Regulatory Response to 2008 Financial Crisis

The Economist provides a good overview of The Origins of the Financial Crisis in one of their crash courses (which appear to be accessible without a subscription)

One of the reforms instituted in the wake of the financial crisis is the establishment of the Financial Stability Board (FSB, unfortunately the same acronym as Russia's intelligence service). The board is intended to coordinate the activities of national central banks & finance authorities (such as the US Federal Reserve, Securities and Exchange Commission and Department of Treasury) and international organizations (such as the European Central Bank, European Commission, IMF, World Bank). [List of FSB members]

The mandate of the Financial Stability Board is to:

• assess vulnerabilities affecting the financial system and identify and oversee action needed to address them;
• promote co-ordination and information exchange among authorities responsible for financial stability;
• monitor and advise on market developments and their implications for regulatory policy;
• advise on and monitor best practice in meeting regulatory standards;
• undertake joint strategic reviews of the policy development work of the international standard setting bodies to ensure their work is timely, coordinated, focused on priorities, and addressing gaps;
• set guidelines for and support the establishment of supervisory colleges;
• manage contingency planning for cross-border crisis management, particularly with respect to systemically important firms; and
• collaborate with the IMF to conduct Early Warning Exercises.

Another major reform was the Basel III set of regulations produced by the  Basel Committee on Banking Supervision at the Bank for International settlements. These regulations, which are recommendations for national level authorities, provide guidance on acceptable levels of risk in capital markets and the amount of reserves banks need to keep on hand to meet obligations and cover bad debts. They are highly technical and focus a lot on the role of Central Counterparty (CCP) clearing. [FTSE has a short video that explains Basel III if you are interested in the details.] Of course, it is up to each nation to implement the rules for itself and the Federal Reserve has done so in the US

An IMF Survey report, "Safer Global Financial System Still Under Construction, Says IMF" notes that the organization feels there is still more work to be done in the following areas:

•  the need for a global-level discussion on the pros and cons for direct restrictions on certain business activities for banks, rather than just requiring them to hold more capital for these activities;

• monitoring, and a set of prudential standards if needed, for nonbank financial institutions posing systemic risks within the so-called shadow banking sector;

• careful thought on how to encourage the use of simpler products and simpler organizational structures;

• further progress on sorting out large institutions that get into financial trouble, including cross-border resolution to help secure the benefits of financial globalization.

In a Finance and Development article, "Fixing the System",  Laura Kodres and Aditya Narain note that regulators have focused attention on the central causes of the crisis, especially the shadow banking system, and have essentially picked the low hanging fruit of regulatory reform. This leaves them with the following more difficult tasks:

• identifying and building tools—still in the early stages of development—to mitigate systemic risk;
• improving the ability of the authorities to deal with the aftermath if the tools designed to prevent systemic events fail; and
• providing a framework for financial intermediation (the transfer of savings to investments) to assist in strong and stable economic growth, without overly prescriptive regulation.

IMF Reforms

Last week, the finance chiefs of the member nations of the IMF met in Washington and ended their meeting with a call for the US to approve a reform package passed by  the IMF Board of Governors in 2010. US approval will require an act of Congress, which so far the White House and Congressional leadership have been unable to pass. The G20 nations have set a deadline of the end of the year for the US to approve the reforms before they begin looking at other option (though what those options might be is unclear given the US' veto power in the IMF).

A March 2014 CRS report, "IMF Reforms: Issues for Congress" summarizes the package of reforms as follows:

• Doubling IMF quota and rollback of the NAB[New Arrangements to Borrow, temporary measures taken to increase IMF funding]: The reform package calls for a doubling of IMF quota, and a corresponding rollback of the NAB. Although IMF quota has been periodically increased before, if adopted, this would be the largest proportional quota increase in the history of the IMF.

