Regulatory Transformations: Rethinking Economy-Society Interactions 9781474201049, 9781849463447, 9781782255444

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O Ñ AT I IN T ER N AT I O N A L S ER IE S IN L AW A ND S O C IE T Y

Regulatory Transformations Rethinking Economy – Society Interactions

ED I T ED B Y

Bettina Lange, Fiona Haines and Dania Thomas

344-7

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ISBN 978-1-84946-344-7

REGULATORY TRANSFORMATIONS The issue of whether transnational risk can be regulated through a social sphere goes to the heart of what John Ruggie has described as ‘embedded liberalism’: how capitalist countries have reconciled markets with the social community that markets require to survive and thrive. This collection, located in the wider debates about global capitalism and its regulation, tackles the challenge of finding a way forward for regulation. It rejects the old divisions of state and market, citizens and consumers, social movements and transnational corporations, as well as ‘economic’ and ‘social’ regulation. Instead this rich, multidisciplinary collection engages with a critical theme— the idea of harnessing the regulatory capacity of a social sphere by recognising the embeddedness of economic transactions within a social and political landscape. This collection therefore explores how social norms, practices, actors and institutions frame economic transactions, and there by regulate risks generated by and for business, state and citizens. A key strength of this book is its integration of three distinct areas of scholarship: Karl Polanyi’s economic sociology, regulation studies and socio-legal studies of transnational hazards. The collection is distinct in that it links the study of specific transnational risk regulatory regimes back to a social–theoretical discussion about economy–society interactions, informed by Polanyi’s work. Each of the chapters addresses the way in which economics, as well as economic and social regulation, can never be understood separately from the social, particularly in the transnational context.

Oñati International Series in Law and Society A SERIES PUBLISHED FOR THE OÑATI INSTITUTE FOR THE SOCIOLOGY OF LAW General Editors Rosemary Hunter David Nelken Founding Editors William L F Felstiner Eve Darian-Smith Board of General Editors Carlos Lugo, Hostos Law School, Puerto Rico Jacek Kurczewski, Warsaw University, Poland Marie-Claire Foblets, Leuven University, Belgium Recent titles in this series Shooting to Kill: Socio-Legal Perspectives on the Use of Lethal Force Edited by Simon Bronitt, Miriam Gani and Saskia Hufnagel Managing Family Justice in Diverse Societies Edited by Mavis Maclean and John Eekelaar Making Human Rights Intelligible Towards a Sociology of Human Rights Edited by Mikael Rask Madsen and Gert Verschraegen European Penology? Edited by Tom Daems, Dirk van Zyl Smit and Sonja Snacken Rights and Courts in Pursuit of Social Change Legal Mobilisation in the Multi-Level European System Edited by Dia Anagnostou Women’s Rights to Social Security and Social Protection Edited by Beth Goldblatt and Lucie Lamarch Delivering Family Justice in the 21st Century Edited by Mavis Maclean, John Eekelaar and Benoit Bastard For the complete list of titles in this series, see ‘Oñati International Series in Law and Society’ link at www.hartpub.co.uk/books/series.asp

Regulatory Transformations Rethinking Economy-Society Interactions

Edited by

Bettina Lange Fiona Haines and Dania Thomas Oñati International Series in Law and Society A SERIES PUBLISHED FOR THE OÑATI INSTITUTE FOR THE SOCIOLOGY OF LAW

OXFORD AND PORTLAND, OREGON 2015

Published in the United Kingdom by Hart Publishing Ltd 16C Worcester Place, Oxford, OX1 2JW Telephone: +44 (0)1865 517530 Fax: +44 (0)1865 510710 E-mail: [email protected] Website: http://www.hartpub.co.uk Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786 USA Tel: +1 503 287 3093 or toll-free: (1) 800 944 6190 Fax: +1 503 280 8832 E-mail: [email protected] Website: http://www.isbs.com © Oñati IISL 2015 Hart Publishing is an imprint of Bloomsbury Publishing plc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission of Hart Publishing, or as expressly permitted by law or under the terms agreed with the appropriate reprographic rights organisation. Enquiries concerning reproduction which may not be covered by the above should be addressed to Hart Publishing Ltd at the address above. British Library Cataloguing in Publication Data Data Available

ISBN: 978-1-84946-344-7 ISBN (ePDF): 978-1-78225-544-4

To Isabel and Manolo who know all about the regulatory capacity of a social sphere

Contents Contributors ............................................................................................ ix 1. Regulatory Transformations: An Introduction...................................... 1 Bettina Lange and Fiona Haines Part I: Theoretical Resources for Thinking about how to Harness the Regulatory Capacity of a Social Sphere 2. The Regulation of Markets: Polanyian Perspectives............................ 31 Alexander Ebner 3. Economics and Transnational Risk Regulation................................... 55 Christopher Decker Part II: Harnessing the Capacity of a Social Sphere for Regulating Corporate Actors 4. Export Credit Agencies and Human Rights Abuses: Flux and Friction in Regulation .......................................................... 81 Fiona Haines and Samantha Balaton-Chrimes 5. Transnational Business and the Politics of Social Risk: Re-Embedding Transnational Supply Chains Through Private Governance ............................................................ 105 Kate Macdonald and Shelley Marshall Part III: Regulating Trade in Fictitious and Risky Commodities 6. Making Sense of the WTO Sanitary and Phytosanitary Agreement: An Essay about Scholarly Expertise ............................... 131 Elizabeth Fisher 7. Regulating Economic Activity Through Performative Discourses: A Case Study of the EU Carbon Market ................................................................................ 151 Bettina Lange 8. (Dis)embeddedness and the Management of Transnational Risk: The Case of Blood Regulation .......................... 181 Anne-Maree Farrell

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9. Double Movements in the Regulation of New Technologies: The Case of Nanotechnology ................................... 201 Elen Stokes 10. Risk-Free Debt: The Distorting Promissory Narratives in Sovereign Debt Law and Policy ................................. 229 Dania Thomas Index..................................................................................................... 253

Contributors Samantha Balaton-Chrimes, Dr Lecturer in International Studies in the School of Humanities and Social Sciences of Deakin University, Australia. She has published widely in the areas of citizenship studies, ethnic politics, democracy and diversity, and corporate accountability. She is currently working on an ARC research project investigating the efficacy and legitimacy of redress avenues available to citizens whose human rights are impacted by transnational business. Sam’s geographic expertise is in Kenya, India and Indonesia. Christopher Decker, Dr Research fellow at the Centre for Socio-Legal Studies, University of Oxford. He is an economist whose research is focussed on the use of economics in public policy, legal and regulatory processes. His core research interests include: regulation (broadly defined to cover the utilities, professional services, financial and environmental regulation); industrial organisation; law and economics, behavioural economics, institutional economics and competition law. He is also interested in the law and economics of development. Alexander Ebner, Professor, Dr Professor of Social Economics, especially Economic Sociology and Political Economy, at Goethe-Universität Frankfurt. His main research fields are Entrepreneurship and Innovation, Governance and Public Policy, Regional Development and the History of Economics. Anne-Maree Farrell, Dr Australian Research Council Future Fellow and Associate Professor in the Faculty of Law of Monash University, Melbourne, Australia. She previously held academic positions at the University of Manchester and Lancaster University. Her research expertise lies generally in health law and policy, with specific interests in law and the human body, health technologies and public health. Elizabeth Fisher, Dr Professor of Environmental Law at Corpus Christi College and University Lecturer in the Faculty of Law of Oxford University. She researches in the areas of environmental law, risk regulation and administrative law. Much of her work has explored the interrelationship between law, administration and regulatory problems. Her work has an important comparative dimension and she focuses in particular on these issues in the legal cultures of the UK, US, Australia, the EU and the World Trade Organization.

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Fiona Haines, Dr Professor of Criminology in the School of Social and Political Sciences of Melbourne University, Australia and Adjunct Professor at RegNet in the College of Asia and Pacific at ANU. She has undertaken extensive research in white collar and corporate crime, globalisation, risk and regulation. She is an internationally recognised expert in the area of regulation and compliance. Professor Haines’ most recent published work includes a critical criminological analysis of financial fraud and the nature of money in the journal Theoretical Criminology as well as work, with Tim Connor of Newcastle University, on abuse of human rights by sports shoe factories in Indonesia in the same journal. Bettina Lange, Dr Associate Professor in Law and Regulation, Centre for Socio-Legal Studies, Oxford University. She has carried out extensive research on the implementation of environmental regulation in the UK and Germany. Her work is informed by social theory and draws on qualitative empirical research, including discourse analysis. Her work has explored the role of emotions in regulatory processes characterised by conflict and contestation. Her most recent project—funded by the Natural Environment Research Council—examines how knowledge practices inform the management of water scarcity in the UK. Kate Macdonald, Dr Lecturer, School of Social and Political Sciences, University of Melbourne. Before joining Melbourne she completed her DPhil in the Department of International Development at Oxford University (jointly supervised in the Department of Politics and International Relations). Her research focuses on transnational governance and accountability systems, especially in relation to transnational business regulation and accountability in the international development sector. She has conducted research and consultancy work on these topics for a range of Non-government Organisations including Amnesty International, ActionAid Australia, Oxfam Australia and the UK’s Corporate Responsibility Coalition, and currently serves on the advisory board of the Jubilee Australia Research Foundation. Shelley Marshall Senior lecturer in the Department of Business Law and Taxation, Monash University, Australia. She teaches, researches, publishes and supervises in the areas of labour law and development and corporate governance and accountability. Her research covers the geographic areas of Australia, India, Indonesia, Cambodia and Bulgaria. Before joining the department she was a Senior Research Fellow with the Corporate Governance and Workplace Partnerships Project at the Law School of the University of Melbourne. Prior to her academic career, Shelley practiced as a lawyer.

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Elen Stokes, Dr City Solicitors Educational Trust Senior Lecturer in Property Law in the Law School of Cardiff University. Elen’s research explores the ways in which the law mediates and manages risks and scientific uncertainties, particularly those associated with new technologies. Her recent work looks at the notion that emerging technologies tend to be born into an inherited regulatory environment, becoming subject not only to the scope and content of existing regulations but also to their operational, institutional and behavioural features. Elen is interested in the consequences of applying pre-existing measures to rapidly evolving fields, such as nanotechnology and synthetic biology. Dania Thomas, Dr Lecturer in Business Law in the Adam Smith Business School and School of Law of University of Glasgow, UK. Her research interests include English contract law, company law, sovereign debt crises and financial law and regulation.

1 Regulatory Transformations: An Introduction BETTINA LANGE AND FIONA HAINES

I. THE RISE OF A SOCIAL SPHERE IN REGULATION

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EGULATION IS NO longer the prerogative of either states or markets. Increasingly citizens in association with businesses catalyse regulation which marks the rise of a social sphere in regulation. Around the world,1 in San Francisco, Melbourne, Munich and Mexico City, citizens have sought to transform how and to what end economic transactions are conducted. For instance, ‘carrot mob’ initiatives use positive economic incentives, not provided by a state legal system, but by a collective of civil society actors in order to change business behaviour.2 In contrast to ‘negative’ consumer boycotts, ‘carrot mob’ events use ‘buycotts’.3 They harness competition between businesses as the lever for changing how and for what purpose business transactions are conducted. Through new social media ‘carrot mobs’ mobilize groups of citizens to purchase goods at a particular time in a specific shop. The business that promises to spend the greatest percentage of its takings on, for instance, environmental improvements,4 such as switching to a supplier of renewable energy, will be selected for an organized shopping spree and financially benefit from the extra income it receives from the ‘carrot mob’ event. ‘Carrot mob’ campaigns chime with other fundamental challenges to conventional economic activity, such as the shared use of consumer goods through citizens’ collective consumption which questions traditional conceptions of private property.5 1 Originally developed in the US, but now also harnessed in a range of countries, including European states, such as Germany. 2 See, for example, Caterina Lobenstein, ‘Zweiter Frankfurter Carrotmob: Ein Äppler für den Klimaschutz’, at: www.faz.net/s/RubBEFA4EA6A59441D98AC2EC7C392932A/Doc~E3 92C75A1CEE145A4BBB517423BC3D563~ATpl~Ecommon~Scontent.html. 3 www.carrotmob.org/. 4 ‘Carrot mob’ campaigns have pursued a range of objectives, including the protection of civil liberties and improvement of working conditions for employees. 5 Steven Pinch, Cities and Services: The Geography of Collective Consumption (London, Routledge, 2006).

