories either individually or jointly create a plausible account of collaboration. Indeed, coordination is not as favored and begs for a nuanced explanation.

Accordingly, I will propose a hypothesis, which, building on the apparent strength of the cognitivist approach, compounds it by proposing a causal relationship between domestic regulatory philosophy of a state and a degree of cohesiveness of an international regime to which that state is a party. By “cohesiveness,” I refer to how far a regime goes in addressing both collaboration and coordination; only that regime is fully “cohesive” which establishes a working framework for both collaboration and coordination. In testing this hypothesis, I turn to instances of international regulation of certain issue-areas, and attempt to demonstrate that a relative emphasis on incentives in regulation of those areas is consistent with greater cohesiveness of a corresponding international regime. In conducting case studies, I consider U.S. regulation of issue-areas in question, in order to trace a causal process originating with domestic regulatory approach and leading to a certain degree of cohesion of an international regime.

The choice of the U.S. as a focal point is not arbitrary, nor is it a matter of pure convenience. In fact, I believe it to be the only suitable candidate for conducting the present inquiry, since it offers a unique opportunity to control for the competing explanations – primarily power-based, but also interest-based ones. In addition, “controlling out” realism and neoliberalism legitimizes the focus on coordination, while shifting collaboration to periphery, without advancing untenable claims that “power” or “interest” “did not matter” in a certain instance.

Behind the argument at the core of the proposed hypothesis is an assumption that lesser density of rules and regulation adopted in each jurisdiction is to a greater extent conducive to forming a regime, since it corresponds to a greater ease in finding and negotiating a “common denominator” – a set of mutually agreed-on norms, rules, and decision-making principles, essential to an international regime. Admittedly, there is no merit to arguing that locating such “common denominator” is likely to degenerate into a “race to the bottom” as far

as stringency and precision of negotiated rules are concerned. This result is likely to ensue if no regime arrangement is in place to begin


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with; however, where an institutional setting is duly furnished, no risk of “collective suboptimality”60 associated with the “race to the bottom” need arise. In terms of regime theory, lesser rule-density and greater incentive-compatibility are both likely to enhance coordination, once collaboration is assured. Thus, I believe that regime design frequently supplies both a more plausible explanation of how coordination is attained and a more satisfactory fit with existing empirical evidence.

Another reflection in support of this argument is that, inevitably, each state, as a rational, self-interested actor – an assumption that no regime theory (at least those presented above) dares to disown – will attempt to gear its regulatory policies to what it perceives to be its own “share” of a common “bad.” For example, it is unreasonable to expect a dwarf economy to be especially concerned with and committed to waging a fight against money laundering.61 Likewise, an extent of environmental regulation is likely to reflect a state’s share of pollution or implicit costs of abating it.62 Such a “personalized” approach, combined with a vast number of other local idiosyncrasies that are likely to be incorporated into policy, such as federalism in the case of the U.S., may be expected to bind devised rules to a given jurisdiction. A greater number and complexity of rules, then, tend to obstruct coordination and to hamper the emergence of common principles and agreed-upon practices.

In contrast, the emphasis on self-regulation, within reasonable bounds and where at all feasible, carries a promise of encouraging the development of “best practices” that are adopted and assimilated far more easily than frequently idiosyncratic rules. Moreover, actor perception of a regime as a medium of exchange for “best practices” may itself be an incentive for abandoning self-centered perspective and becoming a party to an international regime. This focus on rules also elucidates the contribution of another independent variable, “agreement on means”. I believe that “agreement on means”, often reached by epistemic communities, serves as a final “approval seal” for coordination, once favorable conditions are precipitated by flexible, adaptable domestic arrangements. In sum, incentives (or at least a mild rule burden) and “agreement on means” are essential for what I call a cohesive, or comprehensive regime – one that produces both collaboration and coordination.

In emphasizing this distinction between collaboration and coordination and in making both jointly necessary for a cohesive regime to exist, I draw on (and agree wholeheartedly with) Stephen Krasner’s remark that the “basic issue [in the politics of regime formation] is where states will end up on the Pareto frontier, not how to reach the frontier in the first place.”63 A classic illustration of this

distinction portrays a married couple who agree that they want to spend the evening together (they are prepared to collaborate), but disagree over exactly where they would like to go (they are unable to coordinate their decision-making and settle on one of two options that


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survived collaboration stage).64 This example is helpful if borne in mind for what follows.


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Cases & MeasurementI. Hypothesis

I propose a hypothesis to explain how certain domestic regulatory arrangements – in particular, whether they emphasize strict regulation or fall back on incentives as a regulatory instrument – may determine how cohesive an international regime is likely to be. Specifically, I turn to the U.S. involvement in international regulatory regimes for an illustration of this hypothesis. Further, using this focus on the U.S., I venture to demonstrate that cohesiveness of an international regulatory regime (though not necessarily its empirical “effectiveness”) varies with incentive-compatibility of national regulatory politics. Specifically, a relative emphasis on regulation is consistent with weakened participation in an international regime and greater reliance on domestic means of containment of the problem in question. In addition, I afford a measure of explanatory power to what cognitivism terms “epistemic convergence” or, as I suggest it be referred to in this paper, “agreement on means.”

I am convinced that collaboration problem, with its emphasis on cheating and defection, is only one hurdle to be surmounted for a cohesive regime to exist. Once collaboration sets a tenable barrier against cheating, cooperation will nonetheless falter, if no one out of several non-cheating outcomes commands consensus. This scenario evokes a quandary of two spouses, who could only agree not to “defect” and be together, but were still likely to waste a valuable resource – leisure time – by being unable to decide exactly how and where they wanted to spend it. Similarly, I expect a satisfactory explanation properly to address coordination of choices within a regime and to offer a convincing account, which will show that a given regime’s cohesiveness and longevity are not likely to be jeopardized.

A corollary of this hypothesis invites a reflection on cohesiveness of international regimes to which the U.S. is a party: given the U.S. dominance in most issue-areas, its limited or perfunctory adherence to a certain regime’s framework is likely to undermine drastically such a regime, turning it into a rather meaningless multilateral exercise.

I. Cases

In this paper, for practical purposes I restrict attention to those cases which involve the regimes broadly associated with financial regulation; as a related issue, I assume that the information privacy regime is in congruence with this domain, as privacy embodies a “main tenet” of consistent and robust financial activity.65 In a larger sense, a population of cases and issue-areas to which my hypothesis


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would be applicable is broadly associated with, but not necessarily confined to, governmental regulation of business activity. In this paper, I restrict this domain to regulation of financial enterprise, with banks claiming a great deal of attention. One rationale for this specification is that the financial sector is often viewed as paradigmatic in terms of complexity of issues involved. “Overall, financial markets are swiftly moving targets whose supervision and regulation require streamlined decision making and a tremendous amount of technical expertise.”66

Clearly, there is only a narrow pool of cases to expound whatever theoretical framework is attributed to international regimes, especially those designed to address financial regulation. Hence, a feasible study would have to assume the form of comparative case analysis. Specifically, I intend to employ a version of John Stuart Mill’s Method of Difference in order to establish a hypothetical counterfactual condition of the independent variables. This approach entails a comparison of several cases, similar in some respects, different in others and having contrasting outcomes.67 Explanatory power is then attributed to those variables which assume dissimilar values. Thus, I will focus on two cases, one corresponding to the incentive-based approach to domestic regulation, and one implementing the rule-driven approach. The incentive-based approach will be illustrated with the U.S. role in enacting and adopting the 1988 Basel Capital Accord, setting risk-based standards for bank capitalization. The rule-driven approach informs the U.S. domestic regulation aimed at curbing money laundering. In addition, the third case will be borrowed from the abortive informational privacy regime to bolster the argument with respect to the “epistemic convergence” or “agreement on means.”

