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The Privatization of Regulation in Global Markets:

Winners and Losers in the Private Governance of Financial and Product Markets

By Tim Bthe and Walter Mattli

Over the past two decades, governments have

delegated extensive regulatory authority to in-
ternational private-sector organizations. In
this article, based on their new book, The New
Global Rulers, Tim Bthe and Walter Mattli
examine this internationalization and privati-
zation of rule-making for global financial and
product markets. They analyze who writes the
rules in international private organizations
and explain why some win, and others lose in
the process of setting standards in such bodies.
The focus is on three powerful global private
regulators: the IASB, which develops interna-
tional financial reporting rules (IFRS) used by
corporations in more than a hundred countries,
and ISO and IEC, which account for 85 percent
of all international product standards.

O
n 28 August 2008, the world finan-
cial community awoke to stunning
headline news: The Securities and
Exchange Commission (SEC), the powerful
U.S. financial market regulator, had put forth
a "roadmap" for to the adoption of Interna-
tional Financial Reporting Standards (IFRS),
produced by the International Accounting
Standards Board (IASB)a private-sector
regulator based in London. SEC-regulated
U.S. corporations would have to switch from
using Generally Accepted Accounting Prin-
ciples (U.S. GAAP) to using IFRS, possibly as
soon as 2014. Only a decade earlier, the sug-
gestion that the United States might adopt
IFRS "would have been laughable," as many
experts expected U.S. standards to become
the de facto global rules for financial report-
ing.1
The SEC's proposal to require U.S. corpo-
rations to follow international private rules
for financial reporting is part of a broader
and highly significant trend that is the focus
of our new book, The New Global Rulers:
The Privatization of Regulation in the World
Economy. As Figure 1 shows, the number of
Financial reporting affects all sectors of the economy.
The shift of rule-making from the domestic to the inter-
national level therefore is bound to affect a wide range
of interests, and bring deep, costly changes.
jurisdictions where stock market regulators particular types of transactions and events
permit or even require the use of IFRS has to disclosein a firm's financial statements.
exploded since 2001. In the member states The common use of IFRS is likely to increase
of the European Union (EU) and about sixty the cross-national comparability of corporate
other countries across all continents, the information and improve the transparency
use of IFRS is already mandatory for compa- of financial statements for shareholders, in-
nies with publicly traded financial securities vestors, and creditors. Consequently, it may
(stocks and bonds). And the trend is continu- bring greater efficiency and stability of global
ing: Government regulators of several addi- capital markets.
tional countries, including Japan, Canada, At the same time, much more is at stake
Brazil and India, have committed themselves than disclosures in corporate financial re-
to requiring IFRS in the near future. ports. Through the incentives they create,
The shift to common reporting rules financial reporting standards shape research
promises important gains for many par- and development, executive compensation,
ticipants in increasingly internationally inte- corporate governance, etc. Financial report-
grated financial markets. Financial reporting ing affects all sectors of the economy and is
standards specify how to calculate assets, central to the stability of a country's finan-
liabilities, profits, and lossesand which cial system. The shift of rule-making from