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But harnessing the regulatory capacity of a social sphere has many facets. What type of regulatory transformation is really at stake here? While ‘carrot mob’ events are informed by grass-roots and potentially democratic visions of consumer power, harnessing the regulatory capacity of a social sphere can also be informed by a government-imposed neo-conservative vision of citizens regulating where the state retreats. For instance, the ‘Big Society’ initiative6 of the current UK conservative-liberal government has sought to revive and expand the contribution of civil society to the running of public services, formerly provided by the welfare state.7 Here, harnessing the regulatory capacity of a social sphere is associated with an ideological program of ‘rolling back the frontiers of the state’ in the context of significant public sector spending cuts, imposed in the wake of the 2008 economic crisis. Some aspects of this ‘Big Society’ initiative turn citizens into regulators. For instance, citizens are offered choices between different service providers as part of ‘Big Society’ welfare state reforms. Such choices are intended to ‘empower’ citizens, and can also turn them into regulators.8 Exercising choices can involve regulation of services because preferences for services of a particular type and quality are expressed, not dissimilar to choice in a market. Moreover, volunteer citizens’ involvement in the delivery of public services in England, such as housing through community housing associations, can shade into regulatory activity because residents now can influence local council spending on housing. Reflecting on the regulatory capacity of a social sphere is thus timely, because in the wake of the 2008 financial crisis debates about the limits of regulation either by markets or states have been re-invigorated. In the light of the failure of ‘self-regulatory’ financial markets and questions about the appropriate scope and political legitimacy of states regulating in a postcrisis period, the potential of a social sphere to contribute to regulation is again on the agenda. The effects of the 2008 economic crisis sparked by sub-prime lending in the US are still unfolding in Eurozone countries. There are interesting judicial responses to European Central Bank (ECB) policies which address the risk of sovereign debt default and bailouts conditional on government austerity budgets involving significant cuts to public sector service provision.9 These crises have thus raised questions about what states 6

Which involves also a new Minister for ‘Civil Society’ as part of the UK central government. This forms part of a significant overhaul of public service provision under the banner of ‘Open Public Services’. The aim is to increase choice for users of welfare state services while reducing costs in the provision of these services. Services are to be delivered through a combination of public, private commercial and civil society organizations (HM Government, Open Public Services 2014, at: www.gov.uk/government/uploads/system/uploads/attachment_data/ file/291854/Open_Public_Services_Progress_Report_2014.pdf (site last visited 29.12.2014) 1. 8 For instance, from March 2014 onwards patients who are eligible for continuing healthcare from the NHS can ask for a Personal Health Budget to purchase more individually tailored health care services (The National Health Service (Direct Payments) Regulations 2013). 9 Greece, for instance, is facing again the risk of a ‘disorderly’ debt default at the time of writing, at the beginning of 2015. The Observer, 28.12.2014, 17. 7

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or markets can deliver when seeking to regulate risks created by and for business activity. But this edited collection10 seeks to transcend dichotomies between ‘state and market, citizens and consumers, social movements and transnational corporations’ in its analysis of regulation. Such binaries have been enduring in regulation scholarship. They have been buttressed, for instance, by neo-classical economic analysis. From this perspective the distinction between state regulation and market activity underpins distinct state regulatory solutions that neo-classical economic analysis offers for market failures, such as information deficits, externalities and limited competition.11 A market failure, such as information deficits about the environmental performance of electrical goods, can be addressed, for instance through a state law requirement for the labelling of products. Such state-market binaries are pervasive and thus have also informed regulation literature which does not explicitly rely on neo-classical economic analysis.12 In contrast to this, this edited collection argues that we are witnessing the rise of a social sphere that regulates at the interstices of states and markets. We therefore explore a distinct element of the wider change in regulation that John Braithwaite has captured through the notion of the ‘privatization of the public and the publicization of the private’ in the rise of ‘regulatory capitalism’.13

II. WHAT DO WE MEAN BY HARNESSING THE REGULATORY CAPACITY OF A SOCIAL SPHERE?

We explore in this edited collection the regulatory capacity of a social sphere as it links to states and markets because they are still key regulators of business behaviour.14 But we suggest that civil society is more important for the regulation of social and economic risks posed by and for business activity than sometimes recognized in the regulation literature.15 In contrast to some 10 This edited collection arises from papers first presented at an Oñati Workshop. The editors gratefully acknowledge financial and organizational support from the Oñati International Institute for the Sociology of Law for developing the work presented in this book. 11 Anthony Ogus, Regulation: Legal Form and Economic Theory (Oxford, Hart Publishing, 2004) Ch 2. 12 See eg Colin Scott, ‘Regulation in the Age of Governance: The Rise of the Post-Regulatory State’ in Jacint Jordana and David Levi-Faur (eds), The Politics of Regulation (Cheltenham, Edward Elgar, 2004) 2. 13 John Braithwaite, Regulatory Capitalism: How It Works, Ideas for Making It Work Better (Cheltenham, Edward Elgar, 2008) 8. 14 Bridget Hutter, ‘The Role of Non-State Actors in Regulation’ in Gunnar Folke-Schuppert (ed), Global Governance and the Role of Non-State Actors (Baden-Baden, Nomos, 2006) 65. 15 Hutter, for instance, perceives a role in particular for non-state actors in relation to two key dimensions of regulation, the gathering of information and the setting of standards, ibid, 73.

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contributions to the literature on non-state actors in governance, we define civil society as including all non-state actors involved in regulatory activity, including private, commercial actors,16 because individual and corporate citizens may be actually the same people or belong to shared local communities. We argue that in order to transform thinking about regulation, we need to recognize various interconnections between ‘state and market, citizens and consumers, transnational corporations and social movements’ that are not necessarily recognized in classical liberal or neo-liberal thought about regulation, or indeed some contemporary regulation scholarship. Accounts that perceive civil society as characterized by a distinct ‘institutional culture’ emphasize its organizational difference from ‘states’ and ‘markets’.17 A range of terminology is employed to capture the role of such a distinct organizational form of civil society in transnational risk regulation, reflecting various degrees of association between civil society, on the one hand, and ‘states’ and ‘markets’, on the other hand. Civil society is portrayed as acting as an ‘intermediary between’ the market and changing states, as building partnerships between government and the ‘non-profit sector,18 as acting as an extension of public administration,19 while sometimes also operating ‘outside government’.20 This variation in accounts points to the need to develop a typology of interactions between civil society and markets as well as states. This edited collection argues that in doing so we should go beyond established binaries in the analysis of a social sphere in regulation. This entails the recognition of hybrid approaches to regulation, such as those that mobilize the ‘citizen-consumer’ in environmental regulation,21 strategies that recognize the power of social norms to inform the behaviour of a range of market actors, as well as approaches that recognize the symbiotic relationship between social movements and their ‘other’: transnational corporations. A critical examination of the regulatory capacity of a social sphere thus explores how social norms, practices, actors and institutions frame economic transactions, and thereby regulate economic and social risks generated by and for business, states and citizens.

16 Jeannette Hofman, ‘(Trans-) Formations of Civil Society in Global Governance Contexts—Two Case Studies on the Problem of Self-Organization’ in Folke Schuppert (n 14) 179. 17 Gunnar Folke Schuppert, ‘The Changing Role of the State Reflected in the Growing Importance of Non-State Actors’ in Folke Schuppert, ibid, 203, 209. 18 Folke Schuppert (n 17) 209, 210. 19 ibid 212. 20 ibid 211. 21 Christer Berglund and Simon Matti, ‘Citizen and Consumer: The Dual Role of Individuals in Environmental Policy’ (2006) 15 Environmental Politics, 4, 550–71; Gert Spaargaren and Peter Oosterveer, ‘Citizen-Consumers as Agents of Change in Globalizing Modernity: The Case of Sustainable Consumption’ (2010) 2 Sustainability 1887–1908, Victoria Baltrusch, Law and Consumerism: The Regulation of Green Marketing Practices, MSt thesis (2015), Oxford University (forthcoming).

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More specifically we use the term ‘social sphere’ in order to draw attention to three key dimensions of civil society’s involvement in the regulation of transnational risks. First, a social sphere has a spatial dimension. By this we mean that the spaces, including local places, in which regulatory activity of civil society actors can occur, matters. It matters in particular in the context of transnational risk regulation, the focus of this edited collection, because in this context the boundaries of the space in which civil society operates are less obvious than in the context of regulation by civil society within a nation state. Civil society activity within the transnational sphere can be located within particular transnational communities that stretch across international, national, regional and local levels of governance.22 This spatial dimension of a social sphere includes spaces in nature. It reflects the re-orientation of sociological thought away from a pure focus on social laws as distinct from natural laws23 in order to explain how society works. As Ulrich Beck and his co-authors have put it, ‘nature is no longer perceived as an outside that can be adapted to one’s purposes, but increasingly as part and parcel of society’.24 Nature creates spaces for the regulatory capacity of a social sphere, also because regulation is increasingly concerned with addressing the environmental consequences of production and consumption patterns engrained in contemporary societies.25 A second key dimension of harnessing the regulatory capacity of a social sphere involves civil society’s involvement in meaning making. Meaning making involves changing the content of social norms that inform business practice in order to develop new understandings of what it means to trade in ethical and legitimate ways. One example of this is culture jamming which involves the ironic inversion of brand slogans and advertisement messages in order to criticize ‘value–action’ gaps26 in corporate economic practice. A salient example of this is the exchange of e-mails between an anti-sweatshop campaigner and the NIKE corporation about working conditions for children in NIKE factories in Vietnam, also referred to as ‘discursive political

22 Marie-Laure Djelic and Kerstin Sahlin-Andersson, Transnational Governance (Cambridge, Cambridge University Press, 2006) 15, 22. 23 Such as those invoked by biological explanations of human behavior, eg by Malthus and Darwin (Luke Martell, Ecology and Society: An Introduction (Cambridge, Polity Press, 1994) x). 24 Ulrich Beck, Wolfgang Bonss and Christoph Lau, ‘The Theory of Reflexive Modernization’ (2003) 20 Theory, Culture & Society 1–33, 7. 25 Also Karl Polanyi—ahead of sociological thinking during his time—recognized aninterdependence between a social and natural world. He therefore criticized the commodification of land as a category mistake, and suggested that a host of social, beyond merely economic, relationships are an aspect of people’s relationship with land. Mitchell Bernard, ‘Ecology, Political Economy and the Counter-Movement: Karl Polanyi and the Second Great Transformation’ in Stephen Gill and James H Mittelman (eds), Innovation and Transformation in International Studies (Cambridge, Cambridge University Press, 1997) 83. 26 Berglund and Matti (n 21) 553.