III. Logic of Necessary and Sufficient Conditions

There are two independent variables in my hypothesis: whether a selected regulatory scheme presents an incentive-based approach and whether there is an agreement over means. I construe each independent variable as necessary and neither one as sufficient. Hence, I consider three cases, corresponding to each necessary/sufficient configuration; a possible fourth case, whereby both variables are absent is superfluous, yet not altogether useless. An account corresponding to this case would illustrate that, where neither independent variable manifests itself, no cohesive regime is likely to emerge. On a side note, a promising candidate for such a scenario is an accounting standards regime, also falling within a broadly defined domain of financial regulation. However, for the purposes of this paper, I omit a discussion of that case.

I emphasize that “agreement on means” is not an intermediate variable that is somehow traceable to incentive-dominated regulation,


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for parties to an international regime may as well agree to accentuate rule-based approach. I argue that in that latter case, a regime so designed is likely to prove ineffective or perfunctory in its operation. That said, devoid of a thorough empirical study, this theory is nothing but speculation. I hope that a careful, detailed case-by-case analysis of a few, in my opinion, under-studied regimes will ultimately deliver an adequate corroboration that will make this theory generalizable at least with respect to a certain class of international regimes.

IV. Justifying Research Design: Comparison

Two approaches to designing a comparative case study are distinguished. One is to follow a framework broadly comparable to the Method of Difference. Another yields greater precision and generalizability: given at least four cases, one may construct a matrix with four cells, corresponding to the values assumed by a hypothesized independent variable and a competing variable. Then, if the dependent variable allows for ordinal arrangement, one studies patterns of outcomes to conclude whether a certain pattern is attributable to the independent, as opposed to the competing variable.

While this schema wields greater explanatory power and appears in a better position to impel conviction, it also imposes a number of prohibitive criteria on case selection, thereby precluding consideration of cases not amenable to treatment with respect to such criteria. In particular, there are at least three constraints that ordain rejection of this strategy in this particular study. First, this strategy calls for at least four cases in order to sustain analysis; however, not only is it problematic to locate four cases of international regimes addressed to financial regulation, this task also presupposes a level of technical expertise that is not coextensive with the purposes of this paper. Second, it appears superfluous, since proving that two independent variables are both necessary and jointly sufficient may convincingly be established with three, rather than four, cases. Finally, ranking cases may prove a wasteful effort, since there appears to be a reasonable basis for assuming “power” and “interest” as constant in all three cases. This assumption may not be scientifically grounded, yet it does appear to carry conviction, simply because there is no perceptibly compelling evidence to believe otherwise. For example, in neither case is there any indication of the U.S. “power” and “interest” as subject to variation, at least to allow defensible ranking. In any case, the Method of Difference is an accepted, simple, and reliable tool for constructing a comparative case study.

Below is an illustration of the Method of Difference in association with the expounded hypothesis. The survey of schools of thought supplies three broad analytical pathways of explaining variation in the stability of regimes: power, interest, and knowledge. All three are to


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some extent relevant and instrumental for advancing the hypothesis, and thus are tested as potentially competing independent variables. The dependent variable corresponds to regime cohesiveness in each of the considered cases. As suggested above, a cohesive regime is defined in this paper as one that possesses sufficient agency as to resolve both collaboration and coordination dilemmas.

Regime (I) is illustrated by an international anti-money laundering coalition, which exhibits an “agreement on means,” yet is characterized by a pronounced emphasis on rules and heavy-handed regulation. Regime (II), affirming incentive as a regulatory instrument and still eliciting an “agreement on mean,” finds a clear expression in the 1988 Basle Capital Accord. Finally, Regime (III) that admits an incentive-driven regulation, yet fails with respect to “agreement onmeans” is accurately described with reference to a stillborninformation privacy regime.

Following the Method of Difference, I focus on the capital adequacy regime and the anti-money laundering regime, as exhibiting dissimilar values on the independent variable (respectively, incentive-based and rule-based). Subsequently, I redirect attention to contrasting the capital adequacy regime and the (abortive) information privacy regime, as they diverge with respect to another independent variable, namely what I termed above the “agreement on means.” The values ascribed to the dependent variable are derived from the hypothesis and are therefore at this stage tentative, and subject to corroboration by the comparative analysis and full exposition of the cases.

Controlled variables

Regime

VariableI n d e p e n d e n t Dependent

Incentive-Based Interest Power Agreement OnMeans Outcome

I N Y Y Y N

II Y Y Y Y Y

III Y Y Y N N

Table 1 The Method of Difference


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There is one important aspect of this comparative design that warrants further comment. This comparative design does not require that all cases be compared and contrasted in order to elicit a reliable inference. Therefore, I do not just deliberately avoid comparison of the anti-money laundering case to that dealing with information privacy. The exclusion of this pair is in full agreement with the logic of the Method of Difference and should not be disregarded. Since that pair does not exhibit dissimilar outcomes, and both independent variables do diverge, the Method of Difference is silent and does not incline to draw any kind of inference at all.

Another remark concerns the presentation of cases. While the logic of the Method of Difference seems to urge side-by-side comparison of these cases, I decline this invitation so as not to overcomplicate the argument that already exhibits quite a complex nature. Instead, I adhere to an orderly case-by-case narrative that, I hope, fully illuminates the crucial aspects of each case and, just as significantly, will justify the imputed values on the independent variables. Furthermore, I consistently contrast those aspects of each case which make its inclusion worthwhile and which mirror the logic of the Method Difference, justifying the model presented in the table above.

Given that only three cases are considered, I have attempted to impose strict conditions on the selection of cases, with as much consistency in setting as possible, along with identical values on control variables. In particular, I do not extend this hypothesis to distinctly other settings, such as security or even environmental regimes. Yet, in doing so, I hope to dispel the suspicion that observed differences in outcome – namely, whether an international regime could be plausibly described as cohesive – is ultimately a progeny of certain inherently idiosyncratic features of specific issue-areas. A set of characteristics follows that is common to all three regimes and serves further to legitimize case selection.

First, in each case, there is evidence consistent with an international collective action problem – sufficiently severe to pose a systemic, existential threat to stability of an established order in a given issue-area. Money laundering is a systemic threat in that it “distorts macroeconomic estimates, skews currency markets, and destabilizes financial institutions through the creation of illegal economics.”68 Curtailing money laundering transforms into a collective action problem par excellence: while eliminating systemic harm is beneficial to all parties concerned, individual effort is costly and ineffective, since illegal capital will obviate points of greater resistance to settle where no holds are barred. Hence, in order for the anti-money laundering initiatives to be meaningful, “near-global cooperation is a virtual necessity.”69

Similarly, the agreement on capital adequacy standards – inaugurated in the 1988 Basel Accord – finds its origin in a debt crisis


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of the early 1 980s that “threatened to stifle trade, investment, and financial flows between the developed and developing countries, choking the world economy.”70 Crisis prevention and enduring stability, particularly with respect to payments system, are also susceptible to a collective action problem; they are “a common good, with its benefits accruing to all users of international banking services.”71 Yet, “each central bank was only motivated to act as a lender of last resort when a bank failure caused problems for its own domestic financial systems.”72

Finally, safeguarding of information privacy is indispensable for functioning of financial enterprise, now vitally dependent on soundness and impregnability of online transactions. That inadequate privacy safeguards are sufficient to inflict catastrophic damage to electronic financial flows is hardly debatable; unprotected information opens a revolving door to financial crime, fraud, or simply misuse, as when “financial information collected by a bank might be used by a mortgage company to deny a loan.”73 Clearly, in this setting, unilateral effort is also futile, because “information technologies today are by their very nature transnational in scope,”74 and unilateral tightening of privacy standards is likely to prompt ‘forum-shopping.’75

Second, in each instance I consider, an international regime is invoked – or at least proposed – as a means of addressing the respective collective action problems. In surveying the theories of international regimes, I defined an international regime as a set of “principles, norms, rules, and decision-making procedures” applicable to the behavior associated with a certain issue-area.76 Anti-money laundering regime is anticipated, for example, in the 1988 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, as well as a number of non-binding accords, culminating in the promulgation of the forty Recommendations issued by the Financial Action Task Force (FATF).77

Capital adequacy standards are set in the Basle Capital Accord, embodying a consensual framework of rules to strengthen the international banking system. With respect to the information privacy regime, it will suffice to observe that a sustained effort was made to establish a regime, through a series of negotiations to attain convergence on “decision-making procedures,” where “principles, norms, rules” were all presumably already exempt from debate; yet – as I shall attempt to explain below – with scarcely any success.78 This result will be explained by the hypothesis; what is crucial for comparative purposes is that in every instance, there is a confirmed presence or at least a “specter” of an international regime.