• Shifting IMF quota to emerging economies: The reform package also calls for a 6% shift in quota share to emerging markets, which would increase their voting power at the IMF, as well as their relative financial commitments to the institution. If implemented, the negotiated changes in quota shares would result in China becoming the third-largest shareholder at the IMF, and India and Brazil would also join China and Russia among the 10 largest shareholders.  The United States quota share would fall slightly, but the U.S. quota would still be sufficient to ensure it had more than the 15% of the total voting power needed to veto major IMF policy decisions. See Table A-1 for more details about how IMF quota shares would change for major economies. [US quota would go from 17.69% to 17.40%]

• Creating an all-elected IMF Executive Board: Rather than continuing the practice of having the five largest shareholders at the IMF appoint Executive Directors to the Board, the proposed reform would make all Executive Directors on the Executive Board elected. This reform could pave the way for future consolidation of European representation on the Executive Board.

•  Reducing representation of advanced European economies on the Executive Board: Ten seats on the Executive Board represent advanced European economies. The reform proposal reflects a commitment by the membership to reduce the number of Executive Directors representing advanced European economies by two, so emerging and developing countries have more representation on the Board. 

In the IMF's own summary of the reform package highlights the following key facts:

• All BRIC countries will be top 10 IMF shareholders
• More than 6 percent shift in quota share to dynamic emerging market and developing countries
• Voice of poorest countries maintained by preserving their voting shares.

So who pays for the shift?
• The bulk of the shift—about 80 per cent—comes from a reduction in the shares of advanced economies and some oil producers
• 110 countries will gain or maintain quota share, of which 102 are emerging market and developing countries.

Once reforms in place, rebalancing to be mirrored in IMF’s Executive Board
• Advanced European economies will hold two fewer seats
• All Executive Directors will be elected.

With regard to the IMF's funding quota (or core funding), the summary notes:

Member countries’ quotas, the IMF’s principal source of financial resources, will double under the 14th General Review of Quotas to SDR 476.8 billion (about $755.7 billion at current exchange rates) from SDR 238.4 billion agreed under the 2008 quota and voice reform.

As part of the agreement, the New Arrangements to Borrow (NAB), a backstop arrangement between the IMF and a group of IMF members to provide additional lending resources to the Fund, will be rolled back.

Since major policy decisions at the IMF require an 85% vote, the US voting share of 17.69% means that the US must approve these changes for them to go into effect.

While the CRS notes that these reforms will have minimal effects on the US, it does note that there is opposition to the reforms. Without naming names, the report notes that some raise technical objections that the IMF has sufficient funds to do it job and that the New Arrangements to Borrow have better safeguards on the use of the funds in them than is the case for the IMF's core funds. Others are reluctant to increase representation of emerging markets due to concerns about the commitment of these nations to the existing norms and standards of international financial institutions.

In general, this is a fairly modest set of reforms that is going to increase quota funding by giving emerging markets a bigger role in the organization (and thus a bigger quota). The US has long had a voting share that is below its quota share (about 21.6% in 2011) and so the quota can be redistributed without the US losing voting share or its veto. Given that the US will retain its veto, it is hard to give much credence to concerns about emerging market nations subverting the norms of the organization. Within this veto constraint, the reforms do make the organization more inclusive, which will enhance its credibility.

However, most of this is irrelevant to members of Congress who (even if they personally get it) must play out any vote on the package in the arena of election year politics. The hope, of course, is that the lame duck Congress will pass a bill approving the reforms after the elections in November (which will be ahead of the G20 deadline).

Bhagwati on the WTO

Jagdish Bhagwati, a prominent advocate for free trade, served on a group of experts that advised the director general of the WTO on future chage needed at the organization. He summarized his own views on the subject in a short article entitled Reshaping the WTO. (Note: this is a relatively short and accessible paper.)

Bhagwati argues that there several fallacious criticism of the WTO be promoted by otherwise well-meaning NGOs like Oxfam and Action aid. These include the following:

• "Poor countries suffer from systematic rich-country “hypocrisy” leading to “double standards” in trade policy, with the rich countries having more trade barriers than the poor ones."  Bhagwati notes that developed nations in fact have much lower levels of tariff protections than developing nations do.
  