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consumerism’.27 Third, and linked to this second dimension, we also understand a social sphere to be constituted by the social practices of civil society actors involved in regulation. Examples of these are debating, critiquing, holding to account, naming and shaming, as well as building advocacy networks, often through interaction with market and state actors.28 We explore these three dimensions of a social sphere in regulation in the specific context of transnational29 risk regulation.30 This engages risks that transcend nation state boundaries, specifically to prevent and reduce the likelihood of harm arising from such risks to citizens, public bodies and private companies. Transnational risks have proliferated in the context of globalization, ie the stretching of social relations across time and space, since both economic and regulatory activity have become increasingly denationalized and deterritorialized.31 Especially in the transnational sphere, private or hybrid state-private actors have taken over regulatory activities from public regulatory agencies.32 The chapters in this edited 27 Michele Micheletti, Dietlind Stolle and Larua Nishikawa, and research assistance from Matthew Wright, ‘A Case of Discursive Political Consumerism: The Nike E-mail Exchange’, at: http://profs-polisci.mcgill.ca/stolle/Data_files/Micheletti%20och%20Stolle%20Diskursiv% 20TemaNord.pdf (site last visited 29.12.2014). 28 Christer Jönsson and Jonas Tallberg, ‘Transnational Actor Participation in International Institutions: Where, Why, and With What Consequences? in Christer Jönsson and Jonas Tallberg (eds), Transnational Actors in Global Governance: Patterns, Explanations, and Implications (Houndmills, Palgrave Macmillan, 2010) 1; see also Djelic and Sahlin-Andersson (n 22) 22. 29 Financial and environmental risks, such as the failure of national or private debt securitizations or climate change are clear examples of this. Polanyi recognized in several ways an international dimension to economic risks in the ‘The Great Transformation’. For instance, he recognized colonialism, as an aspect of nineteenth century international trade, as creating important export markets for colonizing countries. This provided an alternative outlet for goods, in light of the increasingly limited access of England to other industrializing countries’ national markets due to protectionist tariffs that sought to reduce competition between industrializing countries. 30 We also recognize that the transnationalization of risk regulation varies according to policy fields. While environmental policy and economic governance are examples of significant transnational risk regulation, other policy areas have been subject to greater continuing national controls over regulation. 31 Spaargaren and Oosterveer (n 21) 1887, 1892. 32 Jönsson and Tallberg (n 28) 4–5; James N Rosenau and Ernst Otto Czempiel, Governance without Government: Order and Change in World Politics (Cambridge, Cambridge University Press, 1992); Susan Strange, The Retreat of the State: The Diffusion of Power in the World Economy (Cambridge, Cambridge University Press, 1996). But evidence about a decline of the state in transnational risk regulation is inconclusive. Picciotto, for example, maintains that states are still important regulators also in a transnational sphere (Sol Picciotto, ‘The Control of Transnational Capital and the Democratisation of the International State’ (1988) 15 Journal of Law and Society 1, 58). There has been, however, an increase in transnational non-governmental organizations. For instance, Jönsson and Tallberg report an increase in international NGOs for the period from 1956 to 2003 (in 1956 there were fewer than 1000 international NGOs, in 1985 there were 14,000 and in 2003 there were 21,000 (Yearbook of International Organizations, referred to in Jönsson and Tallberg (n 28) 5)). But this does not preclude that the regulatory powers of both state and private actors, including citizens, to have increased in a transnational sphere (Djelic & Sahlin-Andersson (n 22) 11; John Braithwaite and Peter Drahos, Global Business Regulation (Cambridge, Cambridge University Press, 2000) 3).

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collection explore this further in the context of risk regulation through the World Trade Organization (WTO) Agreement on Sanitary and Phytosanitary Measures, the transnational regime for controlling risks from blood products and the supranational risk regulatory regime for trading in greenhouse gas emissions in the European Union (EU), to name just a few. We work with a wide definition of regulation33 that seeks to capture both legal and non-legal processes for changing the behaviour of economic actors according to specific standards, backed up by institutions and mechanisms of enforcement.34 We include in this list of non-legal processes changes in mind sets and emotional dispositions. But what conceptual lens can frame this inquiry into the regulatory capacity of a social sphere? We argue that the work of the economic sociologist and anthropologist Karl Polanyi provides a valuable analytical starting point for exploring the regulatory capacity of a social sphere.

III. KARL POLANYI’S WORK AS A FRAME FOR ANALYZING THE REGULATORY CAPACITY OF A SOCIAL SPHERE

From a Polanyian perspective, harnessing the regulatory capacity of a social sphere involves embedding economic relationships in social ones in order to shape how and for what purpose economic exchange is conducted. This, in turn, helps to shed light on the wider theme of economy–society interactions which we consider to be at the heart of regulatory transformations. Karl Polanyi, an economic sociologist and anthropologist, argued that over the course of history we can observe different stages of embedding and disembedding of economic in and out of social relationships. In his book The Great Transformation (1944), he traced intersections between economy35 and society from pre-industrial to twentieth century capitalist societies. Polanyi suggested that the increasing reliance on markets for the exchange of goods and services during eighteenth and nineteenth century capitalism generated its own momentum for a ‘counter-movement’ during which society

33 In The Great Transformation, Polanyi works with a wide conception of regulation that includes two types of regulation. First, regulation that constitutes and maintains markets and, second, regulation that corrects the negative social and cultural side-effects of selfregulating markets (Gareth Dale, ‘Karl Polanyi’s The Great Transformation: Perverse Effects, Protectionism, and Gemeinschaft’ (2008) 37 Economy and Society 4, 495, 501). 34 Robert Baldwin, Colin Scott and Christopher Hood, A Reader on Regulation (Oxford, Oxford University Press, 1998) 3–4. 35 Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (first published 1944, 2nd edn, Boston, Beacon Press, 2001). Polanyi’s analysis of the economy was in contrast to Marx’s slanted towards an examination of systems of distribution rather than production (József Bognár, ‘Opening Address’ in Kari Polanyi-Levitt (ed), The Life and Work of Karl Polanyi (Montreal, Black Rose Books, 1990) 14).

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became the source of regulation of the social and economic consequences of capitalist production, such as poverty and disease experienced by the poorest sections of the working classes, as well as loss of economic and political power for the landed gentry.36 Regulation, including state legal regulation, became a key tool for re-embedding economic in social relationships, for instance through legislation limiting the length of the working day and stipulating safety standards in factories. Most importantly in the context of this edited collection, Polanyi’s understanding of regulation was not confined to state legal regulation, but encompassed a whole range of social actors and forces, such as medieval guilds which restricted competition, twentieth century trade unions and the social mores of the household economy.37 We build on Polanyi’s work because his central metaphor of embedding economic in social relationships provides a critique of three key socialtheoretical perspectives which have been influential in regulation scholarship: neo-classical economic perspectives, systems-theoretical and Marxist accounts. Firstly, Polanyi’s empirically grounded economic sociology provides a radical departure from the abstract, mathematical modelling of economic activity by neo-classical economics which has underpinned some contemporary regulation scholarship, and more recently is being supplemented by behavioural and new institutionalist approaches that pay greater attention to the actual behaviour of economic actors.38 Abstract neo-classical economic thinking informs a very specific, and potentially narrow understanding of markets which focuses on competition between economic actors as well as demand and supply equilibria as constituting markets.39 From this perspective markets are governed by their own laws, and only in the exceptional cases of market failures will state intervention be necessary. In contrast to this, economic sociology draws attention to the many ways in which state and non-state regulation by social actors stabilizes and thus prevents the failure of markets,40 for instance by creating and enforcing rules of economic exchange.41 For economic sociologists prices are thus not the starting point

36 An example of a more recent regulatory counter-movement is the Fordist bargain struck between labour and capital in the post-World War II period in Northern-European states which was characterized by significant state involvement in economic management, including controls on financial capital, a developed social welfare system and institutionalized bargaining between management and workers resulting in high wages. A liberal capitalist economic order became thus ‘embedded’ (Bernard (n 25) 86). 37 Polanyi (n 35) 73, 176, 56. 38 See, for example, work by Richard Thaler and Cass Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (Caravanbooks, Padstow, 2008). 39 Ogus (n 11). 40 Mitchel Y Abolafia, ‘Separate Spheres? The Cultural Contradictions of Markets’ in B Lange, D Thomas and A Sarat (eds), From Economy to Society? Perspectives on Transnational Risk Regulation (Bingley, Emerald, 2013) 265, 266. 41 Neil Fligstein, ‘Markets as Politics: A Political-Cultural Approach to Market Institutions’ (1996) 61 American Sociological Review 4, 656, 658.

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for understanding co-ordination of behaviour in markets, but how social relationships shape prices is the interesting question. Secondly, Polanyi’s ideas depart from the Parsonian functionalism of systems-theory in various ways. According to systems-theory, and its variants developed by Niklas Luhmann42 and Günther Teubner,43 significant deficits in the implementation and enforcement of legal regulation is due to the autopoietic nature of sub-systems, such as ‘law’, ‘economy’ and ‘politics’, which can only influence each other to a limited extent.44 But while functionalism differentiates between ‘society’ and its various sub-systems, such as the economy, Polanyi emphasizes interconnections between economy and society, by perceiving economic relationships as embedded in social ones. In the context of the 2008 financial crisis, systems-theoretical accounts have attracted further criticism, because they seem to buttress the idea of selfregulatory markets which function according to their own laws.45 Moreover, the systems-theoretical idea of self-referential, normatively closed, but cognitively open social sub-systems seems to justify the failure of bankers and political elites to communicate with civil society about what risks economic actors should be allowed to create and who should bear the adverse consequences of these risks—eg from new financial products. Thirdly, Polanyi’s work departs from Marxist perspectives on regulation. Polanyi’s economic sociology is based on the idea of the ‘primacy of society’ which suggests that all economic relationships, including those co-ordinated by markets, are embedded in social relationships. This departs from Marx’s determinist base-superstructure model that accords primacy to economic relations of production in shaping state regulation.46 While Marxism has been less influential than neo-classical economics and systems-theory in contemporary regulation scholarship, it has nevertheless provided an important critical lens for understanding whose economic interests are served by specific regulatory regimes. This has informed some accounts of health and safety, environmental as well as consumer regulation and taxation, also in 42

Niklas Luhmann, Soziale Systeme (Berlin, Suhrkamp, 1984). Günther Teubner, ‘After Legal Instrumentalism?—Strategic Models of Post-Regulatory Law’ in Günther Teubner (ed) Dilemmas of Law in the Welfare State (Berlin, Walter de Gruyter, 1986) 299–325. 44 Teubner (n 43); Renate Mayntz, Implementation Politischer Programme 1: Empirische Forschungsberichte (Opladen, Westdeutscher Verlag, 1980); Renate Mayntz, Vollzugsprobleme der Umweltpolitik (Stuttgart, Kohlhammer, 1978); Carl-Fredrik Bergström, Henry Farrell and Adrienne Heritier, Legislate or Delegate? Bargaining over Implementation and Legislative Authority in the European Union, EUI Working Paper, RSCAS No 2006/42, at: http://cadmus. eui.eu/bitstream/handle/1814/6416/rscas_2006_42.pdf;jsessionid=7D6F1B8560A28E726CD E128CDB6F3FDB?sequence=4 (site last visited 29.12.2014). 45 Günther Teubner, Paul Kjaer, and Alberto Febbrajo, The Financial Crisis in Constitutional Perspective: the Dark Side of Functional Differentiation (Oxford, Hart Publishing, 2011). 46 Fred Block and Margaret Somers, ‘Beyond the Economistic Fallacy: The Holistic Social Science of Karl Polanyi in T Skocpol (ed), Vision and Method in Historical Sociology (Cambridge, Cambridge University Press, 1984) 48. 43

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the context of unjust international divisions of labour between the developed and the developing world.47 To summarize, while Polanyi’s work about the embedding of economic in social relationships provides an important analytical framework for exploring the regulatory capacity of a social sphere, this edited collection also critiques and develops his work.