Third, domestic regulation associated with an international regime (but not necessarily imposed by it, since international regime may itself be derived from a certain standard of domestic regulation) directed predominantly at private actors, imposing at least some costs


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associated with compliance. In all three cases, compliance with regulation, be it domestic or international, is costly and, therefore, has a propensity to meet with opposition from regulated entities. For example, a now firmly entrenched tenet of anti-money laundering regulation is that financial entities file reports on “suspicious” transactions and take measures to “know their customers”, both of which place a considerable cost burden on regulated parties. Similarly, agreeing to a capital level standard entails costs through introducing a floor level of capital to sustain loans, which may hurt banks’ competitive fitness.79 Finally, ensuring opacity of private information, in particular with respect to electronic transfers and e-commerce, also implies rising costs for industries – emphatically so for finance and banking – engaging in information transfers, thereby triggering opposition.80

V. Justifying Research Design: Control

In analyzing various theoretical perspectives on international regimes, I suggested that all three schools were to some degree instrumental in predicting whether a certain regulatory regime is destined to be cohesive or will in all likelihood remain fragmented and ineffective. Thus, I intend to incorporate the insights of the knowledge-based approach, specifically its emphasis vis-à-vis “agreement on means” into a composite independent variable, also determined by a degree of incentive-compatibility of the U.S.domestic regulation. As far as the power-based approach is concerned, I surmise that it will prove useful for causal tracing, as well as for drawing up a corollary of this argument, namely that the U.S. disengagement from a certain regime leaves a prospect of cooperative multilateralism largely fleshless. Also, the U.S. predominance in all issue-areas is a relatively constant factor and, since it assumes identical values in both comparisons, the Method of Difference suggests that the U.S. “power” is not endowed with a promise of explaining divergent outcomes. Therefore, “power” will be treated as a controlled factor.

The interest-based approach is also useful, albeit in a descriptive sense. In all three cases, a regime did emerge, in part at least, in response to a cooperation problem. Significantly, it is quite reasonable to expect that a common interest in averting a systemic threat would sustain a regime in existence through a variety of means, notwithstanding hegemonic influence or lack thereof. To support this claim, case studies will show, for example, that reputation of actors – an asset of particular value to neoliberalism – proved an important factor in securing a basic setup for collaboration and discouraging cheating. If I were to focus on collaboration only, I would likely be satisfied with realist and neoliberal arguments. However, once


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coordination enters the picture, whatever variation it carries is impervious to realist or neoliberal claims; neither power nor institutional arsenal of neoliberalism has much to offer in explaining observed pattern. Put another way, because I “control” for, or focus on, collaboration, and collaboration is explained by “power” and “interest” (understood as a demand for institutional solution), in attempting to find a key to coordination, I choose to control for “power” and “interests.” This is reflected in the “Method of Difference” table above.

VI. Measurement

With respect to measurement, I rely on several indicators that, used in conjunction, yield a consistent index for the concepts contained in both independent and dependent variables. To conclude whether a certain domestic approach to regulation is rule or incentive driven, at least three indicators are available. First, one may conduct a survey of legislation (e.g. congressional acts) addressed to a specific issue-area and attempt to gauge its character: how detailed or restrictive it is, whether it allows for use of incentives to further regulation, and so forth. Second, it should prove instrumental to analyze evidence of opposition expressed by regulated entities; as I have attempted to argue above, because regulation tends to entail unwelcome costs, it is likely to face dedicated opposition from private actors in a given issue-area. Third, a plausible indicator may be contained in the design of a domestic regime, charged with tackling a problem. In particular, there is a promise in checking whether a regime is intended to be binding or laissez-faire, or whether “decision-making principles” embodied in a regime are intended to encourage incentive-operated approach or, instead, resort overwhelmingly to rules and close regulation. This latter indicator is especially accurate in those cases, where the U.S. proved a critical factor in forging an international regime.

As its label suggests, “agreement on means” (as opposed to a more ambiguous “epistemic convergence”) is essentially a binary variable, whose value is determined by whether a U.S.-chosen approach is also affirmed and adopted by other dominant actors in a regime. In other instances, the U.S. approach may itself become a blueprint for a regulatory structure of an international regime.

Finally, to measure the dependent variable, I attempt to make an assessment of whether a regime is sufficiently robust so as to be a barrier against both faltering collaboration and coordination. This indicator is approximated by a degree of compliance that a regime elicits. To clarify, I believe that with coordination stalled in its tracks, an international regime is incapable of generating a clear framework of “norms, rules, and decision-making procedures” that define its substantive core. Without such framework, and without rules it puts in

place, there is no ground for compliance, even assuming a good faith


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effort on the part of the regime participant to do so. Simply speaking, if there are no agreed-on, well-understood, and clearly formulated rules, there is simply nothing to comply with. In each case, however, I will try to weigh facts and circumstances with great care, so as to be able to claim that cohesiveness is assessed with requisite accuracy.

Case StudiesI. Anti-Money Laundering Regime

An international regime to combat money laundering is hardly something that could be confidently accepted as a fait accompli. Nor is it any longer likely to raise eyebrows as something hitherto unheard-of or inherently whimsical. In any case, this regime is taking shape and is acquiring a distinct legal status.81 At various points above, I intimated certain attributes of that regime, as well as those of money laundering per se. Here, however, this discussion is appropriate and need not be abridged.

Money laundering is defined as processing of gains from criminal activity, in order to disguise their illicit origin and make them available to a criminal, with no risk of detection by law enforcement. Money laundering earns its stigma not simply as a morally reprehensible chicanery that rewards crime; it has a wide array of quite pragmatic and quite devastating effects: it is “bad for business” because it damages the reputation of financial entities unwittingly serving as conduits for “dirty money”.82 Money laundering is “bad for development,” as it lures unstable economies into offering themselves as safe havens for “dirty money,” thereby clinging onto short-term gains, but foregoing long-term benefits of foreign direct investment, repelled by these economies’ complicity in or, minimally, laxity on crime.83 Money laundering is “bad for economy” since it dilutes macroeconomic indicators, “mak[es] interest and exchange rates more volatile, caus[es] high inflation” in countries afflicted with money laundering and “siphon[es] away billions of dollars” that could otherwise be committed to fostering economic growth.84 Finally, money laundering “empowers corruption and organized crime.”85

With estimates of global money laundering – however imprecise they may be, they are still likely to under, rather than overestimate – creeping into higher and higher percentages of global GDP.86 Indeed, it is clear that money laundering poses a “clear and present danger” on a systemic level. This menace has now further been accentuated by globalization, as well as technological advance, which have vastly expanded an already wide range of laundering means.