• "While trade liberalization by rich countries is beneficial, for the poor countries trade liberalization does not bring benefits." Bhagwati argues that the scholarship and empirical evidence argues to the contrary, despite the repeated claims of a small number of economists. Also, he argues that protection given to 'infant industries', which is the primary alternative to liberalizing trade, tends to be indiscriminate in nature, stifles the competitiveness of the industry, and becomes politically entrenched. In his view the infant industry argument "...has always been indulged to excess whereas experience shows otherwise."

• "Agricultural subsidies in the rich countries are keeping the developing world poor." Bhagwati notes that 45 out of 49 LDCs are net importers of food and thus benefit from the agricultural subsidies of other countries. He argues that middle income countries with large agricultural exports, who are negatively impacted by these subsidies, have been trying to link this issue to the welfare of poorer nations for political convenience. 

The Erosion of Non-Discrimination: Bhagwati feels that the proliferation of Preferential Trade Agreements (PTAs) between nations has eroded the norm of non-discrimination between nations that was established under GATT. Bhagwati would expand on this argument in his 2008 book Termites in the Trade System: How Preferential Trade Agreements Undermine Free Trade. In his 2005 paper he argued:

All economists now recognize the resulting “spaghetti bowl” problem, as I have christened it. The world trading system is charcaterized by a chaotic criss-crossing of preferences, with a plethora of different trade barriers applying to products depending on which countries they originate from. This is a fool's way of doing trade—not only does it destroy the efficient allocation of resources, but it flies in the face of the fact that today it is becoming almost impossible to define which product is whose. It is hard to believe that sensible men in charge of trade policy today, including the USTR, the EU Trade Commissioner and other luminaries of trade are so unmindful of the fact that, in the name of free trade, they are damaging the world trading system through discriminatory PTAs as much as the protectionists did in the 1930s.

Encroachment of Unrelated Agendas: The other problem Bhagwati sees for the WTO is the lobbying by rich nations to attach other issues, such as protections for intellectual property right, to the WTO's rules. He sees PTAs as a means for these nations to insert these issues into the international agenda and build legitimacy for the inclusion of issues into the WTO. 

 Yet another threat to the multilateral trading system arises from the ability of rich-country lobbies to capture, through use of PTAs and the design of S&D preference schemes, the trade liberalization process to advance their unrelated agendas. These lobbies pretend, of course, that “fair trade” and respect for “collective preferences”—both self-serving phrases that conceal the pernicious nature of the demands—require that their pet concerns such as labor standards be worked into trade agreements and institutions such as the WTO.  

This has united the major developing countries such as India and Brazil, both led by democratically elected progressive leaders, against the inclusion of such extraneous issues into trade negotiations and institutions. The Free Trade Agreement of the Americas (FTAA) has also been held up by Brazil, which insists correctly on confining it to trade liberalization, while the United States wishes to corrupt the FTAA with several extraneous issues. Revealingly, none of the many PTAs among the poor countries ever include these extraneous issues—their inclusion arises only when the U.S. and the EU are members.

The WTO's Bali Package

The WTO meeting at Bali passed an agreement known as the Bali Package last December which is the first significant agreement in years on the Doha Round of negotiations. Here are some new articles that discus the package

The WTO Bali Package by Carlos A. Primo Braga at IMD: This is the clearest  explanation of the Bali package and the negotiations leading to it that I could find. This is worth a thorough read.

Trade: the real cost of red tape by Caspar van Vark at The Guardian: van Vark discusses the of border thickness that the trade facilitation part of the package seeks to address.

Analysts of cross-border trade commonly refer to the "thickness" of a border. The more red tape and documentation required to move goods across a border, the thicker it is. Lack of co-ordination between customs directorates, poor IT infrastructure and corruption all add to this, and developing countries tend to have the thickest borders.

These burdens all add to the cost of trade and therefore encumber economic growth in developing countries. According to a report by the World Economic Forum, if every country improved just two key supply chain barriers – border administration and transport and communications infrastructure and related services – even halfway to the world's best practices, global GDP could increase by US$2.6tn (£1.6tn).