IV. BUILDING ON AND DEVELOPING POLANYI’S IDEAS

A. Economic Interests as Informed by a Variety of Social Norms and Values Polanyi’s work highlights that economic interests should be understood as informed by social norms and values. This becomes particularly clear from his discussion of forms of economic activity that he calls ‘reciprocity’, ‘householding’ and ‘redistribution’. Here trade is not primarily co-ordinated through price-setting markets but through gift-like exchange relationships, through the social norms of household organization or through centrally administered redistribution of economic gain, for instance between town and countryside. Contemporary contributions to economic sociology have often further developed this theme of social norms and values framing economic activity by focusing on consensus rather than conflict as the defining feature of these social norms and values. The focus has been on collaborative forms of economic activity48 or the pursuit of economic gain for a community or household rather than individual financial gain.49 The chapters in this edited collection, however, illustrate that a range of interests and values are relevant for understanding how a social sphere can regulate business behaviour. Examples are support for ‘local producers’ (Fiona Haines and Samantha Balaton-Chrimes) or national industry sectors through protectionist trade barriers (Bettina Lange), the value of free trade as enshrined in legal principles of international trade law (Elizabeth Fisher), as well as the value of inter-creditor equity in sovereign debt markets (Dania Thomas). Hence, we argue that developing Polanyi’s idea of embedding

47 Sol Picciotto, ‘Fragmented States and International Rules of Law’ (1997) Social and Legal Studies, 2, 259–79; Steven Tombs and Frank Pearce, Toxic Capitalism (Aldershot, Ashgate, 1998); Laureen Snider, ‘Towards a Political Economy of Reform, Regulation and Corporate Crime’ (1987) 9 Law & Policy 1, 37–68. 48 Giovanni Arrighi, ‘Contribution to Discussion’ in Greta Krippner, ‘Polanyi Symposium: A Conversation on Embeddedness’ (2004) Socio-Economic Review 2, 109, 126; Bernard (n 25), 73. 49 Don Robotham, ‘Market and Society: The Great Transformation Today’ in Chris Hann and Keith Hart (eds), Economic Anthropology: History, Ethnography, Critique (Cambridge, Cambridge University Press, 2009) 273.

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economic in social relationships involves an examination of a whole range of economic interests and values that intersect with social ones. This matters also in light of the fact that contemporary scholarship on the role of citizens and consumers in environmental protection has highlighted the greater influence of motivational values, such as achieving sustainability for a collective (the citizen role), in comparison to financial self-interests (the consumer role), on consumption practices.50 Hence this edited collection raises interesting questions about the balance between conflict and consensus in the definition of ‘the social’ as informing an understanding of economic interests. Polanyi’s starting point is that the social norms that embed economic activity represent collective rather than ‘self-interests’. Polanyi emphasizes the ‘primacy of society’. He therefore suggests that a particular social group can only acquire agency if it can propose solutions that are in the interests of society as a whole.51 Hence, all human behaviour and the perception of interests that drives it are grounded in social conditions. Whether a social actor is pursuing economic gain or enlightenment, the drivers for the action are social contexts that render either goal ‘rational’ or desirable. Hence, according to a Polanyian perspective, seeking material gains and possessions occurs for a social, rather than distinct economic purpose.52 This Polanyian understanding of ‘the social’ as representing collective interests, and thus being informed by consensus rather than conflict is, however, nuanced. Polanyian analysis recognizes that social interests are not necessarily altruistic but can also serve individual self-interests, such as enhancing status in a family unit or standing in a community. Polanyi therefore does not draw a clear dividing line between economic and social interests.53 If that, however, is the case it is not entirely clear what Polanyi meant by the ‘embedding’ of economic in social relationships. At first glance it seems that only if we can distinguish an economic from a social sphere does it make sense to talk about an embedding of economic in social relationships. These analytical challenges have given rise to an embeddedness paradox.

50 In the context of Sweden, this point is made by Berglund and Matti (n 21) 550–71. In the context of the UK this point is made by Lucie Middlemiss, ‘Reframing Individual Responsibility for Sustainable Consumption: Lessons from Environmental Justice and Ecological Citizenship’ (2010) Environmental Values 19, 147, 149, 151. 51 Block and Somers (n 46) 66. Hence for Polanyi, classes flow from the structure of society, they don’t structure society (Block and Somers (n 46) 66). 52 Kurtuluş Gemici, ‘Karl Polanyi and the Antimomies of Embeddedness’ (2008) 6 SocioEconomic Review 1, 20, 21. 53 This move away from particularistic conceptions of interests is noticeable also in Polanyi’s rejection of a class based explanation of changing economy-society interactions in ‘The Great Transformation’. This is in contrast to other nineteenth century social theorists such as Marx. Bastiaan van Apeldoorn, Transnational Capitalism and the Struggle over European Integration (Abingdon, Routledge, 2002) 160; Block and Somers (n 46) 57.

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B. The Embeddedness Paradox A central feature54 of Polanyian thinking about regulation is the idea that business behaviour is facilitated and potentially regulated also by the embedding of economic into social relationships. The rise of market society during the eighteenth century in England in the context of industrialization and advancing capitalism led, however, to the disembedding of economic out of social relationships. Key examples of this are the creation of ‘fictitious’ commodities, such as labour, land and money, in eighteenth and nineteenth century capitalist Britain.55 State law and regulation played some role in this process of disembedding.56 For instance, private property rights enabled self-regulatory markets to develop. As Polanyi has pointed out it took quite a lot of regulation to establish laissez-faire economic practices. But Polanyi also suggested that the negative social and economic side-effects of the rise of capitalism generated a need for the re-embedding of economic into social relationships, for instance through state regulation, such as public health and factory laws, the creation of public utilities and through the activities of trade associations and unions.57 This account of embedding economic in social relationships appears to be, however, paradoxical in two ways. First, there seem to be contradictory empirical claims about the embedding of economic in social relationships. On the one hand, Polanyi suggests that we can identify specific historical junctures at which a ‘regulatory countermovement’ lead to the ‘re-embedding’ of economic in social relationships.58 On the other hand, Polanyi suggests that all economic relationships are always embedded in social ones.59

54 But Polanyi uses the term ‘embeddedness’ only twice in The Great Transformation (Gemici (n 52) 10, referring to Barker). 55 Jens Beckert, ‘The Great Transformation of Embeddedness: Karl Polanyi and the New Economic Sociology’ 2007 MPIfG Discussion Paper 07/1, Max Planck Institute for the Study of Societies, at: www.mpifg.de/pu/mpifg_dp/dp07-1.pdf (site last visited 29.12.2014). 56 National labour markets developed with the aid of state regulation, such as the subsidy of workers’ wages through the Speenhamland Act and finally the Poor Law Reform, through the Poor Law Amendment Act 1834 and the abolition of the Speenhamland Act (Block and Somers (n 46) 54; Fred Block, ‘Contradictions of Self-Regulating Markets’ in Marguerite Mendell and Daniel Salée (eds), The Legacy of Karl Polanyi: Market, State and Society at the End of the Twentieth Century (Houndmills, MacMillan, 1991) 86; Gemici (n 52) 13; Beverly J Silver and Giovanni Arrighi, ‘Polanyi’s Double Movement’ (2003) 31 Politics and Society, 325, 330). 57 Vicki Birchfield, ‘Contesting the Hegemony Market Ideology: Gramsci’s “Good Sense” and Polanyi’s “Double Movement”’ (1999) 6 Review of International Political Economy 1, 27, 38; Block and Somers (n 46) 57. 58 Gareth Dale, ‘Polanyian Meditations on Economy and Society: A Review of Market Society: The Great Transformation Today’ (2010) Dialectical Anthropology 34. 59 Polanyi (n 35) 75; Fred Block, ‘Contribution to Discussion’ in Krippner (n 48) 117; Mark Granovetter, ‘Opening Remarks on Embeddedness’ in Krippner (n 48) 114. While the embeddedness metaphor is often considered as central to economic sociology, it is also worth noting that Adam Smith recognized a notion of ‘embeddedness’ of markets by acknowledging that the density and extent of markets depended on demographic and infrastructural conditions (Djelic & Sahlin-Andersson (n 22) 55).

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Second, there seem to be contradictory theoretical claims about the embedding of economic in social relationships. In order for the economy to be embedded in society, economy and society need to be perceived of as two conceptually distinct and bounded spheres of social life, each with their own specific characteristics.60 But ‘embedding’ also implies a withering away of clear distinctions between an economic and a social sphere. Hence, if embedding really works, an economic sphere—separate from society— would cease to exist and ‘embedding’ would thus no longer be possible. Hence, the idea of ‘embedding’ seems to unwittingly reintroduce a demarcation between economic and social phenomena that Polanyi sought to reject in the first place.61 This paradox at the heart of the embeddedness metaphor may be a result of the abstract language in which the metaphor is couched. Chapters 3 to 10 therefore further unpack and critique specific empirical instances of embedding, disembedding and re-embedding of economic relationships in social ones in order to develop the idea of a regulatory capacity of a social sphere. Finally, we conclude this section by drawing attention to two further limitations of Polanyi’s work for developing the idea of the regulatory capacity of a social sphere.

C. A Limited Discussion of Drivers of Regulation and the Role of Politics in Polanyi’s Work Polanyi’s macro-level account of regulatory counter-movements does not say much about specific drivers of regulation or the role of politics in mediating the embedding of economic in social relationships. Polanyi adopts a functionalist approach that seems to suggest that the embedding or re-embedding of economic into social relationships happens automatically, as a ‘countermovement’ that is necessary in order to maintain social order and integration within society. Also, contemporary interpretations of Polanyi’s work describe the ‘counter-movement’ as ‘spontaneous’ and ‘unplanned’.62 But in order to analyze the regulatory capacity of a social sphere it is necessary to unravel, at a meso- and micro-level, specific drivers of regulation, that is an understanding of the specific conditions and constellations of interests 60 Krippner (n 48) 125. According to Krippner (n 48) 111, the influence of Talcott Parson’s functionalist sociology on contemporary economic sociology is one of the reasons for the idea that there is a clear distinction between an economic and a social sphere. Her own perspective (Krippner (n 48) 112) lessens the distinction between an economic and a social sphere and thus the embeddedness paradox by suggesting that each market is socially embedded in the wider sense that each market transaction reflects a history of political struggle that has generated social actors with a particular set of self-understandings which shape how they conduct economic activity. 61 Gemici (n 52) 27. Not just Polanyi’s but also Granovetter’s notion of embeddedness has been criticized for invoking a physical and thus reified imagery of an economic and a social sphere through the idea that economic action is embedded in social networks (Gemici (n 52) 27). 62 Block and Somers (n 46) 57.

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that facilitate the development of particular forms of regulation. Hence, Polanyi’s account of embedding economic in social relationships also raises the question where ‘politics’ and contestation fit into this idea of close relationships between ‘economy’ and ‘society’. Some interpretations of Polanyi’s work suggest that he merely distinguished a political from a social sphere.63 Others suggest that he subordinated a political to a social sphere.64 There are also accounts that simply see Polanyi as positing a close relationship between economics, politics and the state.65 Hence, a further analysis of how ‘politics’ relate to ‘society’ and ‘economy’ is developed by Thomas, Haines and Balaton-Chrimes and Macdonald and Marshall in order to understand more about the embedding of economic in social relationships. To summarize, this edited collection starts from the idea that rethinking economy-society interactions needs to be at the core of transforming approaches to regulation. We therefore explore the regulatory capacity of a social sphere as it relates to regulation by states and markets. We question the value of binary categories, such as ‘state and market’, ‘citizen and consumer’, ‘social movement and transnational corporations’. Instead a key characteristic of contemporary regulation by civil society actors is the blurring of boundaries of these binaries through regulatory strategies, such as state constitution of markets, as in the case of ‘cap and trade’ emissions trading regimes, ethical and green consumerism, as well as social enterprise crossing the boundaries of social movement and corporation. Second, economic sociology provides an analytical framework for exploring this blurring of binary categories, because its central concern is to analyze the various ways in which economic activity is embedded in and regulated by social norms, institutions and practices. In the next section we summarize the contribution of each of the chapters to the enterprise of exploring the regulatory capacity of a social sphere.