It should not be hard to recognize that an anti-money laundering regime is itself a collective good. While a world with no money

laundering is of undisputed value to all, at least to major states, an individual effort to bring it about is likely to be costly and futile. To


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explain, laxity on money laundering has a clear positive impact on a state’s current account, even if only in a short run, since it quite literally invites money in, no matter what its origin. In particular, in the U.S. “[b]enefits have long accrued to the U.S. Treasury when U.S. banks manage foreigners’ money, much of which is invested in dollars and helps underwrite the country’s chronic trade deficit.”87 In addition, a firm anti-money laundering barrier erected in a certain jurisdiction will win it a sense of moral superiority, but may starve it of much-needed capital, while pushing “dirty money” in other, less scrupulous directions and failing to alleviate systemic damage. As an oft-quoted adage has it, “fighting money laundering is like pushing on a balloon – you simply displace the activity to wherever there is least resistance.”88

Another consideration likely to put a break on individual efforts has to do with secrecy considerations. Even though it is “dirty money” that usually “flee[s] to secrecy,”89 legitimate enterprise also has compelling reasons to be concerned with secrecy and hence be averse to investigations and checks associated with money laundering controls. “[B]anking secrecy is often considered essential in attracting legitimate business; extensive inquiry into the source of funds is likely to push funds offshore.”90

It is hardly a surprise that the U.S., owing to the enviable size and prowess of its financial system, is “according to all credible estimates... the largest repository of ill-gotten gains in the world.”91 Nor should it then be a surprise that in response the U.S. has spearheaded the international effort to forge a regime against money laundering, clearly cognizant of the pitfalls of attempting an individual thrust. Specifically, the U.S. used its influence to bring into existence the Financial Action Task Force (FATF), commonly acknowledged as the lifeblood of international anti-money laundering regimes. The FATF’s major contribution was to develop a set (forty, to be specific) of non-binding recommendations, to serve as guidelines for the domestic anti-money laundering choices of its members, and perhaps elsewhere. As a result, regulatory framework espoused by the FATF is an offspring of that relied upon in the United States.

Meanwhile, U.S. domestic safeguards are credited as being most stringent and comprehensive. Indeed, since 1974’s Bank Secrecy Act the U.S. has struggled to erect a Great Wall against money laundering, with intermittent bursts of fervor prompted by banks scandals or, recently, September 11th . Its approach could be characterized as “incremental legislation”: a trial-and-error process of identifying “predicate crimes” (those that generate “dirty money” that needs to be laundered). Furthermore, this approach may be seen as likely to be exploited for money laundering, enhancing transparency of


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transactions, and so forth. For example, last year’s Patriot Act’s contribution was, among other things, to “requir[e] anti-money laundering compliance for all financial institutions,” imposed “minimum due diligence standards for correspondent and private bank accounts,” and “expanded definition of money laundering by increasing the number of predicate crimes.”92 As a cumulative result, there developed a dense body of rules, procedures, and guidelines, overwhelmingly targeted at banks and other financial entities as points of entry for “dirty money.” One overriding objective of this pressure was to force banks to “know their customers”, in order to sift those arousing suspicion. Clearly, such measures as required to give effect to “know your customer” policies are costly and in tension with privacy considerations, thereby triggering at times significant opposition from banks and other regulated entities. In other words, “[a]nti-money laundering efforts provide no clear economic payoff, and may in fact exact immediate costs.”93

Another reason banks tend to view “know your customer” approach with revulsion is that it “amounts to official spying”94 and “oblige[s] [banks] to become detectives,”95 forcing upon them a due prerogative of law enforcement, with implications not only for privacy, but also for overall efficiency of bank as an institution. In fact, it took September 11th horror to water down financial strata’s opposition to enactment of “know your customer” procedures, which on previous occasions had been repeatedly defeated in Congress.96 In sum, however, only “few countries have embraced the U.S. approach of comprehensive reporting”, and “...most banks have lobbied their governments hard to reject U.S.-style record-keeping and reporting.”97

Notably absent from the U.S. “incrementalism” is the emphasis on incentives as an alternative or at least complimentary instrument of soliciting compliance from the regulated entities.

That incentives could be useful proves a plausible suggestion if examined on a micro, intra-state level. As argued in a well-developed microeconomic analysis of anti-money laundering regulation, both incentives and information are indispensable, if effective regulation is to be achieved.98 This argument construes banks as “agents,” which endowed as they are with information on customers, are charged with detecting and reporting money laundering. However, as rational actors, banks are only likely to “undertake[] active behavior only if this produces some advantage, i.e. if suitable incentives exist for adopting a given conduct.”99 With no incentive structure, banks will be unable to expend considerable effort or to apply with commitment whatever rules are imposed on them, since “in general any decision to disclose [information] can only be made after a fair, analytical and practical assessment of the facts and consequences” of suchdecision. 100


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Furthermore, “the system of rules must be able to exert a positive impact on the resources deemed important by the intermediaries,”101

i.e. banks and other financial actors charged with tracking money launderers. Simply speaking, incentives are necessary to balance coercion; no selfish actor may be expected to subsist on a diet of sticks, without hoping at least for a few carrots. An assumption of “active collaboration,” costly and intrusive as it proves in practice, is then hardly a plausible one, yet it seems to have inspired U.S. regulatory “incrementalism” for over twenty five years. Therefore, in terms of this paper’s hypothesis, I believe, the U.S. stance is fairly described as “rule-driven” or “incentive-incompatible.” The micro-level analysis is also in alliance with the present hypothesis: since heavy regulation tends to stifle domestic compliance, it should not be expected to correlate positively with incidence of cohesive international regimes by having an adverse effect on collaboration, let alone coordination.

While exhorting US commitment and diligence in the fight against money laundering, the FATF itself concedes that US domestic arrangements are too complex, too devoid of incentive rationale, and too inflexible to warrant a full-fledged, effective structure, easily brought into alignment with international “norms, rules, and decision-making procedures around which actor expectations converge” in this particular issue-area. Specifically, the FATF holds,

“The U.S. anti-money laundering system is very complex; and the large number of law enforcement and regulatory agencies, the huge number of financial institutions, the diversity of federal and state laws, and the absence of comprehensive statistics to inform resource allocation decisions militate against a fully effective and efficient system.”102

I could hardly hope to find a more eloquent corroboration of the proposed hypothesis, at least with respect to its focus on the dichotomy of incentives versus rules.

That the U.S. does “agree on means” with the regime’s framework follows from the fact that the framework itself was drawn using U.S.- developed techniques to fight money laundering as a blueprint. Mirroring, albeit imperfectly, U.S. approach to regulation, the Recommendations treat incentives with silent skepticism, emphasizing instead the role of comprehensive, “access-all-areas” legislation.

I am at a loss to explain why, amid the rainfall of praise bestowed on both the FATF and the U.S. for its audacious, world-leading crusade against money laundering, there is not a single – as far as I know – vocal acknowledgement that the U.S., if anything, is not at all in accord with the FATF’s prescription. In fact, according to “2001- 2002 Self-Assessment Survey,”103 U.S. compliance record is second worst, with Mexico – ironically enough – again its only “southern” neighbor. While this puzzling observation may be dismissed as a capricious formalism, I believe it is of critical importance in evaluating an anti-money laundering regime. What I am concerned


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with is not an empirical benchmark of the FATF’s effectiveness; rather I seek to shed light on the cohesiveness of the international regime, and its ability to summon cooperative solutions to coordination conflicts.

If forty recommendations are indeed “the world standard for effective national anti-money laundering regimes,”104, then, clearly, one could not reasonably argue that adhering to them is not a measure of or at least an accurate reflection on compliance with the regime in general. Compliance, however, as I suggested, gives a reasonable estimate of cohesiveness. The situation in which there exists a lack of coordination means that a framework of rules is itself in disarray, and hence there is nothing to comply with.