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One of the key areas of negotiation in Bali will be on the second section of the draft agreement, which sets out the basis for special and differential treatment for developing countries and for the technical assistance and capacity building needed by them for the implementation of the agreement.

Unusually, the agreement proposes that developing countries stagger their commitments in a self-selected way across three categories of commitment: A for obligations that can be implemented immediately, B for obligations that require longer time frames, and C for obligations that need both longer time frames and technical assistance.

This menu-driven approach means that individual countries will have their own tailor-made form of special and differential treatment, which one speaker pointed out was uncharted territory for the World Trade Organisation. At the same time, developing countries are also facing a level of commitment which was described as being "against the spirit of the Doha Round", the negotiations that started in 2001.

Anti-poverty groups condemn WTO pact as big business boost by Philip Inman at The Guardian: As is often the case there is the criticism that the WTO negotiations are biased towards the interests of developed countries and their corporations.

Why farming subsidies still distort advantages and cause food insecurity at Poverty Matters blog: The blog post goes into some detail about the issues at stake in the agricultural policy negotiations:

Since the WTO's Agreement on Agriculture took effect in 1995, world trade patterns have changed, and there are forces distorting food trade that are not being adequately addressed. Subsidies that wealthy countries give their farmers and agribusinesses are mostly classified as "non-distorting" measures, and remain high. A few multinational agribusinesses have increased their domination of global trade and food distribution. Speculation in commodity futures markets is creating volatile price movements that do not reflect true changes in demand and supply.

All this is bad for small producers, who do not benefit from price increases and lose out when prices decline with import surges. It is also bad for poor consumers, who face much higher prices for their food. In many developing countries this has created two linked problems: food insecurity because of high and volatile food prices, and livelihood insecurity of food producers because of rising costs and uncertain supply. 

In the meantime, developing countries must find some way to ensure their citizens' food and livelihood security. Many countries try to do so by introducing measures to make food affordable for low-income consumers or by encouraging domestic food production, particularly through supporting small farmers.

The trouble is that such measures sometimes come up against existing WTO rules. Thus, India's recent law that seeks to provide food security to one of the largest undernourished populations in the world has been challenged by the US in the WTO, even though India's scheme would cost a fraction of what the US provides in food subsidies.

Dani Rodrik on the Bretton Woods Compromise and Hyper-Globalization

Dani Rodrik is one of the leading economists who is critical of the Free Trade orthodoxy in economics. While Rodrik is very much in favor of countries pursuing an outward-focused and export-oriented strategy of growth (which sets him apart from non-economists who vehemently lambaste what they call the Neo-Liberal model or bias), he is critical of the view that nations need to fully and immediately embrace the policies promoted by Free Trade advocates.

Rodrik is a big fan of the Fox and Hedgehog metaphor and view the proponents of rapid and comprehensive trade liberalization, such as Jagdish Bhagwati, as hedgehogs promoting the big idea of Globalization. One manifestation of this big idea is the Washington Consensus which created a laundry list of domestic institutional changes that proponents argued were necessary for nations to implement if they wanted to grow. Rodrik characterizes this push to have nations conform to a rigid (and growing) set of policy guidelines as Hyper-Globalization.

Rodrik argues that this approach differs greatly from that used at the end of World War II under the Bretton Woods system. While the Bretton Woods conference is more closely associated with monetary policy, Rodrik views it as part of a broader international effort to open trade and promote global economic growth. In Rodrik's view, the key to the success of this approach was that it encouraged the growth of international trade without dictating that nations implement specific policies. This gave nations a good deal of policy space within which to craft their own unique policies and strategies for achieving the goals being promoted by the international community. He calls this approach the Bretton Woods Compromise and argues that it was very successful at achieving high levels of growth in domestic economies and international trade.

