6 - Regulating International Financial Markets

Summary

The MAI was flawed because it attempted to micro-manage too much. Its proponents should have been satisfied to do two things: first, articulate the general principle that each country should treat all its investors in the same way, and second, negotiate a binding agreement in the specific policy realms within which an international consensus could be achieved. Instead, the MAI advocates sought global homogeneity in governmental policies toward foreign investment. Comprehensive rules requiring universal application were to be laid down, ensuring international uniformity in the treatment of investment. All nations were to treat foreign investors in the same way.

The MAI effort to achieve international consistency failed because its negotiators could not overcome the obstacles inherent in the fact that the nation-state remains the basic unit of political decision making. The reality of differing national objectives could not be wished away. The larger lesson here is that efforts that insufficiently appreciate international diversity are doomed to frustration.

The temptation to insufficiently respect the importance of national differences is one of the problems that stands in the way of implementing a much-needed reform of the global financial system. As I will argue in this chapter, greater stability in the international financial system would enhance the benefits derived from globalization. But attempting to achieve deep financial integration, involving the creation of a global central bank and a common global currency, would be a mistake.