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Abstract

  1. Top of page
  2. Abstract
  3. Institutional void and societal transgression
  4. How to fill institutional voids?
  5. The (ideal) role of civil society in international finance
  6. A case for social engineering?
  7. References
  8. Biography

Globalizing policy fields can contain institutional voids in which effective regulatory frameworks and the corrective counterbalance of civil society are equally absent. With the inherently incomplete regulation of global finance on the one hand and the evident dearth of civil society institutions on the other, a central governance question emerges: under what conditions could civil society help to recapture the financial system by embedding it in a wider social and economic policy, and thereby reversing the erosion of confidence in market capitalism and liberal democracy? For this purpose, this article proposes the systematic development of a transnational civil society infrastructure in terms of organizational capacity and expertise for accountability enforcement, policy review, performance oversight and advocacy. The goal of this infrastructure is to fill the institutional void and form a counterveiling force against the unchecked might of global finance.

Policy Implications
  • So far, all suggestions and proposals to reform the global financial architecture have aimed at establishing new agreements, statutes and committees but without changing the overall institutional framework. Yet such procedures merely add new layers of complexity. The results will be counterproductive.
  • The institutional void in international finance cannot be closed by civil society actors as they are too scant at both national and international levels. Yet civil society can act as a counterveiling force to help fill the institutional void by working towards embedding the finance sector within broader social norms and conventions.
  • Activists have to overcome relatively high barriers, such as major salary gaps, to enter the discussion on financial issues and to be taken seriously by experts. These barriers lead to a ‘brain drain’ of leadership personalities in civil society.
  • One potential solution to overcome current impediments is offered by independent, endowed foundations. The dual financial and political independence of philanthropic foundations from the market and the ballot box means that they possess sufficient autonomy, which can be paired with expert knowledge and generate a high degree of legitimacy over time. Foundations could interconnect the mobilization potential of member organizations with the political expertise and know-how of think tanks.

It may take some time for historians and social scientists to understand more fully the exact causes, progression and main consequences of the global financial and economic crisis that started in 2008, and that continues to impact many economies and societies. This article argues that the crisis was facilitated by a dual decoupling (Entgrenzung, in Ulrich Beck's terms) of financial institutions: the first decoupling process started in the 1980s by successive pushes for the deregulation of national finance regimes, with the City of London's ‘Big Bang’ in 1986, the failed Mutual Agreement on Investments (1998) and the US Gramm-Leach-Bliley Act in 1999 as cases in point; all of the above loosened control and oversight mechanisms, which had been established in response to the crash in 1929 and the ensuing Great Depression. The push for deregulation was incentivized and fuelled by the creation of new financial products such as the securitization of loan obligations and credit default swaps. It led to a massive growth in international financial transactions and created a complex, global system of finance that soon began to outgrow the capacity of national and international regulatory systems to both regulate and manage it effectively.

The second decoupling happened at the local level. Thousands of local banks, savings and loans associations, mutual insurance and retirement funds moved away from commitments to their communities and regions, and began to orient themselves more toward the new world of global finance and the many lucrative investment options it entailed. This process of ‘dis-embedding’ through demutualization that spread across most developed market economies from the 1980s onwards involved a major change by which membership-owned corporations and associations became shareholder-owned. By implication, this move also distanced financial institutions from local civil society.

Whereas the first decoupling process increasingly led bankers, financiers and investors to operate in an emerging globality of finance that regulators soon struggled to oversee and manage adequately, the second decoupling process changed forms of control and commitments, and ultimately weakened established regulations and social norms to guide the behaviour of financial firms. Thus, while global finance expanded significantly, especially between 2000 and 2008, the two transgressions meant that it harboured a potential for dual market and states failure in its core.

However, the failure was not one of regulatory capture alone, where existing agencies advanced the interests of the global financial system they were charged with regulating in the first place (Levine and Forrence, 1990). Rather, as I shall argue, the dual failure was more fundamental and did result in an institutional void with neither institutions that were appropriate to the tasks at hand nor adequate capacity to implement these rules. I suggest that civil society organizations, with the particular support of endowed foundations, could help fill these institutional voids by re-embedding global finance into society.

This article explores the argument in three main parts. First I will outline the conceptual framework with a focus on institutional voids resulting from an incongruence of institutional arrangements and organizational adequacy in policy domains. This includes an analysis of the current global financial crisis through the lens of such institutional voids, and discusses the evident paucity of civil society institutions in the domain of finance. In the second part, I address a central governance question: relative to other sectors and actors, and under what conditions, could civil society serve as a normative ‘bottom-up’ corrective to reverse the erosion of confidence in the global financial architecture and national democratic fabrics? Finally, this article highlights the potential role of philanthropic foundations in helping to build a civil society infrastructure to fill the institutional void of the financial system.

Institutional void and societal transgression

  1. Top of page
  2. Abstract
  3. Institutional void and societal transgression
  4. How to fill institutional voids?
  5. The (ideal) role of civil society in international finance
  6. A case for social engineering?
  7. References
  8. Biography

The global financial system has outgrown national frameworks; increasingly, its institutions and organizations have operated in the absence of an effective, international and comprehensive governance structure. And yet many experts have solely pinpointed the insufficiency of tools and instruments with regard to risk management and macroeconomic financial coordination, and have highlighted the need for adjustments. But what does that actually mean?