In contrast, Hyper-Globalization leaves very little policy space within which nations can craft their own growth strategies and pursue the policy goals they deem most important. Worst of all, adhering to the rigid requirements of Hyper-Globalization does not guarantee economic growth and in many cases has led to economic turmoil. So, where Thomas Friedman sees Globalization requiring nations to don a Golden Straitjacket, Rodrik argues that there is nothing golden about it.

Furthermore, Rodrik argues that, in the end, the Golden Straightjacket isn't much of a straightjacket either. That is to say, when push comes to shove, democratic leaders will respond to domestic political demands over international economic pressure or they will be replaced by other leaders who do so. Indeed, if leaders ignore domestic demands in favor of international ones, the democracy of the nation would be impaired.

Of course, national leaders do have to deal with conflicting demands from domestic and international sources.  Rodrik sees this conflict as part of a trilemma in the world economy. International integration (or globalization), nation states (or the preservation of their current role), and democratic politics (or the ability for populations to pursue their desired goals) create conflicting demands.

Rodrik argues that only two sets of demands can be reconciled at a time. Hyper-Globalization (or the Golden Straightjacket) satisfies the demands of international integration and the nation state, but does so at the expense of democracy. The Bretton Woods Compromise satisfied the demands of the nation state and democratic politics at the expense of international integration. Some sort of global federalism that allows democratic participation in setting the rules of international integration could satisfy the demands of democracy and international integration at the expense of diminishing the nation state's current role. However, Rodrik argues that, not only is the world a long way away from such a system, but it is unlikely that the diverse interests of developed and developing nations could be reconciled under one government.

Therefore, Rodrik argues that some sort of modified Bretton Woods Compromise is the best approach to managing the world economy. At Project Syndicate, Rodrik lays out seven principles that he thinks nations would agree to if they held a Bretton Woods type conference today. The essay is quite concise and worth reading in its entirety, but the seven principles are as follows :

1. Markets must be deeply embedded in systems of governance.
2. For the foreseeable future, democratic governance is likely to be organized largely within national political communities.
3. Pluralist prosperity.
4. Countries have the right to protect their own regulations and institutions.
5. Countries have no right to impose their institutions on others.
6. International economic arrangements must establish rules for managing interaction among national institutions.
7. Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies.

Dumping: Predation or Creative Destruction?

Dumping is a potentially predatory trade practice, which would make it unfair even by the very restricted meaning of "fair" used by economists.  In theory, a company could sell its product at a price below cost in a market and, thus, drive competitors out of business. Once that happens, the predator company could raise its prices to recoup its losses. If the new price is higher than the one that existing prior to the company's predatory pricing, then this would represent a loss to the society. That would be unequivocally bad.

Note that the essential part of the "badness" here is that the predator company takes advantage of the diminution of the competition produced by its below cost price to later raise its price above the initial market price. In such a case, the competition between companies is not based on who can produce goods more efficiently, but on who can suffer short term losses the longest.

This is what sets predatory behavior apart from good old fashioned competition in which one company eliminates the competition because they are able to produce at a lower cost. In this type of competition, the success of the more efficient company drives down prices and increases the surpluses generated from production and exchange. The companies that can't compete go out of business and free up their resources of labor and capital for other companies to use. This type of economic carnage would be considered creative destruction but it might be indistinguishable from the carnage produced by predation to those suffering from it.

Concerns about predation are not unique to foreign trade, and, indeed large national companies like Wal-Mart are often accused of this type of predation against small local businesses. However, claims of dumping are most common in international trade where there is the added concern that foreign governments might enable their domestic companies to endure short term losses in a foreign market. Governments might do that by providing export subsidies or tax credits (which are much the same thing) or by protecting their own market so that their companies can sell their products at a higher price in the domestic market to compensate for selling at a lower price abroad.