V. HARNESSING THE REGULATORY CAPACITY OF A SOCIAL SPHERE IN TRANSNATIONAL RISK REGULATION

The collection begins with the insights of Alexander Ebner into a Polanyian reading of the current dynamics of transnational risk regulation. Ebner’s analysis is pertinent to many of the questions raised above. It also sets the scene for the chapters that follow. His work emphasizes the importance of Polanyian scholarship for providing a different lens through which to understand regulation. He traces Polanyi’s analysis of the disembedding and re-embedding of economic in social relationships, the double movement, 63 64 65

Dale (n 33) 498; Birchfield (n 57) 33. Gemici (n 52) 11; see, eg Block (n 59) 118; Silver and Arrighi (n 56) 330. eg Block (n 59) 127.

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in its historical context. Ebner highlights the way in which mercantilism and national regulation—which aimed at promoting international trade— developed simultaneously, a point of particular relevance for understanding transnational risk regulation. Indeed his chapter points to the interventionist regulatory nature of disembedding in the context of international trade. Yet, Ebner, drawing on Polanyi, also cautions against a notion of epochal change by highlighting the way historical events influence contemporary contexts. An example of this is the embedded nature of feudalism providing a defence against marketization. Ultimately, Ebner’s chapter throws down a challenge for a Polanyian analysis of transnational risk regulation. He argues, following Polanyi, that the capacity for re-embedding the economic within the social is characterized by ongoing struggles, which historically have had a tendency to resolution by reference to change of a more revolutionary kind, either fascist or socialist in nature. International and transnational institutionalization of economic affairs, when considered separately from social considerations, he argues, lead to persistent and ongoing failure of regulatory attempts at re-embedding economic concerns within the social. Christopher Decker’s analysis in the second chapter also sets the scene for this edited collection by providing a critical gloss on Polanyi’s take on economic activity. He argues that different strands of economic analysis can contribute to the development of the idea of a regulatory capacity of a social sphere. He begins by highlighting the changes that have occurred within the discipline of economics, particularly neo-classical economics, since Polanyi’s critique of it. He argues that economic analysis has developed with institutional and behavioral economics moving away from the focus on abstract modelling of economic actors’ behavior. Behavioral economics can thus help to develop the regulation of markets by taking account of the actual social practices of economic actors. More specifically, Christopher Decker also outlines limits to harnessing the regulatory capacity of a social sphere in the context of competition law and policy. Here harnessing the regulatory capacity of a social sphere could mean to include a range of objectives relating to social welfare into competition policy, such as national development and strategic interests, such as ‘keeping jobs at home’. But Decker is skeptical about this option for embedding economic in social relationships because social objectives are often fairly general, can be politically driven and require resolution of tensions between different social objectives (such as employment protection and environmental aims).66 Contra Ebner (and Polanyi), Decker argues for the continued institutional separation between economic objectives (specifically competition) and social objectives.

66 For instance, where mergers between companies further environmental objectives, eg in order to enable the development of sustainable transport technologies, but would involve losses in jobs.

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The following chapters present case studies of opportunities for and limits to harnessing the regulatory capacity of a social sphere in various regimes of transnational risk regulation. Fiona Haines and Samantha Balaton-Chrimes discuss export investment, with particular reference to export credit agencies (ECAs), ie government bodies that provide investment and insurance services for exporters. Their analysis sheds light on the complex nature of embeddedness. The social sphere—in the context of reducing risks for exporters—is multifaceted. Hence there are also various facets to harnessing the regulatory capacity of a social sphere here. Originally, ECAs developed their economic mandate by reference to ‘protecting jobs at home’. ‘Disembedded’ views of market competition and international ‘free trade’ then reshaped the regulation of (and by) ECAs, most specifically through the Organization for Economic Co-operation and Development (OECD). But most recently civil society concerns about multi-national company complicity in human rights abuse have also come to influence debates about the mandate of ECAs. Drawing on Polanyi’s work as well as more recent scholarship on nodal regulation, Fiona Haines’ and Samantha BalatonChrimes’ analysis traces the complex interaction between different visions of the economic and the social and the nature of the regulatory regime that results from this contestation. Ultimately, they point to the need to highlight and interrogate ‘the political’, such as the different actors’ conceptions of the interrelationships between ‘the economic’ and ‘the social’, as well as the ECAs’ need to be sensitive to their political legitimacy. They trace the significance of ‘the political’ in different spatial locations, specifically in the context of home and host countries. Kate Macdonald’s and Shelley Marshall’s chapter continues with the theme of transnational business and the protection of human rights. Theirs is a comparative analysis of a national, Australian, regulatory framework aimed at the protection of homeworkers (Ethical Clothing Australia) and the Fair Trade initiative for coffee that seeks to develop a fair trading system internationally that supports those most marginalized in the supply chain in developing countries. They point to some successes for both initiatives. The Ethical Clothing Australia example shows the benefits, though also limits of drawing on state-based regulation for bolstering ethical production and consumption practices. Fair Trade highlights the potential for developing regulation that can engender international trade norms that extend well beyond conventional definitions of ‘the economic’ to include living wages, social support such as capacity building of smallholders and environmental controls. Yet, Kate Macdonald and Shelley Marshall argue that both examples remain niche domains of business practice with significant (yet different) challenges facing broader application. The subsequent chapters by Liz Fisher and Bettina Lange focus on harnessing the regulatory capacity of a social sphere, and in particular its cognitive and discursive resources, in the context of transnational regulatory

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institutions, such as the WTO and the EU. Liz Fisher’s chapter highlights the importance of various types of expertise as key to framing interactions between an economic and a social sphere. Her analysis thus contributes a novel angle to understanding Polanyi’s embeddedness metaphor. She examines the transnational risk regulation regime of the WTO Agreement on Sanitary and Phytosanitary Measures which seeks to control risks to food safety as well as animal and plant health. Her analysis challenges binary conceptions of ‘state and market’, because what constitutes states, markets and expertise is co-produced during the application of the WTO Agreement on Sanitary and Phytosanitary Measures, including through its dispute settlement procedures. This further develops Polanyian analysis by emphasizing cognitive resources, such as various forms of expertise, including legal expertise as relevant to understanding the ‘embedding’ of economic in social relationships. Bettina Lange’s chapter further elaborates the theme of cognitive resources and discourses as key to understanding the regulatory capacity of a social sphere. She argues that markets are performed through discourses of ‘economy’ which cannot be clearly demarcated from discourses of ‘society’. Her chapter suggests that Polanyi’s embeddedness paradox can be addressed by drawing on Laclau’s and Mouffe’s ideas about discourses as ‘open’ and ‘relationally constructed’. Her chapter therefore also adds the specific method of critical discourse analysis as a tool for interrogating the contradictions raised by embedding economic in social relationships. From this perspective a social and an economic sphere cannot be clearly differentiated. This point is illustrated with reference to the legal constitution of the EU carbon market. On the one hand, a blurring of boundaries between an economic and a social sphere enhances the scope of the regulatory capacity of a social sphere. On the other hand, a social sphere becomes permeable to economic values, such as national economic interests, as well as the dynamics of energy markets which are distinguished in judicial decisions from environmental policy. The subsequent chapters by Anne-Maree Farrell and Elen Stokes turn our attention to the embodied concerns with health and its intersection with economic interests, specifically around trade in blood and the development of nanotechnology. Their analyses highlight once again the critical role played by experts. Anne-Maree Farrell’s fascinating analysis of the regulation of transnational trade in blood and blood products points to the limits of harnessing the regulatory capacity of a social sphere. She depicts a transnational risk regulatory regime which is characterized by an inherent tension between, on the one hand, blood donations being considered as an expression of a gift relationship that takes place outside market exchange, and, on the other hand, blood being considered as a commodity that is traded in a global market, including an unregulated black market that exploits donors from the developing world. Her analysis therefore challenges Polanyi’s

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idea that society will necessarily and automatically protect itself through a regulatory counter-movement. In the case of blood donations citizens simply fail to engage in social relationships expressed through voluntary blood donation. The persistence of a disembedded global market in blood products, replete with an institutional regulatory arrangement separate from that dealing with whole blood, is also partly the result of a lack of supply of unremunerated, voluntary, altruistic donations in blood. It is also promoted by the development of various treatments based on the supply of finely differentiated blood products that increase demand for blood. Elen Stokes’ chapter then moves on to the analysis of another transnational risk regulation regime that seeks to regulate trade in risky products. Here the tension between regulatory objectives relates to the promotion of technological innovation on the one hand, and uncertainty about risk on the other. In this context, Stokes argues, light touch approaches predominate since law is perceived to undermine innovation within a neoliberal view of the world. Self-regulation proliferates in the space left by state regimes that emphasize a ‘light touch’ approach, also because there is continuing public anxiety in relation to risks posed by nanotechnological products. Yet, Stokes’ analysis points to some advantages of self-regulation, in particular when it is regulation that extends beyond minimum standards. Hence, harnessing the regulatory capacity of a social sphere includes close attention to these self-regulatory practices, as expressed in consumption patterns. Stokes’ analysis also provides an important further development of Polanyian thinking because it suggests that a regulatory counter-movement may have to mobilize market ordering rhetoric, here the provision of information to consumers to enable their choices in the market place, in order for some regulation to be adopted. The final chapter by Dania Thomas returns to the social impact of economic decisions, in this case decisions about legal and policy interventions to resolve sovereign debt crises. Thomas’ chapter further develops an understanding of harnessing the regulatory capacity of a social sphere by unpacking—similar to Lange’s and Stokes’ chapters—the Polanyian idea that markets, in her case financial markets, are not self-regulatory. Thomas shows how European Central Bank (ECB) policy and some US courts have sought to meet the demands of private hold-out creditors in sovereign debt settlements by reinforcing a ‘promissory narrative’, ie for the sovereign to honor a ‘promise to pay’, to the detriment of a conventional narrative framed by a plurality of values such as inter-creditor equity, fairness, also to future generations and good faith. The promissory narrative makes sovereign debt risk-free for some creditors at a cost to other creditors and the debtor in crisis. This transfers the costs of adjusting to a crisis to citizens. Hence Dania Thomas’ analysis adds further nuance to the idea of harnessing the regulatory capacity of a social sphere by showing that regulation of financial markets—and markets in sovereign debt in particular—can be informed by the social norms of market actors, such as ‘fairness’. This further illustrates

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the key theme of this edited collection: the regulatory capacity of a social sphere needs to be understood through its links to markets and states. What is fascinating to note is how the direction of this regulatory capacity of a social sphere is changing, as expressed in civil society activism, such as the petition of 35,000 German citizens questioning the legality of the Eurozone’s Outright Monetary Transactions (OMT) policy, which underpins ‘the promise to pay’ of EU Member State sovereigns. Dania Thomas further notes a weakening of courts’ commitment to enforce ‘the promise to pay’ in various jurisdictions by the widespread adoption of collective action provisions in sovereign bond contracts. To summarize, each of the chapters show specific ways of how ‘the social’ and ‘economic’ become linked in transnational risk regimes that harness the regulatory capacity of a social sphere. Collectively the chapters point to the significance of firstly, political contestation as informing the process of embedding economic relationships in social ones, and secondly, the endurance of institutional histories for understanding how economic relationships become embedded in social ones. In the final section we link these explorations of the regulatory capacity of a social sphere back to academic debates about regulation, in order to show that reflections about interactions between ‘economy’ and ‘society’ matter not just in the context of classical economic sociology, such as that of Karl Polanyi, but are also central to contemporary regulation scholarship.