For one, the current system of international financial regulation has certainly not been lacking in complexity given the multitude of international organizations, statutes, committees and agreements. Besides the IMF and World Bank, roughly 20 organizations such as the Financial Stability Board, Financial Action Task Force (FATF), The International Auditing and Assurance Standards Board (IAASB), Bank of International Settlements, Basel I and II, International Organization of Securities Commissions (IOSCO), International Association of Insurance Supervisors (IAIS) and International Forum of Independent Audit Regulators (IFIAR) make for an interconnected web of regulatory responsibilities that is, even for the expert, hard to disentangle. This complexity, highlighted through the purposeful use of acronyms, has been partially caused by the long-standing yet increasingly obsolete distinction between banking, finance (investment banks, derivatives trade, hedge funds) and insurance business. To some extent, until 2008, the consequence was a regulatory ‘race to the bottom’ (Vogel, 1995, p. 18) that pitted national regulators against each other, while institutional responsibilities and jurisdiction have all too often remained unclear (Davies, 2010).

After the 2008 crisis, the reaction was to increase regulation, which in most instances meant greater reporting requirements imposed by national bodies. So far, all suggestions and proposals to reform the global financial architecture have aimed at establishing new agreements, statutes and committees without changing the overall institutional framework and to rationalize the existing ones along altered macroeconomic conditions. In the end, such procedures merely add new layers of complexity.

Institutions are the backbone on which modern societies, in all their complexity and sophistication, function. They often go unnoticed, are highly routinized and mostly enter legislative and public attention when their deficiencies result in systemic interruption, failure or even collapse. Institutions matter because they act as ‘the rules of the game’, thus establishing stable political, economic and social interactions within a society (North, 1990, pp. 3–6; North et al., 2009). They do so firstly by protecting, policing and enforcing rights and agreements (North, 1990, p. 27) in order to enable cooperation. Because modern societies are highly conflict-prone, they secondly mediate the multiple conflicts that emerge among diverse segments and interests (Dahrendorf, 1961, p. 223).1

However, the way economic globalization progressed in recent decades challenges institutional capacities to provide and act upon such rules. National governance systems as well as international organizations lack the very institutional capacity needed to legislate, control and enforce regulations in such transnational spaces (Zürn et al., 2012). Beck and Lau (2004) point to the underlying pattern of ‘reflexive modernization’ (p. 159), in that more transgression generates more need for decisions. In the present case, the globalization of finance would have required a regulatory system of handling more and different kinds of decisions – and not a system of less regulation at the national level. The potential for institutional voids is rooted in such incapacities. They result from a systemic under-institutionalization of policy domains, i.e. a lack of institutions with a setup that is adequate to the challenges at hand, be they finance, education, health care or security.

Situated in economic institutional theory (North, 1990; Williamson, 1996) and organizational sociology (Aldrich, 1999; Perrow, 2002; Scott, 2001), the conceptual framework of the analysis traces governance failures to a pattern of double incongruence within specified policy fields and policy domains. Such fields or domains require a set of institutions, which charge dedicated organizations to regulate and monitor activities. The successful governance of institutions depends on two factors: first, on whether the institutional rules in place (i.e. the formal and informal ‘rules of the game’ of an institution) are adequate to the requirements of the policy field that the institution is in charge of regulating; and second, on whether the institutional rules are sufficiently implemented by key actors. Depending on the quality of the institutional rules and of the implementation, one of the four following scenarios may emerge (Table 1).

Table 1. Requirements, institutions and implementation.
Institutions implementationInstitutional framework adequate to requirements of field or policy domain Institutional framework inadequate to requirements of field or policy domain
Sufficient implementation of institutional rules

Adaptive coping

Example: autonomy in wage bargaining

Institutional deficit

Example: NATO security policy in the 1990s

Insufficient implementation of institutional rules

Implementation deficit

Example: NATO security policy in the 2010s

General under-institutionalization / institutional void

Examples: global financial system; failed states

The ideal would be a situation of what can be called ‘adaptive coping’. Where institutions provide adequate rules and regulations, and the expectations and specifications set out by the institutional framework are implemented adequately, the interactions are stable and ordered among the actors involved and the system rests in a state of equilibrium. The wage-bargaining process among German employers and labour unions provides an illustrative example of adaptive coping, as do weapons-inspections programmes in nonproliferation regimes such as the Treaty on the Nonproliferation of Nuclear Weapons.

In contrast, institutional rules can be inadequate for domain-specific requirements, leading to an institutional deficit, or insufficiently implemented by the regulatory organizations in place, bringing about an organizational deficit. When neither adequate institutional rules nor sufficient implementation is in place, there is a severe under-institutionalization that can culminate in institutional voids, where actors are free to engage in self-serving behaviours as rules are either severely limited or unenforced.