With the U.S. basically in default on compliance, especially given its overwhelming share of “dirty money,” the international anti-money laundering regime, therefore, appears to be but a frail institution. Even as a purely symbolic expression of international cooperation, the FATF is lacking credibility, at least if one bothers to take more than a passing glance at how it works. Armed with no genuinely coercive means to induce compliance, it finds solace in its “name-and-shame” approach, whose utility also appears dubious, as those jurisdictions which subsist on “dirty money” hardly care how “shameful” their ways are.

One important reason – at least that is officially cited – behind U.S. neglect of the Recommendations is its approach to regulating insurance industry. Specifically, the Recommendations prescribe that anti-money laundering safeguards (such as “know your customer” or reporting practices) be extended to “all financial instititutions.”105 The U.S. reluctance to bundle insurance together with banks for the purposes of anti-money laundering regulation is not arbitrary. In the United States, the power to regulate insurance is and has traditionally been reserved to the States.106 Therefore, only individual States may elect to adhere to regulatory structure envisioned by the Recommendation, not necessarily with universal compliance.

In light of the aforementioned facts and cited circumstances, it is difficult to imagine that, even allowing full credit to U.S. good-faith effort to foster international cooperation against money laundering, it will move to restructure its approach to regulation in such a way as to comport to internationally accepted standards. Needless to say, the FATF’s “name-and-shame” approach to inducing compliance will scarcely intimidate the U.S. into reassessing its standards, such as insurance industry regulation. What is, of course, ironic in this situation is that the U.S., as noted above, played a leading role in shaping current FATF’s philosophy, thereby guaranteeing that they would “agree on means.” Therefore, while the U.S. may recognize that an international anti-money laundering regime is able to promote international cooperation, from which it is likely to benefit, US is


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hardly to be expected to make such adjustments to its regulatory policies over and above those dictated by its domestic strategy. In other words, the U.S. appears to regard this regime as auxiliary to, rather than predominant over, its domestic policies; as an instrument whose utility is derived from a peculiar international setting of money laundering, rather than its inherent institutional promise of effective international solution to collective action problem posed by money laundering.

To conclude, despite its leadership in forging a series of international arrangements, culminating with the FATF, the US appears reluctant in adhering to the regime’s basic tenets, as embodied by the forty Recommendations. US, cushioned by its leverage in a multitude of issue-areas, and especially those related to finance and trade, simply opts to resist revamping its complex, rule-based, incremental approach to regulation, merely to harmonize itself with international guidelines.

A power-based explanation, therefore, appears inapplicable here; ironically, power in this case, if anything, is a destructive, rather than constructive, element. Were the U.S. a tiny, economically inconsequential jurisdiction, vulnerable to a threat of being cut off from global financial mogul-states, it would perhaps respond to the FATF’s “name-and-shame” strategy. Power – expressed as economic, political, perhaps ideological influence – clearly played a role in assuring collaboration, or in setting stage for an international regime, as the U.S. did in pursuing a number of international anti-money laundering instruments, culminating with the FATF. Power nonetheless may also be viewed as one factor that, by discouraging defection, assured collaboration. Specifically, by threatening to isolate cheaters from financial markets – relying on major states to implement this threat, if necessary – the FATF arguably did manage to set up a basic mechanism for making defectors think twice. Defectors could be identified through FATF’s “name-and-shame” approach, for example.

In any case, power is not of much solace when coordination of efforts, which actors did agree to exert under U.S. prodding, enters the agenda. Unless “power” is construed as nothing less than “omnipotence,” it will only provide a half-baked explanation of the current international anti-money laundering regime. In terms of cause-and-effect reasoning, a greater emphasis on rules is associated with, and in fact accomplished by, either a break-up of the preexistent broad prescriptions into a number of narrowly focused rules and guidelines or simply an increase in the overall body of rules so as to cover a greater number of circumstances. In either case, a likely result is that this incremental approach will bear a heavy imprint of various country-specific factors and, therefore, will be less fit for convergence with its international counterparts. Hence, a regime, for which convergence of “norms, principles, and decision-making procedures”


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is vital, will likely be underdeveloped or ineffective. This reasoning illustrates that, however crucial power may be, it lacks explanatory salience. In this specific case, using power to build into an international regime a peculiarly American approach to regulating insurance industry, in turn deriving from its federal structure, would simply be absurd.

Interest-based theory also leaves a lot to be desired in what would be its attempt at explanation. In fact, it may even be in a weaker position than that occupied by power-based theory. For one, an argument that an incipient regime arose as a result of spontaneous institutional salvation from uncertainty and rational-actor selfishness, rather than hegemonic position and bargaining leverage (or simply power) of the U.S. is bound to be implausible. Second, if the interest-based theory were fruitful in this case, it would go a longer way (than it actually does) in spelling out how it is that, with uncertainty at least to some degree suppressed, there is a dearth of institutional solutions to currently existing stupor. Were neoliberalism truly applicable here, it would be expected that perhaps a second regime would arise (or that the original one would somehow perpetuate itself) to enliven the otherwise stalled coordination. However, at this stage, uncertainty, cheating, or transaction costs of information exchange, which usually feed the demand for a regime-like solution, are no longer a formidable presence, because a rudimentary collaborative framework is already in place; therefore, an institutional solution is thwarted. One way in which neoliberalism may stand ground is with respect to its emphasis on reputation and “shadow of future” aspect of cooperation, which finds an expression in the FATF’s “name-and-shame” practice, effectively assigning to each actor a qualitative measure of trustworthiness. Still, in doing so, the FATF seems to be concerned with cheating and collaboration, rather than establishing a stable coordinated outcome.

I am left to conclude that, while the U.S. could be justly said to “agree on means” with other regime participants, it failed to develop an incentive-based approach to domestic regulation. Indeed, one only need to cast a cursory glance over the FATF’s “Self-Assessment Exercise” to note that all member states adopted at least some version of the U.S. approach, if only somewhat diluted and indecisive in some cases. As a result, currently existing international anti-money laundering regime, though in certain it does tackle collaboration problem, is a frail, disoriented creature, with no truly common standard associated with its performance. It is not a cohesive regime.

II. Basel Capital Accord

An international regime to regulate banks’ capital levels, unlike that to combat money laundering, is firmly rooted, to be sure. Again,

mentioned above for illustrative purposes were a few aspects of this regime. A detailed discussion is in place here.


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“Capital serves as an internal insurance fund to cover risks... that cannot be externally insured.”107 Capital adequacy refers to such levels of capital held by a bank as are sufficient to sustain its loans or to preserve its solvency in case of massive default on issued loans. Capital adequacy is indispensable to a soundly functioning international financial system – that much is clear. It also should escape doubt that such outcome is itself a collective good “with benefits accruing to all users of international banking services.”108

Therefore, “each country that enjoys its use also has a responsibility to contribute to its maintenance.”109 A necessary step to secure this reciprocity is, of course, to reach an agreement over what exactly counts as “adequate.”

As a collective action problem, capital adequacy is in certain ways similar to money laundering. In one respect, it is likely to punish a state that attempts to institute a capital levels standard on its own by putting it at a competitive disadvantage vis-à-vis those states whose banks pursue a riskier, yet a more lucrative short-term strategy, simply by being able to make more loans.110 Like money laundering, inadequate capital may rapidly grow into a systemic threat, with disastrous consequences following continuous neglect, as was the case with debt crisis in the early 1980’s. Again, such systemic devastation is now likely to be amplified by globalization, with one defaulting bank capable of triggering a chain reaction of solvency collapse, if no safeguards are in place.