This possibility has led to "dumping" being defined rather simplistically as selling at a lower price overseas than at home. The Generalized Agreement on Tariffs and Trade (GATT) and the rules of the World Trade Organization allow nations to apply corrective or retaliatory tariffs on goods that are being dumped by this definition. The WTO explains dumping and it rules for anti-dumping actions as follows:

If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product. Is this unfair competition? Opinions differ, but many governments take action against dumping in order to defend their domestic industries. The WTO agreement does not pass judgement. Its focus is on how governments can or cannot react to dumping — it disciplines anti-dumping actions, and it is often called the “Anti-Dumping Agreement”.... 

The legal definitions are more precise, but broadly speaking the WTO agreement allows governments to act against dumping where there is genuine (“material”) injury to the competing domestic industry. In order to do that the government has to be able to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter’s home market price), and show that the dumping is causing injury or threatening to do so.

Note that the WTO expresses an ambivalence about the fairness of dumping in the above passage.  This is partly because the simple definition of dumping misses key aspects of the predatory scenario, i.e., that the companies are selling below cost (or at an unsustainably low price) and that the ultimate result will be higher prices due to decreased competition. Therefore, not everything labeled as dumping will necessarily be predatory and it is possible that companies engaged in beneficial efficiency based competition will be accused of dumping.

Furthermore, the domestic import competing industry will suffer injury whether the low prices of the foreign industry are predatory or not. Creative destruction may be good for the economy, but it is not good for the less efficient (or comparatively disadvantaged) businesses or industries. Therefore, an accusation of dumping may simply be camouflage for protecting a domestic industry from competition. In this sense, complaining about dumping may be the "last refuge of a scoundrel" under the current rules of international trade.

To put this in the context of something we have more personal experience with, consider the case of Wal-Mart. As mentioned earlier, Wal-Mart is often accused of selling below cost to drive out competition, though this seems to have been a more popular charge to make in the 1990s and 2000s. The question is, has Wal-Mart later raised prices to benefit from the loss of competition? I think it is pretty clear that they have not since a reputation for low prices is key to the success and stock value of the company. Also, Wal-Mart faces very significant competition from Target (or tar-Jay) which comes close to matching its prices and has a reputation for higher quality goods.

The story I would tell about Wal-Mart is that they came up with a more efficient way to sell products in comparison to local and regional retailers. This means that their lower prices are not a short-term phenomena. The proof of their retail model's superior efficiency lies in the fact that Target has been able to copy it and, thus, negate the possibility that Wal-Mart can charge monopolistic prices after driving out competitors. Wal-Mart's so called downtown busting effect is, therefore, creative destruction not predation.

For an example of international dumping, consider the case of shrimp imports to the US. In 2004, the US ITC announced that it had officially found that exporters of frozen and canned shrimp to the US from  Brazil, China, Ecuador, India, Thailand, and Vietnam were dumping and that this was causing significant injury to the US shrimp industry. Tariffs were placed on shrimp imports from these nations with the proceeds from those tariffs being distributed to US shrimp companies affected by the imports (this last part is due to the somehwat controversial Byrd Amendment).

As part of the US anti-dumping process, the Department of Commerce (DoC) investigated the domestic prices of frozen and canned shrimp in three countries and compared it to the price being charged for shrimp exported to the US. In the case of Chinese exporters, the DoC calculated that most Chinese exporters were selling shrimp 55% below the price of shrimp in China (with a couple of companies selling at a margin of above 80% below domestic prices). However, in Ecuador and Vietnam the margin was about 3-5%, the margin in Thailand was about 6%, and in India and Brazil it was about 10%.

So what do we make of these numbers? You might make the case that China is doing something strategic here or that they have significantly manipulated their domestic prices to inflate the price of shrimp in China for other reasons (it is China after all). However, the other nations have much lower margins that might be accounted for by reasons other than predatory pricing. Perhaps consumers in these countries are willing to pay more for frozen and canned shrimp than US consumers. Maybe, the domestic companies are able to charge a higher domestic price due to a pro-home product bias among consumers in their country (and a anti-foreign product bias among US consumers). Of course, it could also be that the governments in these countries are supporting exports by giving tax credits for exports or preventing foreign suppliers of shrimp into their domestic markets.