22 The World Financial Review


Use of IFRS as Allowed or Required by Stock Market Regulators
120
Number of Jurisdictions/Countries
100
80
60
40
20
0
1990 1995
Jurisdictions permitting use of IAS/IFRS2
Figure 1 Jurisdictions requiring use of IAS/IFRS for some/all firms
the domestic to the international level therefore is bound to affect
a wide range of interests, and bring deep, costly changes, especially
for countries or regions with large, sophisticated capital markets and
long-standing domestic accounting traditions, such as the United
States and many European countries. The greater the difference be-
tween IFRS and long-established domestic rules and practices, the
larger these costs will be. International standards that end up being
identical or very similar to a country's domestic standards will maxi-
mize that country's net benefits of switching to "international" rules.
And in highly competitive international markets, differential switch-
ing costs may jeopardize even the survival of disadvantaged firms.
Given the enormous stakes involved, distributional conflicts are very
likely, and the battle over global rules is likely to be intensely fought,
especially between Americans and Europeans.
The shift of financial rule-making to the IASB is part of a striking and
much wideryet little understoodtrend: the delegation of regu-
latory authority from governments to a single international private-
sector body which, for its area of expertise, is viewed by both public
and private actors as the obvious forum for global rule-making. This
simultaneous privatization and internationalization of governance is
driven, in part, by governments' lack of requisite technical expertise,
financial resources, or flexibility to deal expeditiously with ever more
complex and urgent regulatory tasks. Firms and other private actors
also often push for private governance, which they see as leading to
more cost-effective rules more efficiently than government regula-
tion.
Besides the IASB, two such international private regulators stand
out: the International Organization for Standardization (ISO) and the
International Electrotechnical Commission (IEC). They jointly account
for about 85 percent of all international product standards, i.e., the
technical rules that specify design and performance characteristics of
manufactured goods. Cross-national differences in these standards
mattered little when product markets were predominantly domes-
tic. The global integration of product markets, however, has greatly
and lastingly increased international interdependence and thus cre-
ated strong incentives to coordinate on common technical solutions.
International standards offer such a solution. ISO and IEC product
standards, in particular, play a critical role in facilitating international
trade and boosting economic growth. Their numbers have been
September - October 2011
growing steadily over the last twenty-five years while the production
of national standards has dwindledas illustrated by the declining
number of new German (DIN) standards in Figure 2 (see next page).
Little known until the mid-1980s, ISO and IEC have become promi-
nent, in part due to the Agreement on Technical Barriers to Trade, ne-
gotiated during the Uruguay Round trade negotiations from 1987 to
1994. This Agreement obliges all member states of the World Trade
Organization (WTO) to use international standards as the technical
basis of domestic laws and regulations unless international standards
are "ineffective or inappropriate" for achieving the specified public
policy objectives.3 Regulations requiring the use of a standard that
2000 2005 2010
Year
differs from the pertinent international standard may be challenged
through the WTO dispute mechanism as unnecessary non-tariff barri-
ers to trade and thus a violation of international trade law.
The commitment by governments to use international rather
than domestic standards has enormous economic significance, since
governments adopt hundreds of new or revised regulatory measures
each year. These regulations affect trade through the product stan-
dards embedded or referenced in them. And government regula-
tions are just the tip of the iceberg, since consumer demand and con-
cerns about legal liability create strong incentives for firms to comply
with a wealth of product standards that may not be legally mandated
but define best practice.
This simultaneous privatization and inter-
nationalization of governance is driven, in
part, by governments' lack of requisite tech-
nical expertise, financial resources, or flex-
ibility to deal expeditiously with ever more
complex and urgent regulatory tasks.
The shift from domestic regulation to global private rule-making
brings substantial gains, particularly to multinational and internation-
ally competitive firms, for which it opens up commercial opportuni-
ties previously foreclosed by cross-national differences in standards
and related measures. The share of U.S. exports affected by foreign
product standards, for instance, had risen from 10% in 1970 to 65%
in 1993, and by the time the WTO's TBT-Agreement came into force,
cross-national differences in product standards were estimated to
result in a loss of $20-$40 billion per year in U.S. exports alone. U.S.
imports and consumers were also affected. For some manufacturing
industries, U.S. non-tariff barriers in the late 1980s created losses due to
increased costs and reduced trade equivalent to a tariff of 49%. Even
today, about one third of global trade in goodsvalued at $15.8 tril-
lion for 2008is affected by standards that often differ across coun-
tries, and the boost in trade from a complete international harmoni-
zation of product standards would be equivalent to a reduction in
tariffs by several percentage points.4 A shift to common international
standards thus benefits internationally competitive firms by increas-
ing their export opportunities. It also benefits consumers who, as a
result of increased trade and competition, have access to a broader
range of goods and services and can buy them more cheaply.
www.worldfinancialreview.com 23
 areas of the global economy. The book is based on two compre-
New Domestic and International Standards per Year, 1980-2008
hensive multi-country, multi-industry business surveysone about
international financial reporting standards and IASB standardization,
Number of Standards

1800
1600
1400 the other about international product standards and ISO/IEC stan-
1200
1000 dardizationwhich we conducted among hundreds of companies
800
600
400
in the United States, as well as France, Germany, Spain, Sweden, and
200
0 the UK. We supplement the analysis of the survey data with insights
gained from more than two hundred interviews with senior and

20 6
20 7
08
19 5
19 6
19 7
19 8
20 9
20 0
20 1
20 2
20 3
20 4
20 5
19 0
19 1
19 2
19 3
19 4
19 5
19 6
19 7
19 8
19 9
19 0
19 1
19 2
19 3
19 4
9
9
9
9
0
0
0
0
0
0
0
0
8
8
8
8
8
8
8
8
8
8
9
9
9
9
9
9
19