Institutions fulfil their requirements by providing formal rules and regulations within a specified polity and policy field (North, 1990, chapter 6). Public agencies have no monopoly in such regulatory frameworks, and, depending on the policy field involved, share regulatory tasks with private actors.2 Both the relative presence and the relationship between public and private actors are important. Fully developed regulations and state agencies may still lead to governance failures when adequate enforcement mechanisms are de facto absent, as they would require private actors to comply (Khanna and Palepu, 1997; Khanna et al., 2005).3

Conversely, with formal state structures lacking, their ‘shadow’ may be sufficient to compel private actors to self-regulate their behaviour to avoid stricter regulatory constraints by the state (Heritier, 2002; Heriter and Lehmkuhl, 2008). Indeed, in policy fields without immediate threats of government regulation, private actors may choose to impose strict self-regulatory standards and at times even press governments to implement and enforce more thorough regulatory systems (Thauer, 2010).

For Börzel et al. (2011), such standards can then be adopted by competitors, leading to a ‘race to the top’. Business generally prefers weak regulation over strict regulation, yet under certain conditions it also prefers weak regulation over no regulation. Reputational incentives may lead a firm to self-impose standards that will be marketed, such as is the case with organic or fair trade products. Equally, if the producer of a high-quality product sees its market share threatened by competitors that produce with lower standards, the high-end producer may even press for common – usually industry-wide – standards. But for this race to the top to be induced, institutional conditions and incentives must be in place.

Decoupling, on the other hand, creates transgressional spaces in which private operations and interactions have outgrown the regulatory frameworks of individual states, and the shadow of regulation may be too pale. Global rules are lacking, patchy, weak and contradictory; governance organizations are either absent or ineffective (see Held and McGrew, 2007). Such circumstances make institutional voids likely. The global financial crisis is an example of such a general under-institutionalization, caused by the breakdown of ‘territorial synchrony’, where new social spaces outgrow ‘classical-modernist political institutions’ on the state level, thus substantially constraining the latter's effectiveness and legitimacy (Hajer, 2003, pp. 182–183). Other examples of such ‘desynchronization’ between institutions and actors in policy fields are cyberspace, genetic engineering, the ‘new wars’ and failed states.

How to fill institutional voids?

  1. Top of page
  2. Abstract
  3. Institutional void and societal transgression
  4. How to fill institutional voids?
  5. The (ideal) role of civil society in international finance
  6. A case for social engineering?
  7. References
  8. Biography

While decoupling and the creation of transgressional spaces are a necessary condition for institutional voids to emerge, they are not sufficient in terms of persistence. The extent and depths, as well as the implications, of institutional voids depend on counterveiling forces that seek to alleviate causes and mitigate actual and potential consequences. What could such counterveiling forces be?

As the recent European move towards introducing a financial transaction tax shows, there are some initiatives for reinforced state and transgovernmental regulation. While better rules are a key prerequisite for the filling of institutional voids – their absence is one of their main causes – nation states have not been able to sufficiently reform institutional rules in the aftermath of the 2008 financial crisis. The regulation of financial flows is still inadequate and transnational institutions lack the teeth to tame financial speculation. The European sovereign debt crisis is a case in point. Moreover, as pointed out previously, better institutional rules are not enough on their own; they also have to be better implemented.

In this context, because institutional voids are governance failures implicating states and market actors, the role of civil society becomes important: it can not only mobilize opinion and bring governments to impose better rules, but also play a crucial part in ensuring compliance and implementation by monitoring the behaviour of states and economic actors. Civil society is the self-organization of society outside the stricter realms of state power and market interests, and, in the words of Gellner (1994), serves as a counterveiling force against the powers of both. The term ‘civil society’ refers to the diverse activities of nongovernmental and nonprofit organizations, social movements, activist groups, foundations or think tanks (Anheier et al., 2012). In the present context, civil society can be seen as a political space where associations, organizations and movements of many kinds seek deliberately to shape policies, norms and deeper social structures (Scholte and Schnabel, 2012).

On the one hand, global finance has become a key element in political economy; on the other, civil society has become a key element in today's polity. Contributors to the Civil Society and Global Finance volume edited by Scholte and Schnabel (2012) recognize this point, and demonstrate how civil society organizations have been more active in global finance dealings through multiple and overlapping local, national, regional and transnational networks in the past decades. Scholte (2002) also shows how civil society organizations have played a significant role in the IMF, and that their interventions have had multiple effects on IMF policy process, policy content and policy discourse. For instance, civil society organizations have encouraged the IMF to alter various institutional procedures, including measures related to public consultation, transparency and policy evaluation. Civil society groups also do advocacy work or lobby national governments and legislatures to take one or the other position towards the IMF, or through other multilateral venues such as G7 summits (Scholte, 2002).

They also do so in cooperation with third parties. In fact, according to Kamal Malhotra, Senior Civil Society Advisor at the UN Development Program, civil society organizations played a crucial role during the Asian crisis. This ranged from their catalytic role in making links between economic and political democratization issues, to the promotion of alternative development principles and strategies to the mainstream economic orthodoxy. In the context of the Asian crisis of the 1990s, these groups were not just addressing the social cost of the crisis but also the broader systemic implications, and made the link between economic and political democratization issues (IMF, 2001). Therefore, in the current context of a challenging global financial crisis, civil society can and could serve as a platform for objection and challenge.