VI. HARNESSING THE REGULATORY CAPACITY OF A SOCIAL SPHERE: A CONTRIBUTION TO THREE CONTEMPORARY REGULATION DEBATES

To harness the regulatory capacity of a social sphere captures a specific shift in regulation. We suggest that understanding this shift also contributes to three contemporary regulation debates. These are, firstly, discussions about what drives self-regulation of corporate actors, secondly, how regulatory agency is achieved, and thirdly, what the role of state law is in harnessing the regulatory capacity of a social sphere. In relation to the first regulation debate, self-regulation matters because the new regulatory state increasingly delegates some of its regulatory power back to corporations67 which, in turn, has catalyzed civil society actors to influence corporate business practices. Moreover, ‘marketization’ of both private economic and public sector activities—a characteristic feature of contemporary neo-liberal governance—involves more reliance on self-regulation. Last but not least, self-regulation is particularly important

67 Christine Parker, The Open Corporation: Effective Self-Regulation and Democracy (Cambridge, Cambridge University Press, 2002) 100; Braithwaite and Drahos (n 32) 484.

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in transnational risk regulation, because global regulatory norms are often based on corporations’ self-regulatory practices.68 Hence, what is meant by ‘self ’ is a key question in debates about selfregulation. Is self-regulation nothing more than corporations implementing regulation in pursuit of ‘their’ traditionally defined economic interests as suggested in criticisms of environmental self-regulation as a form of eg ‘greenwashing’?69 Or can wider social norms inform business self-regulation, as suggested by the ‘carrot mob’ story and Christine Parker’s model of the ‘open corporation’?70 Parker outlines various ways in which the private corporation—focused on maximizing its returns—becomes permeable to wider social norms influencing its business activity, such as labour standards and environmental protection. She emphasizes, for instance, the key role that ‘organized value carriers’, such as epistemic communities, professions or organizational units, such as self-regulation professionals71 within a corporation can play in framing economic decision-making through ‘social values’.72 A similar emphasis on how it is possible to change corporate economic activity can also be observed in regulation scholarship focused on sustainable production and consumption. Contributors to these debates have in particular explored hybrid types of agency in order to explain change in corporate economic activity. These arise from a combination of individual actors’ agency and social structures, where social structures arise from social practices of consumption, and the rules and resources that constitute capitalist consumption and production (‘lifestyles’).73 Others have added an emphasis on discourses, eg around climate change, as being a driver in their own right of continuity and change in consumption patterns.74 But the idea of harnessing the regulatory capacity of a social sphere suggests, firstly, that debates about what drives self-regulation may have focused too much on the question of what procedures, mechanisms and tools enable the ‘opening up’ of business activity to wider social norms. Polanyi suggested that all economic activity is always embedded in social relationships. If that is the case, then the key question is not so much how we can embed economic in social relationships, but what the meaning and content of these

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Braithwaite and Drahos (n 32) 491. ie limited application of environmental standards to corporate activity and use of claims about adherence to such standards in corporate branding that may mislead consumers and investors. 70 Parker (n 67). 71 ibid x. 72 ibid 73. 73 Spaargaren and Oosterveer (n 21) 1894–95. Middlemiss (n 50) 19, 147. Carme MeloEscrihuela, ‘Promoting Ecological Citizenship: Rights, Duties and Political Agency’ (2008) ACME, at: www.acme-journal.org/vol7/CM-E.pdf (site last accessed 9.1.2015). 74 Stewart Barr, Andrew Gilg, Gareth Shaw, ‘Citizens, Consumers and Sustainability: (Re)Framing Environmental Practice in an Age of Climate Change’ (2011) 21 Global Environmental Change 1224–33. 69

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social relationships is. Crucially, this raises the question whether these social relationships do not simply establish new systems of social stratification.75 Hence, from a Polanyian perspective the relevant question to ask is: whether and how the corporation can—from within itself—develop ‘social’ norms for self-regulation and thus embed its economic relationships in social ones, rather than merely become open to external society’s social norms? In fact a clear-cut distinction between employees of the corporation and civil society actors outside it needs to be questioned. Sometimes a corporation’s employees may also be civil society activists, or civil society activists may determine the meaning of ‘social norms’ to which employees in the corporation respond. As the story about culture jamming at the beginning of this introduction shows, subverting and creating new meanings for social norms such as labour standards and environmental protection is crucial to self-regulation that occurs through the branding of a corporation. From a Polanyian perspective it also becomes important to ask what conceptions of equality and inequality are embedded in such social norms. Moreover, a Polanyian perspective and the three examples of civil society activism discussed at the beginning of this introduction foreground a collective understanding of ‘social norms’, as discussed in Section IV above, which reflect the wider interest of society as a whole, not just the potentially competing interests of factional groups, such as customers, employees, management and shareholders of the corporation.76 Various chapters in this edited collection develop these points through detailed analysis of specific regimes of transnational risk regulation. For instance, Elen Stokes’ chapter highlights some of the limits to ‘culture jamming’ in the context of new technologies, where consumers’ self-regulatory practices are based on information regulation underpinned by state law requirements for the labelling of risky nanotechnology products. Here consumers have limited opportunity to question the veracity of information provided by manufacturers. This therefore poses restraints on the regulatory agency of citizens, a point of wider significance also in light of the fact that citizen-consumers who respond to eco-labelling schemes are an important new figure in environmental regulation.77 Anne-Maree Farrell’s chapter, too, points to the role of expertise in driving self-regulation by those involved in the commercial trade of blood products. Yet, public anxiety around HIV infection drives an enlightened form of self-interest in the businesses involved that blurs the line between economic and social norms in framing trade in blood

75 For instance, in the context of the development of social norms by self-regulatory organizations, Hutter also with reference to Gunningham points to the fact that trade associations often set standards that favour the interests of large rather than small and medium-sized businesses (Hutter (n 14) 66). 76 Parker (n 67) 5. Such factional groups are also referred to in Hutter (n 14) 72. 77 Spaargaren and Oosterveer (n 21) 1887–1908.

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products. Reflecting on what drives self-regulation of corporate actors links to a second important debate in contemporary regulation scholarship that addresses how can people, networks78 or social forces become ‘regulatory actors’?

A. How is Regulatory Agency Achieved? Harnessing the regulatory capacity of a social sphere involves reclaiming and enhancing the regulatory capacity of civil society actors in relation to corporate actors. This chimes with a Polanyian perspective because embedding economic in social relationships requires active social practices. This is different from the regulatory agency of the ‘invisible hand of the market’. Here prices simply co-ordinate and thereby regulate the economic exchange of goods and services. Contemporary accounts of ‘embedding’ economic in social relationships therefore focus on social practices, such as negotiation about the environmental credentials of products between market participants based on ‘conscious choices of those affected by economic transactions’.79 In fact a burgeoning literature has developed in the field of sustainable consumption that discusses the opportunities for but also limits of individual consumers contributing to environmental protection through green purchase decisions. Consumers’ social practices can be facilitated or restrained by social structures, such as sustainable transport systems or public administration engaging in green procurement. Such ‘systems of provision’ can enable the sustainable production and consumption choices of individuals.80 But what the contributions to this edited collection show is that Polanyi’s analysis needs to be developed further by not assuming the existence of regulatory agency but by probing what conditions facilitate or restrain regulatory agency in specific empirical contexts. The contemporary regulation literature points to the importance of legal mandates, coercion, rewards, capacity building and cognitive resources, such as modelling of regulatory regimes and scientific knowledge,81 as well as political resources, such 78 Braithwaite and Drahos (n 32) 24 provide a list of regulatory actors in a transnational sphere which includes states, organizations of states, business organizations, corporations, NGOs (including trade unions, churches and the professions), mass public and epistemic communities of actors. They also discuss the work of individual regulators such as Ralph Nader (eg Braithwaite and Drahos (n 32) 32, 478, 494–97). 79 Fikret Adaman, Pat Devine and Begum Ozkaynak, ‘Reinstituting the Economic Process: (Re)embedding the Economy in Society and Nature’ (2003) 13 International Review of Sociology 2, 357, 371. 80 Gert Spaargaren, Sustainable Consumption: A Theoretical and Environmental Policy Perspective (2003) 16 Society & Natural Resources: An International Journal 8, 687, 688; Spaargaren and Oosterveer (n 21) 1887–1908. 81 Djelic and Sahlin-Andersson (n 22) 4; Braithwaite and Drahos (n 32) 9, 16–17.

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as democratic legitimacy.82 An inquiry into the specific conditions that facilitate and constrain regulatory agency also matters because Polanyi’s account of the regulatory counter-movement seems to invoke technological determinism. Polanyi considered industrialization—including its technological manifestations—in eighteenth century England as a key driver of the regulatory counter-movement, with social actors playing a secondary role,83 and hence regulation occurring potentially ‘behind the back’ of social actors.84 The chapters in this edited collection question such technological determinism (eg Farrell and Stokes), and identify further facilitators and constraints of regulatory agency, in particular networks of regulatory actors which can both limit and promote the regulatory agency of a social sphere. This chimes with accounts in the literature that have pointed to a proliferation of complex hybrid regulatory arrangements that involve both public and private, national and transnational regulatory actors, such as transnational corporations co-regulating with trade associations or national regulatory authorities.85 By virtue of being enrolled in such networks, the agency of individual regulatory actors becomes more difficult to identify and instead it is the network as a whole that is ‘the regulatory actor’. This point is well illustrated by Anne-Maree Farrell’s chapter. She discusses the significance of transnational risk governance networks, such as the Global Collaboration on Blood Safety (GCBS) which brings together a range of international organizations, non-governmental organizations (NGOs) and blood experts in order to harmonize regulation for global blood safety. Her chapter also discusses the role of civil society, in particular patient activist groups—well organized both at a national and supranational level—as contributors to transnational risk regulation. Farrell highlights that in a number of Western countries patient activism in the 1980s in relation to HIV contaminated blood products triggered in the 1990s new regulatory initiatives at both national and supranational levels. Some accounts of regulatory agency in the contemporary regulation literature identify sources of regulatory agency in more abstract terms: as arising

82 Fiona Haines, ‘Addressing the Risk, Reading the Landscape: The Role of Agency in Regulation’ (2011) 5 Regulation and Governance 1; Margaret E Keck and Kathryn Sikkink, Activists Beyond Borders: Advocacy Network in International Politics (Ithaca and London, Cornell University Press, 1998); Ernst Haas, ‘Do Regimes Matter: Epistemic Communities and Mediterranean Pollution Control’ (1989) 43 International Organization 377–403; Braithwaite and Drahos (n 32) 502. 83 Birchfield (n 57) 40. 84 Block and Somers (n 46) 58. But see Bernard (n 25) 81, who argues that Polanyi’s analysis allows for a degree of political agency of social actors. 85 Braithwaite and Drahos (n 32) 7, 491; Braithwaite (n 13) 1; Djelic and Sahlin-Andersson (n 22) 11; Anne-Marie Slaughter, ‘The Real New World Order’ (1997) 76 Foreign Affairs 183, 195.

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from a set of discourses, such as ‘centres of calculation’ which can govern at a distance,86 or interaction between human actors and technological artefacts. Hence, from this perspective regulatory agency cannot be located in individual actors or organizations.87 Accounts of regulatory regimes influenced by governmentality as well as science and technology studies have particularly clearly expressed such an understanding of regulatory agency as the result of discourses or the association of actors and technological artefacts in networks. A variation of such an approach is developed in Liz Fisher’s chapter. She develops a nuanced understanding of regulatory agency through her account of the cognitive foundations of the risk regulatory regime of the WTO Agreement for Sanitary and Phytosanitary Measures. Regulatory agency is here the outcome of a precarious process of communication between different regulatory actors, such as the WTO panel, different disciplinary discourses as well as various types of expertise, including that of trade, administrative and environmental lawyers. Fiona Haines’ and Samantha Balaton-Chrimes’ chapter introduces a new point into the debate—echoing Christopher Decker’s concern about combining ‘economic’ and ‘social’ objectives in competition policy—by highlighting the unresolved tensions within networks that push and pull regulatory agency in different directions. Fiona Haines’ and Samantha Balaton-Chrimes’ chapter highlights the way the Australian export credit agency EFIC was enrolled in three separate networks, one with a focus on the public interests of the state in job creation, the second focused on competition and transparency, while the third was concerned with business respect for human rights. Hence, collectively the chapters show that regulatory agency in transnational risk regulation is achieved through networks, with an analysis of the variety of these networks enhancing our understanding of the conditions that constrain and facilitate ‘regulatory agency’. Finally, the analytical framework for the chapters in this edited collection is economic sociology, and more specifically economic sociology of law, that is sociological inquiry into business behavior within the context of specific state legal systems. This brings us to the third key contemporary regulation debate to which inquiry into the regulatory capacity of a social sphere contributes. This is concerned with understanding the relationship between state law and the regulatory capacity of a social sphere.