Year
Figure 2 ISO + IEC Standards DIN German National Standards
At the same time, the shift to global private-sector regulation
also entails costs. To comply with international product standards,
for example, firms may have to re-design their products, retool their
production methods, or pay licensing fees to other firms whose pro-
prietary technology may be needed to implement the international
standard efficiently. These costs can be massive, to the point where
some feel forced to discontinue production of certain goods or even
go out of business.
In sum, while the convergence on a single set of international stan-
dards may bring overall gains for all countries, those gains can differ
greatly across countries and firms. Firms therefore have a strong in-
centive to seek to influence the process of international rule-making
to minimize their switching costs. For those who succeed in push-
ing their domestic standards for adoption as international standards,
switching costs will be minimal. The stakes thus are also high in the
private regulation of product markets, and severe conflicts of interest
are likely.
There is essentially no alternativepublic or privateto ISO, IEC,
and IASB as the global rule-makers in their respective areas. Their
prominent position in the regulation of international markets raises
pressing empirical and analytical questions, including:
Who exactly gets to write the rules in these private organizations?
Who wins and who losesand whywhen standard-setting takes
place in these private international organizations? What, in other
words, is the nature of politics in private-sector rule-making?
Specific answers to these questions are hard to come by, in large
part because these global regulators are private. Financed mostly by
voluntary contributions from private-sector stakeholders, they are not
subject to public oversight, and writing specific rules is in the hands
of groups of experts who are not required to keep records of their
proceedings. It is therefore difficult to obtain systematic information
about these regulatory processes. Yet, global private regulation has
in recent years become vastly more important and is now a phenom-
enon of considerable social and economic consequenceit matters
to understand it. This makes the lack of reliable information all the
more problematic, since comprehensive data are a crucial prerequi-
site, not only for assessing but also for improving the performance
and processes of global private regulators.
In our book, The New Global Rulers, we provide not only a gen-
eral framework for understanding private regulation but also detailed
empirical answers to the above questions, thanks to seven years of
collecting extensive information on private rule-making in central
mid-level managers, current and former IASB and ISO/IEC staff, and
government regulators. Together, these data allow us to provide the
first systematic analysis of key private institutions for the regulation of
global markets.
Global standardization is rarely about
reaching a compromise among different
regulatory models and approaches. In-
stead, it often entails battles for preemi-
nence of one regulatory approach or techni-
cal solution over another.
International private rule-making as a
political process
International standardization is sometimes described as an apolitical,
scientific process of identifying or developing the technically optimal
solution to a regulatory or technical problem. But there is seldom a
single, universally optimal solution, and global standardization is rare-
ly about reaching a compromise among different regulatory mod-
els and approaches. Instead, it often entails battles for preeminence
of one regulatory approach or technical solution over another. The
language accompanying these processes is technical; the essence
of global rule-making, however, is political, because it has important
distributional implications and generates winners and losers. To
lose may mean higher production costs, steeper costs of switching
to international standards, lower international competitiveness, loss
of export markets, and even risk of corporate demise. Under these
conditions, technical expertise (and financial resources) are neces-
sary but not sufficient conditions for successful involvement in global
private-sector standardization. It is timely information and effective
representation of domestic interest that confer the critical advantage
in these regulatory processes, determining who wins or loses. Such
representation occurs not through state or government intervention,
as in traditional intergovernmental organizations, but through do-
mestic private-sector standard-setters.
ISO, IEC, and IASB are not operationally self-sufficient. They heavily
rely on private-sector standards bodies at the national level for logisti-
cal and technical support. The domestic bodies thus are part and par-
cel of the global institutional structure of standardization; in a sense,
they form the institutional backbone of the global regulators. Domes-
tic standards bodies, however, are not disinterested aides to the inter-
national bodies. They are accountable to their domestic stakeholders,
whose regulatory preferences they seek to promote and defend at the
international level to minimize domestic switching costs.