Recent literature lists several benefits of the involvement of civil society in financial dealings (Scholte, 2002, 2004; Anderson, 2000; Birdsall, 2012). Because citizens are rarely aware of what decisions are taken in global governance, civil society can serve an important communicative function by, for example, disseminating information through public education activities. In her research for the Funders Network on Transforming the Global Economy, Anderson (2000) found that nearly every person interviewed pointed to the need for training on the workings of financial markets. In Civil Society Voices and the International Monetary Fund (2002), Scholte argues that inputs from civil society can put a variety of perspectives, methodologies and proposals in the policy arena. What is more, civic groups have been instrumental in generating debate about the so-called ‘Washington Consensus’. Friesen (2012) points to one of the greatest achievements of civil society in global financial dealings: the cancellation of debt in the developing world. This shows that transnational civil society networks can mobilize to challenge the power of global finance and can help fill institutional voids.

Although civil society organizations seem to have been involved in global finance, some scholars suggest that they have yet to reach the ‘critical mass’ necessary to make a real difference (Fioramonti and Thümler, 2011). Contributors to Scholte and Schnabel (2012) argue that civil society organizations’ performance, and the legitimacy that comes with it, depends on their technical expertise regarding the workings of the financial sector. Therefore, to address global financial areas, civil society organizations have had to develop different kinds of knowledge including macroeconomic theory, debt restructuring options, terms of trade debates and monetary policy.

At the economic forum ‘Governing Global Finance: the Role of Civil Society’ at the IMF, 2001, Nodari Simonia, Director of the Institute of International Relations and World Economy (IMEMO) suggested that civil society's interest in global finance varies from one country to another; Alison Van Rooy (IMF, 2001), Senior Fellow of the North-south Institute, Ottawa, also said that the involvement of civil society organizations in global finance might imply all kinds of conflicts and compromises given disparities in national cultures but also organizational culture, language, experience, funding and relationships with grassroots organizations. Nancy Birdsall (IMF, 2001), former Executive Vice President of the InterAmerican Development Bank, argued that so far there is evidence that the civil society groups in the north, by putting pressure on the World Bank and the IMF, are helping to set an agenda that is sometimes a peculiarly northern agenda. However, civil society organizations are starting to respond to these criticisms by developing voluntary codes of conduct, by getting national accreditation and by coming up with rules so that their own processes are more transparent (see Alexander et al., 2005; Underhill and Zhang, 2006).

I argue that there is a need to examine the potential of civil society more systematically. Table 2 highlights the relationship between institutional voids and civil society. Of particular interest is the combination of decoupled, transgressed space with the absence of civil society actors. In these fields actors operate without a significant civil society capacity or at least a potential to act, which leaves the influence of private interests on legislation and regulation within a policy domain largely uncontested, and the negatives of institutional voids (e.g. moral hazard, regulatory capture, profiteering) continue unabated. As a result, the institutional void can widen through contagion effects or deepen by weakening whatever institutions and organizations might exist in the field itself.

Table 2. Examples of configurations of institutional voids and civil society.
 Coupled, grounded policy domainDecoupled, transgressional policy domain
Civil society present in policy domainLocal environmental policy; local financial institutions; domestic security, armed forces; human rights; labour marketClimate change; Internet; data protection
Civil society absent in policy domainInfrastructure developmentGlobal finance;failed states

Second, the institutional void is accompanied by a normative weakness, even hollowness, as domain actors are alienated from social values and the civic awareness represented by diverse civil society groups. Increasingly they operate under different norms, often rationalized as ‘logics’, and the seemingly unquestionable systemic demands of global finance and the highly specialized professional groups involved – especially corporate lawyers, finance economists and accountants. Thus, a structural hole (Burt, 1995) exists in a domain with private and civil society actors sealed off from each other. In this case civil society is unable to function as a social guide to the behaviour of private actors and, where necessary, as a moral corrective and counterveiling force.

For the US, Laumann and Knoke have shown that ‘policies are the product of complex interactions among government and nongovernment organizations, each seeking to influence the collectively binding decisions’ (Laumann and Knoke, 1987, p. 5). Such organizations are ‘in conflict with one another over the collective allocation of scarce societal resources’ and use ‘power relations within them and inter-organizational networks among them […] to mobilize political resources that shape public policies beneficial to their organizations’ (Laumann and Knoke, 1987, p. 8). These organizations form ‘issue publics’ (Laumann and Knoke, 1987, chapter 3) that monitor and react to legislative and regulatory initiatives as well as dynamics within the policy domain, while simultaneously they proactively influence state agencies by mobilizing resources.

Laumann and Knoke's analysis would apply to many policy domains, but not all: it simply takes a civil society infrastructure to engage with other policy makers, and it creates a system whereby opposing interests check and balance each other's influence, as suggested in Figure 1. Yet, with civil society actors low in number and weak in influence and corporate finance transgressing the state, the actual pattern becomes markedly different.

image

Figure 1. Influence patterns (ideal).