One such safeguard became a driving force behind the international effort to assemble a capital adequacy regime – namely, it was to “level the playing field” by instituting a universally accepted benchmark for evaluating risk, so as to prevent predatory competition arising from reckless, risk-blind lending. Admittedly, this goal faithfully reflects two important expectations generally attached to regimes: piercing uncertainty and discouraging cheating. However, in doing so this regime only helps collaboration; coordination is not thereby granted and may still be jeopardized if, for example, approaches to “leveling the field” are divergent or otherwise incoherent with respect to each other. Assuming, arguendo, that it is incentive compatibility that is crucial to securing coordination, I shall now examine if the U.S. domestic treatment of capital adequacy standards exhibits this quality. I find that it does, and in several respects.

First, a flashback to anti-money laundering regulation demonstrates that a similar “incremental” approach to regulating bank capital solvency is conspicuously absent. There is no similar legislative trail, or anything analogous to “know your customer” struggle. Capital adequacy is enforced (if at all necessary) by the


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Federal Reserve and is guided by its internal guidelines. A search of U.S. Code for such keywords as “Basle” or “capital adequacy” yields only a handful of notices and prescriptions to conduct a series of surveys to compile a regular report for the Basel Committee.111

Second, a valuable insight is that banks comply with capital adequacy requirements to avoid regulation or sanctions, both of which may be costly and at odds with a bank’s internal decision-making. In other words,

“Banks are forward looking. They also seek to avoid regulatory interventions, such requiring them to recapitalize or adjust their asset portfolio to comply with capital requirements. Such an intervention is costly because it distorts bank decisions and uses up scarce senior managementtime.”112

Third, another incentive motive was contained in Federal Reserve regulatory measures promulgated even before the Basle Capital came into existence. Introducing risk-weighted system, the Board emphasized that one objective of this measure was to reward those banks that held more liquid assets, that is, more capital.113 Fourth, domestic regulatory regime, besides an idealistic promise to abate a systemic threat of unsound, risky banking, provided another, quite tangible incentive by establishing a convenient reputational benchmark. By relating a bank’s capital holding to the mandated threshold, it was easy for each bank to gauge each other’s solvency, business prudence, and reliability for future contracts. With the Basle agreement, this effect only gained vigor by making reputation an internationally recognized and essentially quantifiable asset. Indeed, “[b]anks have found a distinct advantage in being able to satisfy the rating agencies and the market generally that their capital was adequate in terms of the final Basle standard.”114

Another measure that I deemed indicative of “incentiveness” was a perceived degree of opposition to regulation from those subject to it. In this regard, there is little to suggest that bankers were significantly opposed to capital adequacy standardization. Initially, they appeared to balk at innovation, for it was seen as capable of injuring competitiveness. However, banks’ opposition lasted only as long as capital adequacy remained a unilateral measure, and before it found a permanent and central niche in the Basle agreement.115 I conclude that for present purposes, the U.S. domestic approach to regulating capital levels may be aptly and confidently characterized as “incentive-compatible.” To ascertain the relevance of incentives to the issue of capital adequacy, I suggest that another micro-level analysis be taken.

Echoing with an uncanny precision, the aforementioned discussion of applicability and the importance of incentives vis-à-vis anti-money laundering regulation is a similar prescription regarding the adjustment of capital levels: “Within the regulatory regime paradigm, a central role for regulation is to create appropriate incentives within regulated firms so that the incentives faced by decision makers are consistent


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with financial stability.” Further, “[i]ncentive structures need to be at the center of all aspects of regulation because if these are wrong it is unlikely that the other mechanisms in the regime will achieve their regulatory objectives.”116 Excessive regulation is also likely to encourage cheating or perfunctory, “don’t ask, don’t tell” compliance, just in order to avoid sanctions:

In a market which is heavily regulated for internal standards of integrity, the incentives to fair dealing diminish. Within the company culture, such norms of fair dealing as “the way we do things around here” would eventually be replaced by “It’s OK if we can get away with it.”117

This analysis closely resembles that offered with regard to micro-roots of compliance with anti-money laundering regulation. As I have suggested there, such analysis contributes to the explanation of how less regulation is consistent with greater macro-regime cohesiveness. The Basle Capital Accord differed from the FATF’s approach – informed by U.S. regulatory philosophy in that area –in that it that it took above admonitions to heart and strove to emphasize incentives and lesser rule density.

This approach was eventually imparted to an incipient international regime, to be negotiated and signed in Basle. Again, the role of the U.S. in securing this regime is indisputable. The U.S. involvement commenced with its signing of a bilateral accord with the U.K. to put in place a system of risk-weighted assessment of capital. That accord further empowered both the U.S. and U.K. and gave them sufficient leverage to push for wider acceptance of the standard by threatening the recalcitrant states with isolation from the uniquely lucrative financial markets of both countries. The Basle Committee, which has been for some time engaged in formulating its own standard, similarly came under pressure and was forced to acquiesce.118 The Basle Capital Accord, based on the U.S-U.K joint model, thus came into existence.

The Basle Capital Accord declares two “fundamental” objectives. It seeks, first, to create a framework to “strengthen the soundness and stability of the international banking system; and second, it intends to endow this framework with such qualities as to attain “a high degree of consistency in its application to banks in different countries with a view to diminishing an existing source of competitive inequality among international banks.”119 As a reflection on this latter statement, it is interesting to observe that Germany, for example, was initially reluctant to acquiesce in Basle, claiming that its risk-weighted framework for capital was inapplicable to German “universal”banks.120

With respect to the “agreement on means,” then, it has historically become a premise of the international capital adequacy regime. The Basel Capital Accord grew out of convergence of regulatory approaches, first in the U.S. and U.K. (incidentally, U.S. system was in part modeled after that in use in U.K.) and then, with some

coercion, globally. Its goal was precisely to “agree on means” of assessing capital saturation of banks’ assets, “since it is difficult to


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make valid comparisons when every country counts it differently.”121

Both the U.S. domestic and international foci testify in unison that Basle proved a success, at least in terms of eliciting an enviable degree of compliance. Domestically, it elicited a swift positive response, with an overwhelming majority of banks reporting full or even excessive compliance way in advance of preset deadline. A survey conducted by American Banker full two years before the Basle requirements were officially to take effect had found that “[t]he overwhelming majority of America’s largest banks already meet the tough international capital standards.”122 Internationally, compliance made itself known not only by generating a response, similar to that in the U.S., but also by showing that the Accord garnered wide, albeit informal, acceptance outside of the original G-10 membership. I argue that either on its face or through the suggested link between compliance and coordination success, the capital adequacy regime may be safely characterized as cohesive and triumphant in resolving often intractable coordination dilemma.

Again, power can hardly be discounted as an influential factor in generating a regime solution to the capital adequacy predicament. A narrow version of “hegemonic stability” theory would be confirmed, recalling that the first spark was lit by U.S. and U.K. combined pressure and an implicit threat it contained – that deviants would be shunned in or altogether barred from U.S. and U.K. financial markets. However, beyond this stage, beyond a basic precept for collaboration that may indeed have had to be imposed, there is no evidence that power had any relevance. As a causal element, it became unnecessary. Assuring coordination, once a favorable environment of collaboration had been won, became a matter of a highly fluid, easily implementable and commonly understood character of regulation, its perceived nature as a “best practice” that was not bound to, for example, a specific legal system of a given state or its traditional regulatory practices. Therefore, coercion had no apparent utility. Put differently,

“... the U.S.-U.K. agreement was not simply forced upon the other G-10 countries.123 In their negotiations with individual countries and the Basle Committee more broadly, the United States and Great Britain took account of the differing national systems that made a straightforward extension of their agreement difficult to accept. It was obviously in the interest of the Bank of England and the Federal Reserve to shape a standard which every G-10 member could agree upon and, just as important, live up to by domestic enforcement.”124

To reiterate, Basle’s success lay in its flexibility that allowed it to erect “a common standard while respecting national differences.”125