86 David Garland, ‘Governmentality and the Problem of Crime: Foucault, Criminology, Sociology’ (1997) 1 Theoretical Criminology 173, 182; Peter Miller and Nikolas Rose, ‘Governing Economic Life’ (1990) 19 Economy and Society 1, 1–31. 87 Emily Cloatre, ‘TRIPS and Pharmaceutical Patents in Djibouti: An ANT Analysis of Socio-Legal Objects’ (2008) 17 Social and Legal Studies 2, 263–81.

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B. What is the Role of State Law in Harnessing the Regulatory Capacity of a Social Sphere? As pointed out in Section II, the key theme of this edited collection is to analyse the regulatory capacity of a social sphere as it relates to regulation by markets and states, with states defined as historically specific political institutions for the exercise of public powers.88 An important aspect of this analysis is to inquire into how state law facilitates or restrains the regulatory capacity of a social sphere in the context of transnational risk regulation. This requires addressing a prior but linked question. Does state law still matter in transnational risk regulation? How do norms of civil society influence the content of state law? Three perspectives can be identified. First, some contributors to regulation debates consider state law to be still at the core of the post-regulatory state.89 Second, others suggest that transnational risk regulation involves a distinct shift from state to soft law90 or at least an increase in soft law standards, such as the rules of international standard setting organizations, or regulatory initiatives of NGOs,91 including direct action, as well as self-regulatory standards developed by corporate actors themselves.92 Third, others see the role of national state law declining in favour of the development of a new form of public transnational risk regulatory law. The challenge for transnational law, however, is to accommodate diversity arising from various national risk regulatory regimes. ‘Ordered pluralism’ has been advocated as one solution to this problem.93 It maintains a degree of hierarchy—as in the relationship between EU supranational and Member State law—between a patchwork of different legal orders, by retaining a ‘margin of appreciation’ for states in the application of supranational law.94

88 We consider the state as composed of various political factions, but, like Polanyi, perceive it as distinct from civil society and thus a ‘social sphere’ which has its own relative autonomy and operates according to its own social dynamics (Kari Polanyi-Levitt, ‘Introduction’ in Kari Polanyi-Levitt (ed) (n 35) 4. 89 Scott (n 12) 8. 90 Djelic and Sahlin-Andersson (n 22) 17. 91 Folke-Schuppert (n 17) 217, 221, 229 highlights the capacity of non-governmental and international organizations to promote juridification either through soft law standard setting or calls for institutionalizing standards in formal law, such as the development of rules in transnational commercial contracts. 92 Parker (n 67) 16–17. 93 Mireille Delmas-Marty, Ordering Pluralism: A Conceptual Framework for Understanding the Transnational Legal World (Oxford, Hart Publishing, 2009). 94 ibid 17. ‘Unification through hybridization’ is another route to develop transnational law that conforms to Delmas-Marty’s vision of ‘ordered pluralism’. Hybridization involves combining different elements from various legal orders, for instance through reference to legal provisions from various national jurisdictions, from a comparative perspective and sometimes from outside a specific jurisdiction, eg by the Court of Justice in the EU and the International Criminal Court (Delmas-Marty (n 93) 60).

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‘Ordered pluralism’ does not strive for complete unification of legal orders. It also seeks to avoid legal universalism based on political hegemony, in particular the imposition of US regulatory law on other countries. But it also rejects complete relativism and therefore aims to enshrine a commitment to values—a point that chimes with Polanyian analysis—even in a transnational sphere. In the context of exploring the regulatory capacity of a social sphere, the key challenge then is whether transnational law can also reflect the social norms of civil society or is even more removed from these than national risk regulatory law. In the context of the EU carbon market Lange’s chapter points to the endurance of national economic and related social interests, such as supporting economic development in Eastern and Central European Member States in the EU through low energy costs. Also, Fiona Haines’ and Samantha Balaton-Chrimes’ chapter highlights the significance of national economic interests as one of the values that embed the activity of ECAs. Indeed, regional controls around export finance such as those promulgated by the OECD are often premised on the need to control national self-interest albeit whilst recognising the enduring nature of that interest. ‘National Interest Accounts’ in export finance are but one example of that enduring nature. Further, their work points to the importance of understanding the institutional-political imperatives of the state—the enduring concerns around balancing capital accumulation with legitimation that shapes whether and how socio-political demands, for example in relation to human rights, will be met. Kate Macdonald’s and Shelley Marshall’s chapter, in contrast, documents the limited significance of nation-states, in regulating the social and economic risks of poor labour conditions and exploitative trade relationships faced by marginalized producers and workers in the global economy. They point to the lack of a co-ordinated inter-governmental response and therefore emphasize the importance of private risk regulatory regimes, such as fair trade and corporate social responsibility labour governance schemes. They also argue for a stronger embedding of private risk governance in statebased institutions at national and local levels, and therefore clearly envisage the possibility for transnational risk regulation regimes to reflect social norms of civil society, such as those of the Homeworkers Code of Practice. This can entail the institutionalization of private risk governance through a constitutional and hierarchical structure, such as mandatory codes of practice applied by Australian state legislation, leading to a regulatory regime that is similar to ‘ordered pluralism’.95

95

Delmas-Marty (n 93).

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VII. HARNESSING THE REGULATORY CAPACITY OF A SOCIAL SPHERE: A NEW RESEARCH AGENDA

This edited collection argues that developing the idea of harnessing the regulatory capacity of a social sphere with reference to economic sociology,96 and in particular the notion of embedding economic in social relationships, constitutes a significant new research agenda. This agenda therefore charts alternatives to established binaries, such as ‘state and market’, ‘citizen and consumer’ as well as ‘social movement and transnational corporation’, by exploring the regulatory capacity of a social sphere as it relates to regulation by states and markets. This agenda aims to contribute to regulatory reform and transformations by providing critical reflection upon key regulatory initiatives by civil society actors in light of knowledge generated by contemporary regulation scholarship. Particularly relevant here is scholarship that addresses questions such as what drives self-regulation, how do networks constrain and facilitate regulatory agency in the transnational sphere, and how can state or transnational law incorporate the social norms of civil society actors? This research agenda raises a range of interesting, analytical challenges, such as whether and how we can distinguish between economic and social objectives of regulatory regimes and what organizational forms facilitate the involvement of civil society in regulation in a transnational sphere. What role does state law play in harnessing the regulatory capacity of a social sphere and what is the reach of the regulatory capacity of a social sphere? Is it to promote existing regulatory projects also pursued by the state, such as environmental protection as depicted in the ‘carrot mob’ story? Or does the regulatory capacity of a social sphere reach further by questioning and subverting major brands and ultimately the production and consumption patterns that they represent, as in the NIKE culture jamming story? The following chapters present fascinating new insights gained from the pursuit of this research agenda.

96 Including economic sociology of law. Legal sociology can enhance economic sociology since what legal constraints on business activity actually involve, how they work and often fail is under-conceptualized in some of the economic sociology literature.

Part I

Theoretical Resources for Thinking about how to Harness the Regulatory Capacity of a Social Sphere

2 The Regulation of Markets: Polanyian Perspectives ALEXANDER EBNER

I. INTRODUCTION

K

ARL POLANYI’S REASONING on the institutional dynamics of market economies is persistently relevant in related discussions on economic sociology and political economy. In particular, Polanyi is viewed as a paradigmatic reference concerning the variety of institutional arrangements that are required for the coordination of commodity production and exchange in modern capitalism.1 This implies that Polanyi is interpreted as a theorist of the institutional transformation of the relationship between states and markets, whose arguments may be applied to issues such as economic globalisation, international finance, welfare regimes, and industrial relations.2 Yet a common denominator in these discussions is the concern with the regulation of markets; a concern that combines political, social and legal viewpoints in approaching a set of economic affairs.3 In fact, Polanyi’s reconsideration of the embeddedness of market operations in non-market

1 Keith Hart and Chris Hann, ‘Learning From Polanyi’ in Keith Hart and Chris Hann (eds), Market and Society: The Great Transformation Today (Cambridge, Cambridge University Press, 2009) 8–9; Richard Swedberg, ‘The Economic Sociology of Capitalism: An Introduction and Agenda’ in Victor Nee and Richard Swedberg (eds), The Economic Sociology of Capitalism (Princeton, Princeton University Press, 2005) 7–8; Robert Boyer, ‘The Variety and Unequal Performance of Really Existing Markets: Farewell to Doctor Pangloss?’ in J Rogers Hollingsworth and Robert Boyer (eds), Contemporary Capitalism: The Embeddedness of Institutions (Cambridge, Cambridge University Press, 1997) 60–61. 2 Fred Block, ‘Introduction’ in Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (first published 1944, 2nd edn, Boston, Beacon, 2001) xix; Robert Boyer and J Rogers Hollingsworth, ‘From National Embeddedness to Spatial and Institutional Nestedness’ in Hollingsworth and Boyer (eds) (n 1) 467–77. 3 Christian Joerges and Josef Falke, ‘Introduction: The Social Embeddedness of Transnational Markets’ in Christian Joerges and Josef Falke (eds), Karl Polanyi, Globalisation and the Potential of Law in Transnational Markets (Oxford, Hart Publishing, 2011) 4.

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institutions provides arguments for perceiving the regulation of markets as a persistently contested process. In this view, markets tend to be embedded in social relationships that contain persistent struggles over the organisation of the market system and its viable demarcation to societal spheres of nonmarket coordination and social integration. The Polanyian rationale of market regulation differs markedly from the prevailing neoclassical argumentation in economic theory, which derives from the need for regulation from constellations of market failure that may be due to externalities, among others. According to Polanyi, it is not the failure of markets to function in line with the ideal of perfect competition that requires regulation. Rather, it is the impact of market competition on social areas that are decomposed by the market mechanism, which is the primary domain of regulatory efforts. However, these regulatory efforts are bound to fail under conditions of the institutional separation of political and economic affairs. Thus, in the Polanyian view, the regulation of markets is intimately related to the institutional range of market competition in society at large. Regulation needs to be viewed as an institutional component in the re-embedding of market competition in non-market schemes of coordination, thus redefining the relationship between economy and society in coping with the uncertainty that derives from the dynamics of markets. Based on these considerations, a Polanyian view on transnational risk regulation would insist that corresponding transnational governance mechanisms need to include not only government but also diverse economic and social actors with their particular interests and claims. In this manner, the transnational regulation of risk transcends the provision of an institutional order of market competition in order to accentuate the re-embedding of the market process in non-market schemes of economic, social and political interaction. In discussing these issues, the chapter proceeds as follows. The first section outlines Polanyi’s theory of the economy as instituted process, pinpointing the dynamism of the embeddedness of markets. The second section links up Polanyi’s views on embeddedness with the problems of market regulation. The third section then addresses the Polanyian concern with failures of market regulation under the condition of separated economic and political spheres.