Download figure to PowerPoint

In this scenario, influence patterns are not reciprocal but one-directional, with state agencies’ regulations on the state level insufficient to affect the behaviour of globalized financial actors. Moreover, formal regulations represent only one side of the institutional coin. Institutions operate not only through formal rules but also through the generation and maintenance of norms and conventions (North, 1990, chapter 5; North et al., 2009; March and Olsen, 1989). Thus, the institutional–organizational incongruence represents as much a normative void as a regulatory one. It creates a vacuum where an intersubjective understanding of what is ‘right’ or ‘appropriate’ (and what is not) is lacking, and invites moral hazard and profiteering, including exaggerated expectations of remuneration – as evidenced in rapidly rising executive pay and bonuses throughout the last two decades.

However, such normative doubtfulness can be mitigated by guidance emanating from civil society actors – not in the sense of a unison voice or singular perspective; on the contrary, in the sense that the finance system is viewed from, and vetted by, many different actors, as illustrated in figure 2. In other words, a policy domain like finance is deprived not only of essential institutions (Basisinstitutionen) but of socially shared principles (Basisprinzipien) (Beck et al., 2003, p. 21). In the longer term, institutional under-regulation with accompanying shutout of civil society actors can cause severe crises for modern liberal-democratic societies as it drastically erodes the legitimacy of the democratic process per se, as Table 3 suggests. It does so because a structural hole (Burt, 1995) between a sector or policy field – in this case international finance – and civil society emerges, which deprives the latter of its ability to mitigate the normative vacuum.

Table 3. Congruency between requirements, institutions, organizations and societal embeddedness and transgression.
 Congruency between requirements, institutions and organizations Incongruity between requirements, institutions and organizations
Societal embeddedness

Legitimacy dividend and adaptive advantage

Example: environmental policy

Legitimacy risk

Necessity for discussion and for political action

Example: German labour market reforms, 2002 (Agenda 2010)

Societal decoupling

Legitimacy risk

Necessity for discussion and for political action

Example: European policy

Legitimacy deficit for democracy

Example: current fiscal and financial policy in Europe

Table 3 shows that where there is congruence between requirements, institutions and organizations as well as a societal embeddedness of a policy through legitimate processes or social and moral norms, policy makers benefit from a ‘legitimate dividend’ in future actions, while society at large enjoys a comparative adaptive advantage.

Where policies are embedded but there is incongruity, legitimacy is obviously at risk; this creates the need for justification, discussion and revision. This is often the case in large-scale reform projects in the welfare state, be it the labour market or health-care reform. The same risk exists in cases where requirements, institutions and organizations are in congruency, but policies are decoupled from the structures, processes and norms by which a society defines itself. EU politics are an excellent case in point. While virtually all EU states and their respective economies benefit from the common market, the euro currency and free movement across borders, the accompanying policies are often perceived as unwelcome intrusions into domestic affairs, technocratic power grabs that are devoid of a legitimate decision-making process. Finally, where we find both incongruity and decoupling, democracy itself is put at risk – and options for political action are severely limited. As I will argue, the current financial crisis is the most prolific example in this category.

The (ideal) role of civil society in international finance

  1. Top of page
  2. Abstract
  3. Institutional void and societal transgression
  4. How to fill institutional voids?
  5. The (ideal) role of civil society in international finance
  6. A case for social engineering?
  7. References
  8. Biography

If we manage to overcome the aftermaths of the 2008 crisis, the most likely outcome will be a better organized, but institutionally still inadequate financial architecture that is still more transgressed than socially embedded. To put it simply: the financial sector will continue the life of its own, endowed with better instruments and tools but with the same old carrots and sticks to guide its actions. Unless civil society fills the normative void of the sector and moves it beyond the functional rationality of a Weberian normative minimum, it will remain easy prey to moral hazards.

But how and under what conditions may civil society act as a normative corrective ‘bottom-up’ to reverse the erosion of confidence in the global financial architecture and national democratic fabrics? In other policy fields, the embeddedness of policy domains has been reached through the establishment of transnational civil society actors, for example on environmental issues and human rights. Other domains, like migration, have a markedly worse record yet none of them worse than the international banking and finance sector. Yet it is exactly this domain that erodes democratic legitimacy even in tranquil times and endangers it significantly in times of crisis.

So, what can be done? First, we have to ask ourselves which civil society actors are most capable of helping fill the institutional void. Endowed foundations are one such actor. Their dual independence from the ballot box and market expectations afford foundations unique advantages (Hammack and Anheier, 2013): they can act as social entrepreneur and respond to needs that are beyond the interests or capacities of state and market actors; with their financial independence, they can function as institution builders establishing self-sustaining organizations. By implication, their endowments also allow them to absorb the risks other civil society actors and organizations take in engaging policy domains and interested parties.

In particular, philanthropic foundations have the ability to help generate structural folds – a distinctive network topology, where ‘actors … are multiple insiders, facilitating familiar access to diverse resources’ (Vedres and Stark, 2010, p. 1150; Figure 3). Therefore, actors located in a structural fold (as opposed to structural voids) have the ability to create bridges between different sectors. Because philanthropic foundations have the potential to connect the two segments of civil society and international finance, they could bring about such structural folds that would help mitigate the complexity-attractiveness problem by implanting civil society experts inside the financial system. By holding a distinctive network position at the intersection of the two groups, they are able to facilitate the exchange of ideas and may build a common normative framework through inter-cohesion (Vedres and Stark, 2010).