A bigger point here is that, with six countries exporting shrimp to the US, is there really any danger of them raising prices if the US shrimp industry shrinks? That is to say, can we tell a convincing story about these nations colluding to swamp the US with cheap shrimp, drive US shrimpers out of business, and then collectively raise prices (like some kind of shrimp OPEC) to recoup their losses and make future profits? Or, is it more likely that whatever export supporting policies are in place will remain in place in these nations and competition between them will keep the price of shrimp low even if there are less US shrimpers? This latter scenario is not much better for the US shrimp industry, but is quite favorable for US consumers of shrimp.

International Law and Institutions in the Ukraine Crisis

Crises like Russia's occupation of Ukraine are often held up as examples of the inadequacy of international law and organizations. As Eric Posner posted:

The international law commentariat has been pretty quiet about the most important geopolitical event so far this year. Hello? Anyone want to offer an opinion? Let me fill in the silence:

1. Russia’s military intervention in Ukraine violates international law.

2. No one is going to do anything about it.

The four blog posts listed below address such criticisms of international law and/or institutions arising from the current situation in the Ukraine.

The Crimea, Compliance, and the Constraint of International Law by Chris Borgen: 

Borgen argues that  international law serves other purposes than to be a brick wall blocking armies from invading other nations.While enforcing compliance remains problematic, international law still play a role in "framing expectations and viable policy options" which itself puts a constraint on state action. He writes:

The language of international law can provide a vocabulary by which states and other actors may frame their arguments in an attempt to persuade other international actors. As it is a normative language, it is also provides a context against which arguments, claims, and positions may be assessed. Bargaining in the shadow of international law may make it more difficult to maintain positions that are clearly against the consensus of the international community.

And this is where Russia may find itself in a bind. If it tries to sit on a piece of Ukraine’s territory, it may find significant push-back from many states, going beyond those most directly involved in the Ukrainian crisis, because although many states may not have a geopolitical interest in the Crimea, many states do have an interest in how norms of military intervention and self-determination are interpreted.

Ukraine, International Law, and the Perfect Compliance Fallacy by Peter Spiro:

Spiro has a short post firing back at critics, like Posner, who make the claim that international law is not effective because nations are not forced to comply with it. Spiro calls this the Perfect Compliance Fallacy and he argues that it pits international law against an idealized form of domestic law that does not in fact exist. Even where substantial enforcement mechanism exist, domestic law does not achieve perfect compliance. People still commit crimes, deny that their actions are a crime, and sometimes get away with it.

Also, some areas of domestic law lack centralized enforcement mechanisms. For instance, constitutional law in the US lacks an enforcement mechanism in much the same way that international law does. In some cases, such as the Supreme Court ruling that the legislative veto was unconstitutional, Congress and the President can and do ignore rulings by the Supreme Court. The implied argument here is that constitutional law nevertheless often constrains the actions of Congress and the President.


International law and institutions look pretty weak now, but they will matter a lot down the road by Eric Voeten:

Voeten also takes a swipe at critics if international law and institutions, with a heavier emphasis on the role of institutions. He argues that:

The web of international legal rules and institutions to enforce international law is simply not strong enough to prevent Russia from intervening militarily in Ukraine. Yet, it would be a mistake to dismiss the role of international institutions in how the crisis will develop. Indeed, international institutions may well play a crucial role in containing the conflict and bringing about an eventual peace agreement.

International organizations such as NATO, the Organization for Security and Cooperation in Europe (OSCE), the European Court of Human Rights will play a role in constraining Russian actions and  facilitating international responses to them.


Obama is using the OSCE to give Russia an exit strategy … if it wants one by Henry Farrell:

Farrell argues that the Obama administration is trying to use the OSCE to provide an alternative means of meeting Russia's security and human rights concerns, thus giving Putin a face saving exit strategy. Of course, it is not clear that Putin wants one, but, if he did, it would be a concrete example of an international organization mitigating the rawness of anarchy and facilitate peaceful resolution of conflict (as Neo-Liberal Institutionalists claim they can do).