It is hard to dismiss interest-based theory outright; however, it clearly suffers if compared with presently advanced hypotheses. There is no pressing evidence, besides speculation, that coordination stage of capital adequacy regime was strictly out of reach for a


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functionalist explanation. In fact, there is one aspect in which a functionalist explanation does appear to have relevance, and it has to do with this theory’s emphasis on reputational effects that international regimes may acquire. Specifically,

“[i]nternational regimes help to assess others’ reputations by providing standards of behavior against which performance can be measured, by linking these standards to specific issues, and by providing forums, often through international organizations, in which these evaluations can be made.”126

Intellectual honesty, therefore, requires acknowledging that this statement captures quite precisely an important building block of the Basle regime. However, just as there is no compelling evidence to discount an interest-based explanation, nor is there a swaying reason to grant it full credit. One reason to doubt its capability to dispel both collaboration and coordination problems is that, while reputational effects may discourage cheating that plagues collaboration stage, they may not be powerful enough – compared with a payoff in terms of incentives – to level the playing field. Such outcome would ensue in a hypothetical situation, whereby parties agree to impose some capital controls, but fail to find common ground with respect to where a key threshold should lie. In this case, a rudimentary regime would still exist; presumably all regulators would agree to punish especially “wild”, deviant lending behavior of banks. Such a regime would serve its purpose by limiting uncertainty and serving to discourage cheating, in particular through its reputational and “shadow of future” effects. Hardly, however, would such a regime become as successful as that concluded in Basle.

I conclude that evidence strongly suggests that the Basle Capital Accord did lay a foundation for a genuinely cohesive regime. I argued that this result is traceable to U.S. domestic regulation as well as to there being a solid consensus among experts – central bankers in this case – as to how regulation is to be carried out and which quantitative yardstick constitutes a commonly acceptable standard.

III. Information Privacy

This account is necessarily shorter and more brisk than those dedicated to, respectively: money laundering and capital adequacy. Unlike the anti-money laundering regime that exists in a frail and fragmented form or the capital adequacy regime that is well-developed, information privacy regime may be pronounced as altogether non-existent. Therefore, there is no basis to explore how cohesive such a regime is, or which factors are responsible for a suchand-such outcome. That there is not at least a de jure international information regime is puzzling, especially because an international regime in this area would seem almost preordained.


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First, as I previously argued, there is a genuine collective action problem, which is broad enough in scope and effects as to acquire an international character. Second, negotiations over a potential regime structure actually have taken place, yet failed to lead to a successful outcome. Conspicuous for its absence in this scenario is America’s decisive role in building a bridge to collaboration (though, as I have argued, not necessarily to coordination), despite its obviously sizable stake in whatever information regime would come about.

Third, as I will point out shortly, the U.S. domestic approach to regulating information privacy domain is quite incentive-compatible. Therefore, there must be a compelling reason behind this failure. I believe this reason is the negative value attached to the second independent variable, “agreement on means.” I also wish to make an important disclaimer: I do not construe this case – or my hypothesis in general – as implying that when there is no well-pronounced incentive structure, it only affects coordination, while no “agreement on means” signals that even collaboration is bound to be infeasible. For example, if power were to assure collaboration, “disagreement on means” would certainly stifle coordination, though only in some cases would it have enough capacity to overcome hegemonically supported collaboration. However, since it is comprehensiveness of a regime – its ability to facilitate both collaboration and coordination – that I study, I do not seek an empirical corroboration of such scenario.

Essentially, a weak system of information privacy, especially in application to online fora, is a collective “bad.” Without a trustworthy, reliable system that safeguards integrity of personal information – be it personal or corporate – there may develop a choking effect on the development of e-commerce and other kinds of online enterprise. Nonetheless, there is a deeply ingrained and not easily extricable disincentive facing each state to expend effort and resources to protect privacy. Indeed, by their very nature (and not unlike laundered money) informational flows cross state boundaries and are both accessible and vulnerable in those jurisdictions, which choose to settle for laxity.

Prima facie, it may not be immediately clear how to construe a threat to individual privacy as a systemic danger. However, this impression is misleading because an insufficient guarantee of privacy, especially in application to e-commerce, is likely to beget distrust of consumers and stifle what would otherwise have full potential to evolve into a burgeoning industry: “The lack of trust in the Internet would have staggering implications for the willingness of consumers to look to it as a place to conduct business, ultimately leading to the failure of the Internet-based business model.”127 Moreover, “the commercial market for data”, indispensable even for that progressively shrinking category of businesses not concerned with online privacy


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issues, “might collapse as individuals refused to provide information or governments restricted its transfer abroad.”128

The current U.S. approach to dealing with information privacy issues could be described with fair accuracy as inviting and welcoming self-governance. 129 As such, I believe that an explanatory variable in this paper is related to incentive-compatibility. To be sure, there are several ways in which self-regulation – or self-governance – is incentive compatible.

First, it substitutes for the rule incrementalism that, as I have argued, for example, in analyzing the micro-foundation of anti-money laundering policy, is inherently antagonistic to an incentive-friendly environment. Second, self-governance also offers a reputational incentive, whose utility also made it a centerpiece of capital adequacy regulation. “Since merchants have an economic incentive to attract consumers,”130 they have to build a positive reputation. This interest in turn entails an incentive to take steps to ensure consumer privacy. Third, there is also an incentive – again one akin to that incorporated into the capital adequacy regulation - for private companies to be enthusiastic and scrupulous in handling privacy concerns. A system of self-imposed standards and procedures is one way to preempt governmental regulatory action that is likely to be associated with greater costs and possibly misallocated resources.131 This incentive is further reinforced by the immense interest to preserve Internet’s innate promise, namely, “to flourish with innovation, expanded services, lower costs and broader participation in an unregulated, market-drive environment,” which could be significantly stifled by “heavy-handed” regulation. 132

In some cases, private actors are willing to accept a degree of regulation, especially if strings attached are not too long and still allow for “preemption.” “You know who really wants privacy legislation, – and won’t admit it, is industry because they want preemption.”133 A flipside to incentive compatibility, rule density has also been kept low, “So far, the U.S. government has deliberately avoided creating a comprehensive domestic regulatory system for privacy issues, especially for the critical information industries.”134

Moving on to the international forum, the privacy regime is found in shambles. The U.S. and Europe, although both keen on devising a mutually acceptable solution, failed to “agree on means.” While a detailed account of, for example, the EU approach to information privacy is here inapposite; it should suffice to say that it stands in radical opposition to that which has thus far characterized the U.S. position. In fact, European approach to information privacy is remarkably reminiscent of the U.S. “incremental” treatment of money laundering. Thus, in France, for example, “[m]any observers argue that self-regulation by industry has failed, technical solutions are unavailable, and strict legislation is the best solution.”135 In other


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words, there has failed to develop an “epistemic community” that would precipitate an emergence of coherent technical standards, or “best practices,” let alone converging norms, rules, or decision-making principles.

The power-based explanation in this case seems clearly out of tune. In fact, I contend, this case is important precisely because it puts in doubt the universal utility of power-based explanations, even as far as collaboration is concerned. This is not to suggest that the U.S. happened to be “non-powerful” in its handling of information privacy; rather it shows that “power” may not be an infallible panacea. In any case, the power-based theory’s failure in this case is especially noticeable since its premise – unlike its conclusion – is matched with enviable precision. As a home to most online commerce and a producer of “most of the content in the Internet and in commercial databases,” the U.S. would stand to gain the most from an international regime, while other participants would also be in a position to benefit, albeit in absolute, rather than relative terms. 136

This setting encapsulates almost perfectly the basic tenets of hegemonic stability, yet it does not lead to a corresponding regime.