However, structural folds require longer-term investments in both organizations and people. The right talent must be nurtured over years, and brought in contact with the right organizations. This long-term perspective plays into the hands of foundations, as they can afford to take the long view; because they are not beholden to short-term financial or political expectations, they can accompany and support the embedding and development of fold positions and occupants.

Clearly, given the scale and complexity of the global financial system, many if not thousands of such folds must be created and occupied to ‘bring global finance back in’. As insiders and outsiders alike, they can build bridges to other policy fields and reduce the decoupling of global finance. Yet they are part of a social engineering project that would involve two other approaches, namely weak ties and structural closures.

Structural folds go beyond the potential offered by weak-tie configurations and structural closure, although part of the strategy would clearly involve all three (Figure 3). For one, it will be important to connect finance to many other policy fields by creating opportunities for weak-tie connection to take hold. They are important for information flows and mobilization efforts. Likewise, structural holes invite activists and policy entrepreneurs to seek closure for taking advantage of opportunities that emerge from combining financial policies with other domains.

Yet to what extent are structural weak ties, closures and folds realized at the intersection of civil society and finance? While a much fuller empirical account would be needed,4 three main indicators may suffice to support the argument of a general underdevelopment of civil society in the field of finance, and to make the case for a systematic and larger investment on behalf of foundations: the number of civil society organizations, websites and foundations in the field of finance.

The small degree to which the international financial system is embedded in civil society, in particular when compared to domains such as climate change, international trade, migration or security, is striking. In many domains such civil society actors have grown into a significant force and mediate nationally, and increasingly internationally, between the public and the private sector while offering citizens a security umbrella and a transmission belt to influence collective actors. The financial sector has been largely free of such influence – in relative rather than absolute terms. However, the small number of NGOs engaging in the financial sector is noteworthy and even in a country with a large nonprofit sector such as the US, their influence is hardly significant. According to the National Center of Charitable Statistics, only about 160 of the 370,000 major nonprofit organizations in the US operate predominantly in the domain of ‘finance, tax and monetary policy’. This equals less than 0.1 per cent of all nonprofit organizations, whose expenditure amounts to merely 1 per cent of overall expenditure – numbers that have been relatively unchanged for the last two decades (Figure 4). Thus, the number of NGOs in the finance sector and their annual expenditure are miniscule, even though we have chosen a wider definition of the finance sector that incorporates consumer advocate organizations and mutual associations in the insurance sector.

We arrive at a similar picture, if we take a global perspective. Only 2.5 per cent of 55,853 INGOs are situated in the financial sector. For comparison, 4.4 per cent of all INGOs are active in the health sector and more than 10 per cent in education – a remarkable difference, particularly in light of the importance of the respective sectors and their developments over the last decade. Even more remarkable is the decrease in the number of newly established and founded international NGOs in finance (FINGOs) since the millennium. Whereas one would expect an increase in the number of new INGOs concerned with global finance, a growth proportional to the growth in importance (and revenues) of global financial actors simply did not take place (Figure 5).

The numerical insignificance of FINGOs also becomes apparent when comparing their growth with that of international human rights and environmental NGOs (Figure 6): while international human rights and environmental NGOs display a steep growth curve between the mid-1970s and early 2000s, the growth rate of FINGOs is moderate at best.

However, one might argue that organizational numbers and size are not everything, particularly because, as could be observed in the Arab Spring, even small groups can gain voice and followers thanks to new channels of influence such as social media. The Occupy movement is a case in point. Could it be that civil society's voice is increasingly raised via the Internet, and that we should be able to find a higher number of Internet-based platforms and forums?5

The analysis shows that while there are some activist sites and platforms like Attac in cyberspace, most of them are hardly visible and are usually accompanied by shareholder associations and ombudsmen of large financial institutions. Their size tends to be small, their mobilization potential limited, and connections among them largely absent. Compared to other fields, these platforms and websites are hardly recognizable (Table 4). And even the Occupy movement and its affiliated sites, which surged in 2011, could not maintain their momentum and are lagging behind established actors such as Transparency International (Table 5).

Table 4. Web activism sites in international finance, the environment and human rights. 6
WebsiteUnique visitorsPage viewsTotal visitsMean time on website (minutes)
Source: Google Adplanner, June 2012.
www.finance-watch.orgNo dataNo dataNo dataNo data
www.ifiwatchnet.orgNo dataNo dataNo dataNo data
www.brettonwoodsproject.orgNo dataNo dataNo dataNo data
www.transparency.org 39,000320,00075,0007:20
www.attac.org 48,000290,00084,0004:50
www.socialbusinesstour.com No dataNo dataNo dataNo data
Comparison:
www.greenpeace.org 570,0003.5 million1.1 million4:50
www.hrw.org 150,000990,000310,0006:40
www.amnesty.org 300,0002 million610,0005:30
Table 5. Web activism sites associated with the Occupy movement.
WebsiteUnique visitorsPage viewsTotal visitsMean time on website (minutes)
Source: Google Adplanner, June 2012.
www.occupywallstreet.org (now registered as www.adbusters.org/campaigns/occupywallstreet)36,000180,00073,0004:00
www.occupytogether.org No dataNo dataNo dataNo data
www.wearethe99percent.tumblr.com No dataNo dataNo dataNo data