September - October 2011 www.worldfinancialreview.com 25

 Domestic standards bodies and systems also vary widely in re-
sources and organizational structures and consequently in their abil-
ity to enable domestic stakeholders to speak with a single voice and
effectively promote domestic preferences. Some countries have one
domestic institution for standard-setting or a clear organizational hi-
erarchy, with long-established procedures for arriving at a single na-
tional position on any technical rule. In other countries, standard-set-
ting is market-based, and rule-making authority is fragmented among
multiple competing standard-setters. Both systems have served their
respective domestic economies well by generally producing (in very
different ways) high-quality standards over time. However, they differ
in how well they serve national interests when standardization shifts
to the global level.
Who then wins or loses and why? We argue that firms operat-
ing in a domestic system characterized by organizational hierarchy
and coordination have a crucial advantage because their system fits
more naturally with the global structure of private regulation. Such
a domestic system enables a countrys stakeholders to speak with a
single voice and in a timely fashion on the global stage. We call this
a case of high "institutional complementarity" between the domestic
and global levels. High institutional complementarity implies that
the interaction between domestic and global institutions is smooth
and easy, yielding decisive strategic benefits to the firms in terms of
effective interest representation in global rule-making and timely
information. By contrast, firms in a fragmented domestic system,
characterized by contestation among rival standard-setters are at
a distinct disadvantage. Their system fits relatively poorly with the
global system of private regulation, rendering both effective national
interest representation and domestic diffusion of information about
new global standards projects more difficult. We call this a case of
low institutional complementarity between the domestic and global
levels.
Winners and losers in global financial and
product markets
In The New Global Rulers, we show how the focus on institutional
complementarity helps explain the very different outcomes in global
private regulation of product and financial markets, based on our in-
ternational business surveys and a wealth of other sources. In the pri-
vate regulation of financial reporting, the IASB is unambiguously the
global rule-maker. The United States has in the Financial Accounting
Standards Board (FASB) a single private organization that is uncon-
tested as the institutional setting for developing financial reporting
standards at the domestic level. It provides an efficient and effec-
tive mechanism for aggregating preferences, with high institutional
complementarity vis--vis the IASB. Accounting standard-setting in
Europe, by contrast, is characterized by institutional fragmentation
and competition for authority among multiple institutional centers,
both at the domestic and the European levels. As expected, given
these differences in domestic institutions, we find that U.S. firms are
substantially more successful than European firms when they try to
influence international financial reporting standards. And responses
to a battery of questions about different methods of influencing IASB
standard-setting show that the greater success of American firms is
26 The World Financial Review
indeed due to the greater fit or complementarity between IASB and
U.S. domestic institutions.
ISO and IEC play the corresponding central role in the private reg-
ulation of global markets through international product standards.
Rule-making for product markets constitutes a particularly interesting
counterpart to private rule-making for financial markets, because U.S.-
European differences in product standard-setting institutions are the
exact opposite of what we observe in accounting standard-setting.
The domestic institutional structure for setting product standards
in the United States is characterized by institutional fragmentation
and contestation among competing standard-setters, i.e., low insti-
tutional complementarity. In Europe, by contrast, standard-setting
is characterized by a high degree of coordination and organizational
hierarchy at both the national and regional levels and thus greater
complementarity with the structure of ISO and IEC than in the U.S.
And our multi-country, multi-industry business survey provides com-
pelling evidence that Europe's usually much greater success in shap-
ing international standards is due to the higher complementarity
between standard-setting institutions at the domestic level and the
institutional structure of standardization in Europe compared to the
United States.
About the authors
Tim Bthe is assistant professor of political science at Duke University
and a member of the Rethinking Regulation project. Walter Mattli is
professor of international political economy and a fellow of St. Johns
College, Oxford University. Bthe and Mattli are co-directors of the In-
ternational Standards Project and co-authors of The New Global Rul-
ers: The Privatization of Regulation in the World Economy, published
by Princeton University Press in April 2011.
Notes
1. The "Roadmap to IFRS adoption" was published on 14 November 2008 in the
Federal Register as "proposed rule" # 33-8982/34-58960, File # S7-27-08. The SEC
has not yet committed to a specific timetable for IFRS adoption, but has repeat-
edly confirmed its commitment to IFRS in principle, most recently in a round-
table held at the SEC on 7 July 2011. The quote is from John House, "Global
Standards Here to Stay." Accountancy (August 2005), 72.
2. Until 2001, the predecessor of IASB developed International Accounting Stan-
dards (IAS). IFRS here refers to both the still-valid IAS and new international stan-
dards known since 2001 as International Financial Reporting Standards (IFRS).
3. TBT-Agreement, Article 2.4.
4. These figures are from chapter 1 of our book (Tim Bthe and Walter Mattli,
The New Global Rulers: The Privatization of Regulation in the World Economy
(Princeton University Press, 2011), which includes the complete references for
them.
The article is based on materials from the book: The
New Global Rulers: The Privatization of Regulation in
the World Economy, by Tim Bthe & Walter Mattli,
Princeton University Press, April 2011. All Rights Reserved.
For more information, please visit:
http://press.princeton.edu/titles/9470.html
http://www.facebook.com/NewGlobalRulers