Nor does the interest-based explanation appear to be of much avail. Its emphasis on mutual gains, uncertainty, and cheating does not find a fitting landing spot. For one thing, if mutual gains were decisive, there would be at least some hope for a collaborative solution. Clearly, both Europe and the U.S. would gain even from a marginal benefit associated with collaboration. Characteristically, neoliberal emphasis on reputational effects of international regimes, shaped by “iterated” collaboration, is a non-issue, since there is no collaboration (for all practical purposes, at least) to begin with. Nor is there much promise in neoliberal reference to “nested regimes” that may also be conducive to collaboration; if anything, information privacy is embedded in or contributes to a number of other regimes, some of which – for example, telecommunications – did prove to be successful. Yet “nesting” did not transmit this quality to a privacy regime, clearly a logical part of a wider telecommunications regime.137

I conclude, therefore, that a meaningful explanation resides with “agreement,” or rather “disagreement on means” that put a halt on the developing of an international regime in the domain of the information privacy. This result is in accord with my hypothesis, since it demonstrates that “disagreement on means” does not lead to a cohesive regime, even if domestic regulation is conceived as incentive-compatible. This case, though it may appear as limiting to some, may in fact be stronger than its counterparts above. It weakens realism and neoliberalism as competing explanations, while giving credibility to my hypothesis, proving that no cohesive regime is in place.


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Conclusion

I submit that all three cases I have presented are in accord with my hypothesis. One advantage of this hypothesis is that it does not purport in one swift gesture to overturn existing regime theories, which, although locked in a fraternal struggle, nonetheless have proved of great value in constructing a comprehensive theory of international cooperation. Rather, I propose an explanation that allows for, and in fact depends on, a contribution by all three approaches, yet assumes a perspective that sustains a more penetrating analysis. In doing so, I propose a systematic approach that avoids ad hoc and dubious apologetics often used in neorealism or neoliberalism, whenever an empirical test fails to meet expectations.

Evidently, this paper is not about abstract theorizing. Recall the unfortunate position of two spouses whose “cooperation” rests on a vague agreement that, whatever they pursue, they wish to do so together. Often, such an agreement, owing in part to its powerful symbolism, is sufficient to say “I do.” However, a marriage evolving from such an agreement is not just likely, but destined to be fragile and short-lived, if it is not bolstered by enough resourcefulness, patience, and flexibility to resolve conflicts, reconcile differences, and be together “in sickness and in health.”

All cases presented in this paper are not lived out in a far-flung province of abstract political science; they are real, substantive, and are quite “empirical,” or “tangible” to a great number of people. That they are characterized as “systemic” should convey their effect as pervasive and powerful, rather than impersonal. Therefore, extensive inquiry into how regimes operate and which factors determine their success may have real, “empirical” implications for resolving collective action problems that may only be expected to maintain their presence in human endeavors. A clear understanding of the circumstances under which the regimes are or are not likely to make a difference, therefore, is likely to save time and effort spent in seeking solutions where they are not to be found.

I wish to emphasize that this paper is not intended to defend a “lowest common denominator” approach to regulation. Calling a regulatory approach “incentive based” should not be taken as implying its laxity or full submission to business interests. Rather, as micro-analysis indicates, to be efficient, regulation may in fact be tight, as long as it is not repressive. Otherwise, not only does it stifle business domestically (creating a disincentive for full-fledged, committed compliance); in addition, it detracts from international effort to combat whatever systemic threats may afflict globalizing economy. Whether money laundering may be conclusively defeated is not so much at issue here as whether it can be curtailed to a perceptible degree. This result certainly depends on a multitude of factors, and not just


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incentives or agreement on means. For one thing, I do believe that the idiosyncratic nature of each issue-area does have a role to play in determining how robust international cooperation is likely to be. Simply speaking, I do admit that it may be “easier” to fine-tune capital levels than to fight crime and money laundering. Thus, a cohesive regime is not necessarily an empirically effective one. Yet, I hope that my case studies have gone to some length in showing that a cohesive regime, through its link to compliance, is quite likely to boast tangible results.

However, making regime success a function of the peculiar setting in which it is set would be to surrender any effort to find a generalizable theory and settle for ad hoc apologetics. Also, with respect to money laundering, by no means do I wish to convey that an extensive use of incentive to cajole banks into compliance would make law enforcement obsolete. But neither could I deny, based on this research, that incentives may go a long way in making compliance not only a feasible, but also an attractive option. In choosing a strategy they consider most apt, policy makers do not have a luxury of an unbound sea of resources to indulge in a trial-and-error exercise, far less to commit to a course destined to be fruitless and wasteful. One example that emerges from case studies is that reputation, which neoliberalism also recognized as a lever, could be used as an incentive mechanism. However, unlike its role in a typical neoliberal account, reputation could be an attribute that actors do not acquire as a result of a series of iterated cooperation dilemmas, but rather one that they consciously cultivate and advertise.

Another inference that arises from this paper suggests that the big picture of the U.S. role in international regimes be redrawn, or at least revisited. For one thing, one ought to be cautious when praising the U.S. for playing a critical role in establishing a framework for cooperation on a certain issue of common concern. In this paper, I have argued that even when the U.S. is a driving force behind a certain regime, its contribution often does not stretch beyond collaboration. As far as coordination is concerned, the U.S. power may be an impediment to cooperation, rather than catalyst, as it uses its hegemonic position to cushion itself from pressures to converge on a specific distributive outcome. This was an issue in the money laundering case, and also to an extent in that of information privacy. However, a similar pattern is evidenced by the U.S. attitude to human rights treaties. I do not intend to convey that I consider my present hypothesis as broadly applicable as to encompass human rights – that daring task I leave to further research. Indeed, it may be difficult to speak of offering “incentives” to states in exchange for accepting a specific package of human rights, although this approach does not ring entirely alien, either. In any case, I do believe that human rights area may at least serve as an illustration.


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While “the United States played a leading role in the drafting of the ICCPR [International Covenant on Civil and Political Rights]”, it “did not ratify the ICCPR until 1992, more than 25 years after the Covenant was first opened for signature,” and that with a significant package of reservations, understandings, and declarations.138

It is, of course, power that affords the U.S. a “sunscreen” against international scrutiny or criticism of its stance. Still, as I argued above, power ends up as an explanation of what made a regime fragmented and weak, rather than cohesive. Power would also seem to fail a hypothetical counterfactual test: to effect a solution to a coordination problem – in other words, to choose a specific approach to human rights observance – the U.S. effectively would have to muscle an entire international community into accepting its Bill of Rights – again, an unrealistic scenario, at least as long as power falls short of “omnipotence.”

Neoliberalism would suggest that states would be institutionally compelled to find and implement a universal formula for civil and political rights. They would acknowledge that gains to be reaped from concerted observance and enforcement of human rights would drive international community as a whole to espouse a common standard, valuable, inter alia, as a means to dispel mutual distrust. In this scenario, maintaining such common standard would not require hegemonic oversight. Yet, whatever common standard developed has remained an idealistic aspiration, rather than a practical guideline.

The U.S. withdraws to its domestic forum and settles on its preferred scheme of things – in this case, its time-honored Bill of Rights. There may be nothing immediately disastrous about this outcome. However, certain problems – a sample of which was surveyed in case studies – do require multilateral action, and cannot be resolved unilaterally, no matter how momentous an effort is applied. Therefore, international cooperation matters, and so does a theoretical investigation into what may release its full potential and what may strain it into inaction. In this paper, I have tried to argue that two simple principles may sharpen and bring into focus international cooperation. One praises consensual knowledge as a prerequisite of successful cooperation. Another echoes a precept of economics, urging attention to self-interest of private actors and caution with respect to regulation to be imposed on them:

“The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security is so powerful a principle that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its security.”139


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