The data suggest a clear conclusion: the institutional void in international finance can hardly be closed by civil society actors because they are too scant at both national and international levels. Nevertheless, civil society can act as a counterveiling force to help fill the institutional void only if it can contribute towards embedding the finance sector within broader social norms and conventions. To do so it has to find its voice first and learn to influence this policy domain, which so far is lacking.

What would it look like if civil society had voice and influence? A look at other fields is instructive: can we imagine the environmental policy domain today without Greenpeace or a human rights regime without Amnesty International? Many policy makers and other actors in different domains have accepted that fundamental principles and institutions frequently overwhelm politics and economics, and thus benefit greatly from the inclusion of civil society as an integral part of the problem-solving mechanism. Shell, Greenpeace and the Ministry of the Environment need each other just as Wal-Mart, Human Rights Watch, China and the WTO do.

Why are civil society actors so under-represented in the financial sector? For one, there is a lower potential for emotion-based mobilization. Finance is a ‘dry affair’ and more emotionally charged issues like peace, human rights or the environment offer easier affective attachment. The abstract nature of banking and macrofinance doesn't help either, which makes the hurdle separating passive animosity and frustration from active involvement relatively high.

There is also what could be called the ‘complexity-attractiveness’ issue. Activists have to overcome relatively high barriers to enter the discussion on financial issues and to be taken seriously by experts. If activists invest in this costly endeavour, they encounter an attractive salary gap between civil society and business, and many an expert gets thus drawn into the financial sector, which leads to a ‘brain drain’ of leadership personalities in civil society.7

A case for social engineering?

  1. Top of page
  2. Abstract
  3. Institutional void and societal transgression
  4. How to fill institutional voids?
  5. The (ideal) role of civil society in international finance
  6. A case for social engineering?
  7. References
  8. Biography

The decoupling of the financial sector has not been met with an adequate institutional and organizational response, thus leaving the global financial architecture in an institutional void – with devastating consequences. This problem is exemplified not only in the current financial crisis but also in the rather helpless attempts of national governments – Germany, France, the US and UK are currently foremost – as well as international institutions such as the EU and IMF to come to grips with the depth and consequences of the financial and economic quagmire.

This article has taken a look at the crisis through an institutional lens, arguing that the incongruity of the institutional framework as well as the organizational incapacity of actors has created an institutional void that was insufficient to the regulatory requirements of the financial domain. Yet, because this policy domain has been increasingly detached from civil society over the last two decades, its crisis threatens not only the legitimacy of global economic and financial arrangements but the fabric of democracy itself.

The proposal is to establish a civil society infrastructure of formal organizations, interest groups, think tanks and foundations at both national and international levels. The aim is to grow civil society by overcoming two structural weaknesses that seem to have contributed to its underdevelopment so far: a more limited mobilization potential based on emotional attachment and moral commitment alone; and the high investment and maintenance costs in finding access to the world of finance as an outside organization, combined with the eroding potential of the complexity-attractiveness phenomenon.

One potential solution to overcome both impediments is offered by independent, endowed foundations. The dual financial and political independence of philanthropic foundations from both the market and the ballot box (Hammack and Anheier, 2013) means that they possess sufficient autonomy that can be paired with expert knowledge and generate a high degree of legitimacy over time.Foundations could interconnect the mobilization potential of member organizations (such as the future Greenpeace of finance) with the political expertise and know-how of think tanks (like YouFinance or Oikos) and consumer advocacies. As Table 6 shows, some foundations already support initiatives in this realm.

Table 6. Initiatives supported by foundations in finance.
Type of engagementCivil society initiatives with support from philanthropic foundations
Source: Fioramonti and Thümler (2011).
Research and education initiatives
  • Institute for New Economic Thinking
  • Task Force on Financial Integrity and Economic Development
  • New Era Economics Programme, IPPR
  • New Economics Foundation
  • High Pay Commission
  • Future Social Market Economy
Advocacy campaigns
  • Bretton Woods Project
  • Tax Justice Network
  • Bank Information Center
  • Corporate Watch
  • Corporate Europe Observatory
Ethical investment
  • Your Ethical Money
  • Fair Pensions
  • Social Business Tour

However, so far the number of initiatives and their foundational backers is quite small. Moreover, the results of a survey conducted by Fioramonti and Thümler (2011) show the untapped potential of foundations in this regard: while half of 80 surveyed foundations acknowledge the possibility that foundations generally could support civil society initiatives in the finance sector, only 39 per cent see themselves as either willing or able to do so. And merely one in five gives attention to the fundamental problems of the global financial system.

In conclusion, the development of a civil society infrastructure is a cornerstone of a functional financial system of the future. We need neither a political master plan nor necessarily more and hyper-complex national institutions. We need to fill the institutional void through the wisdom of crowds (Surowiecki, 2005) as well as the ideas of the many to construct a civil society infrastructure that provides an intersubjective normative framework. We need interconnected civil society actors that are willing and able to influence policies in the financial domain. The establishment of such an interconnected infrastructure might have its price – likely in millions of euros. Yet, compared to the vast sums of public bailout money for AIG, Citibank and others – let alone the subprime crisis – they might just be ‘peanuts’.

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Figure 2. Influence patterns (actual).

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Figure 3. Structural folds, weak ties and structural closures. (a) Weak tie configuration. (b) Structural holes and closure. (c) Structural folds and intergroup cohesion.

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Figure 4. Share of US nonprofit organizations in finance in the entire US nonprofit sector.

Source: National Center for Charitable Statistics.

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Figure 5. Growth in international NGOs in finance (FINGOs) based on the number of newly founded FINGOs by year.

Source: Union of International Associations.

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Figure 6. Growth in financial, human rights and environmental INGOs based on the number of newly founded FINGOs by year.

Source: Union of International Associations.

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Notes
  1. 1

    For examples think about the institutionalized systems of corporatism in many welfare states (Schmitter, 1979) or guaranteed quotas for ethnic minorities in multinational states (Alonso, 2011). This insight also applies to institutions designed to ‘right’ past wrongs such as the institution of Affirmative Action in the US and the South African Truth Commission.

  2. 2

    For the US, Laumann and Knoke (1987) showed that national policy domains are populated by an abundance of private actors that ‘possess sufficient political clout to ensure that their expressed interests will be taken into account’ and significantly influence policy formation by the state (Laumann and Knoke, 1987, p. 375). Comparatively, Streeck and Schmitter (1985) used the term ‘private interest government’ to stress that regulation involves diverse actors, not state agencies alone.

  3. 3

    For example, Tarun Khanna and Krishna Palepu (2000) point to institutional voids of financial markets in emerging economies that are characterized by ‘a lack of adequate disclosure and weak corporate governance and control. Intermediaries such as financial analysts, mutual funds, investment bankers, venture capitalists and a financial press are either absent or not fully evolved. Securities regulations are generally weak and their enforcement is erratic’ (p. 269).

  4. 4

    Important initiatives on international finance involving civil society include Eurodad, New Rules for Global Finance, Rede Brasil, among others, in addition to a growing number of accredited NGOs attending the IMF/World Bank annual and spring meetings. There are also advocacy initiatives by trade unions and NGOs active in development, humanitarian assistance and social justice like ActionAid, Oxfam, Friends of the Earth and CIVICUS, among others, in addition to business forums (Bretton Woods Committee, the World Economic Forum) and think tanks (Bruegel, Brookings, Peterson, etc). However, even if it were possible to have a more comprehensive account of civil society activities in the field of finance, the overall conclusion – namely the underdevelopment of civil society in this policy domain compared with many others – is unlikely to be different.

  5. 5

    The analysis of web statistics helps us to trace the popularity of certain websites along several characteristics. Generally, two generic types of statistics can be sourced: the actual behaviour of users on a particular website on the one hand (e.g. how many users visited a website in a given month, how many pages a given user viewed on a website and how much time he or she spent on the website overall); and the sociodemographic characteristics of these users on the other. The latter type of information is inferred by tracing a particular IP address and observing its Internet surfing patterns (that is, which other types of websites were visited). There are many websites that provide such types of analysis for any given website; however, there are significant limitations when it comes to using such a type of analysis in comparative research. Most providers of web statistics sell data that reflect more accurate information for local or national pages, whereas the validity for ‘global’ pages is weaker. However, because this article does not aim at an in-depth analysis of web statistics, we can rely on Google Adplanner for the purpose of this argument. Google Adplanner is a source freely available to all web users that provides these generic types of web statistics (it is used as a marketing tool to incentivize companies to post online ads via Google) and brings with it the advantage of providing free and accurate information about websites hosted worldwide.

  6. 6

    FinanceWatch is trying to reverse this trend by attracting highly trained experts and staff members to build a network of expertise to match that of financial institutions and state agencies, especially within the EU.

  7. 7

    For some of the websites analysed and detailed in Tables 4 and 5, there are no data available. This type of entry may not be mistaken for missing values; rather, it is a statement about the relevance of a given website. ‘No data’ indicates that a given website had less than 10,000 visitors per month during the time period in question.

References

  1. Top of page
  2. Abstract
  3. Institutional void and societal transgression
  4. How to fill institutional voids?
  5. The (ideal) role of civil society in international finance
  6. A case for social engineering?
  7. References
  8. Biography
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Biography

  1. Top of page
  2. Abstract
  3. Institutional void and societal transgression
  4. How to fill institutional voids?
  5. The (ideal) role of civil society in international finance
  6. A case for social engineering?
  7. References
  8. Biography
  • Helmut K. Anheier is Dean and Professor of Sociology at the Hertie School of Governance in Berlin. He also holds a Chair of Sociology at Heidelberg University and serves as Academic Director of the Center for Social Investment.