II. POLANYI’S THEORY OF THE ECONOMY AS INSTITUTED PROCESS

The key concern in Polanyi’s comparative institutional analysis of economic systems is provided by the notion of the economy as instituted process, which actually serves as a leitmotif of his research programme. It means that an analysis of the institutional substance of economic processes is indispensable for understanding their social coherence and historical dynamism, which is derived from both economic and non-economic institutions

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that constitute a specific mode of social integration.4 Polanyi contrasts this substantive perspective with the concern of neoclassical economic theory, which is said to refer exclusively to the logic of choices about means–ends relationships that are marked by resource scarcity. In the Polanyian perspective of a substantive perception of economic life, interchanges with the natural and social environment for the means of material want satisfaction are taken to the fore, basically referring to subsistence as an analytical point of departure.5 Only this substantive perspective is said to approach the economy in adequate terms as an instituted process of coherent interactions between society and the natural environment.6 All recorded types of economies are integrated through historically specific support structures that institutionalise the movement of goods and services and contain distinct rights of disposal that shape the allocation of resources in the economic process. These institutional structures are denoted as reciprocity, redistribution and exchange, highlighting integrative patterns of interaction that are relatively independent from deliberate interventions of government or the variable ideals of cultural frameworks.7 Reciprocity accounts for the movement of goods and rights of disposal between corresponding points of a symmetrical arrangement, involving symmetrically placed social groups as exemplified by kinship-related types of gift exchange. Redistribution addresses related movements towards and out of a centre, involving an established political–administrative centre as exemplified by a territorially centred storage system run by local authorities. Exchange stands for movements between dispersed or random points in a system of interactions, involving the presence of a market mechanism. Householding as an additional principle then contains the autarchic and self-sufficient production of a group. Yet its integrative function in more complex economic systems is of minor importance as compared with reciprocity, redistribution and exchange.8 At this point, the matter of embeddedness emerges as a major analytical device, because Polanyi claims that all historically recorded economic systems except for the market system submerge the economy in social relationships, framed by non-economic institutions. Production and distribution would not follow economic interests shaped by acquisitive motives, but rather resemble social interests, based on collectively shared norms and conventions. These may differ in diverse economic systems over time and space, 4 Karl Polanyi, ‘The Economy as Instituted Process’ in Karl Polanyi, Conrad M Arensberg and Harry W Pearson (eds), Trade and Market in the Early Empires: Economies in History and Theory (Boston, Free Press, 1957) 249–50. 5 ibid 243–44. 6 ibid 248–50. 7 Polanyi, The Great Transformation (n 2) 50–51; Karl Polanyi, The Livelihood of Man (Harry W Pearson ed, New York, Academic Press, 1977) 36–37. 8 Polanyi, The Great Transformation (n 2) 55.

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involving small hunting communities as well as vast despotic societies. Yet in all of these cases economic systems were driven by non-economic motives.9 This means that the individual economic actor ‘does not act as to safeguard his individual interest in the possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets’.10 In primitive societies, thus, the pattern of embedding economic activity in noneconomic institutions that integrate social relations may be derived from kinship aspects as well as from separate political–economic organisations preceding the institutional evolution of the modern state: Since there is no separate economic organization and, instead, the economic system is embedded in social relations, there has to be an elaborate social organization to take care of such aspects of economic life as the division of labor, disposal of land, organization of work, inheritance, and so on.11

According to this logic of embeddedness, the economic system was historically set to be a function of social organisation—a pattern that remained intact until the rise of the market economy in the nineteenth century, which reversed relationships between economy and society as economic requirements came to determine social structures. This would actually imply a disembedding of the economic sphere. With intellectual reference to Maine and Tönnies, then, this disembedding dynamism resembles a move from status to contract in terms of Maine, and from community to society in terms of Tönnies. Economic systems are no more embedded in social relationships, as these are now embedded in the economic system, that is, they come to follow the commodity logic of the market.12 Contract serves as the decisive feature of this disembedded economic sphere, in which legal aspects of exchange provide the institutional order of the market process. Status, in contrast to that, reflects the predominance of norms of reciprocity and redistribution which shape the embeddedness of production and consumption in societal institutions like family and kinship. The disembeddedness of the economic sphere is therefore analogous to the institutional separation of the market from social relationships apart from contractual exchange.13 Accordingly, as the market becomes an institution in its own right that shapes the modern exchange economy, it coincides with legal concepts like the rule of law, which imply a reduction of social relations to the regulation of property and contract.14 9

ibid 48. ibid. Polyany, The Livelihood of Man (n 7) 53. 12 Karl Polanyi, ‘Our Obsolete Market Mentality, Commentary, Vol. 3’ (1947) in George Dalton (ed), Primitive, Archaic, and Modern Economies: Essays of Karl Polanyi (New York, Anchor, 1968) 70. 13 Karl Polanyi, ‘Aristotle Discovers the Economy’ in Polanyi, Arensberg and Pearson (eds) (n 4) 70–71. 14 Karl Polanyi, Dahomey and the Slave Trade: An Analysis of an Archaic Economy (Seattle, University of Washington Press, 1966) xvii. 10 11

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As the resulting institutional order propels the disembedding of the economic domain from non-market modes of social integration, it also drives a separation of economy and society at large. According to Polanyi, this issue is to be approached as follows: It was characteristic of the economic system of the nineteenth century that it was institutionally distinct from the rest of society. In a market economy, the production and distribution of material goods is carried on through a self-regulating system of markets, governed by laws of its own, the so-called laws of supply and demand, motivated in the last resort by two simple incentives, fear of hunger and hope of gain. This institutional arrangement is thus separate from the noneconomic institutions of society: its kinship organization and its political and religious systems. Neither the blood tie, nor legal compulsion, nor religious obligation, nor fealty, nor magic created the sociologically defined situations that insured the participation of individuals in the system. They were, rather, the creation of institutions like private property in the means of production and the wage system operating on purely economic incentives.15

This institutional dynamism of market exchange relates to the aspect that the exchange motives of truck and barter, so vibrantly portrayed by Adam Smith, cannot rely on established social institutions. These have to be created in the deliberate formation of markets.16 The resulting type of market economy resembles a self-regulating system of markets. It is historically unique in its character as an economic system that is exclusively directed by market prices.17 Market prices are indispensable for this kind of self-regulation: according to Polanyi, ‘[a] market economy is an economic system controlled, regulated, and directed by market prices; order in the production and distribution of goods is entrusted to this self-regulating mechanism’.18 Yet selfregulation through market prices also implies that all production factors, goods and services—decisively involving labour, land and money—are turned into commodities, bought and sold at market prices while generating a market income.19 Subjecting labour to the self-regulation of markets and thus separating it from other societal domains, however, tends to annihilate the organic interdependencies of the social whole. The underlying freedom of contract eliminates non-contractual organisations such as kinship. Indeed, the contractual exchange mode of the labour market, ideologically legitimised through the notion of non-interference in the spontaneous order of the market process, radically interferes with social relationships that are based on non-contractual interactions.20 This tendency drives the formation

15 16 17 18 19 20

Polanyi, The Livelihood of Man (n 7) 47. Polanyi, The Great Transformation (n 2) 60. ibid 45. ibid 71. ibid 72. ibid 171.

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of market society as an extended format of market principles beyond the economic domain. Consequently, the differentiation of economic and political spheres becomes a historically unique trend in the evolution of market economies. While in preceding formations the economic order served as a function of the social order now these relationships are redefined, as the separate economic system of a market economy promotes the formation of a market society as a supporting device. The unfolding of the market pattern as the dominant system in the economy leads to the relegation of society as a mere adjunct to the market. Market society is thus adapted to the institutional pattern of the market economy. Polanyi puts forward the following argument that underlines the hegemony of the market domain, which is actually equalled with the economic sphere in general: Instead of economy being embedded in social relations, social relations are embedded in the economic system. The vital importance of the economic factor to the existence of society precludes any other result. For once the economic system is organized in separate institutions, based on specific motives and conferring a special status, society must be shaped in such a manner as to allow that system to function according to its own laws.21

However, this extension of the market sphere all over society breeds a basic structural contradiction. The essence of society is subordinated to the market mechanism, for labour and land as representations of the human substance and natural environment of society also become commodities. Together with money as a mere representation of purchasing power promoted by the state and the banking system they share the characteristic that they are actually not produced for sale. Their existence is not to be derived from a commercial rationale. Thus their characterisation as marketable commodities is fictitious. This commodity fiction becomes the organising principle of the market society. Indeed, the rise of the market society is necessarily based on this commodity fiction involving labour, land and money, which requires comprehensive policy interventions during its emergence.22 Decisively, then, the formation of the market system is not a spontaneous process as liberal theory may have it, but the politically administered result of artificial stimuli based on socio-economic constellations shaped by the likewise artificial phenomenon of modern machinery as a representation of disruptive technological change.23 In this manner, the logic of technology breeds a market setting that is set to mould the fabric of society in its own fashion. Yet the constellation of a predominance of an almost uncontested market system was short-lived, if ever realised in history, for society was soon endangered in its totality, as reflected by the uncertain living conditions of 21 22 23

ibid 60. ibid 75–76; Polanyi, The Livelihood of Man (n 7) 9–10. Polanyi, The Great Transformation (n 2) 60.

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labour. Thus, the need of protection arose as a condition in safeguarding the reproduction of its substantial components, namely its human substance and the natural habitat.24 The extension of markets was actually paralleled by efforts in the self-protection of society, amounting to a ‘double movement’ of market forces and social regulation: Social history in the nineteenth century was thus the result of a double movement: the extension of the market organization in respect to genuine commodities was accompanied by its restriction in respect to fictitious ones. While on the one hand markets spread all over the globe and the amount of goods involved grew to unbelievable dimensions, on the other hand a network of measures and policies was integrated into powerful institutions designed to check the action of the market relative to labour, land, and money.25

What was to be observed was a double movement of distinct organisational principles in society, namely economic liberalism promoting self-regulating markets, socially based in the trading classes versus social protectionism as an effort to shield human and natural resources from the grip of the market forces through interventionist measures in legislation, administration and associative self-organisation, socially based primarily in the working and landed classes.26 Yet this interventionist counter-movement against the expansion of markets and its underlying commodity fiction was incompatible with the working mechanism of the market itself, leading to a further intensification of institutional tensions.27 Measures of social protectionism obstructed pricebased adjustments of labour markets by stabilising earnings beyond volatile market incomes as well as by regulating institutional features such as professional standards, thus reconstituting the human character of labour beyond the commodity fiction.28 As the counter-movement and its interventionist– protectionist stance came to disturb the self-regulation of the market system ever more severely since the 1880s all over Western Europe, the national domain became the decisive terrain for political identity—implying a drive for national rivalry. Economic and political crises then culminated in World War I, followed by a prolonged period of instability that would pave the way for totalitarian solutions to the prolonged crisis of the market system during a ‘great transformation’ of society.29 At this point, it needs to be reconsidered that Polanyi’s view of economy–society relationships transcends common distinctions between market and state. Instead, viewed in a substantive manner, the economy is basically viewed as a subset of society that is

24 25 26 27 28 29

ibid 76–77. ibid 79. ibid 138–39. ibid 136–37. ibid 185–86. ibid 210–12.

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concerned with the production and distribution of goods, paralleled by other subsets of society such as kinship organisation, religious systems and the political system, which are concerned with particular norms and obligations in the reproduction of society at large. Accordingly, the trias of economy, polity and civil society is constitutive for Polanyi’s line of reasoning—and so is the related concern with democratic governance as a key feature of sustainable regulative efforts.

III. EMBEDDEDNESS AND THE REGULATION OF MARKETS

In reiterating the motives discussed so far, Polanyi’s notion of embeddedness comprises two distinct facets. On the one hand, in an analytical sense, it denotes the historically contested connectedness of markets to the moral fabric of society; on the other hand, it may be perceived as a normative term that refers to the political and social regulation of markets—in particular regarding the domain of fictitious commodities.30 However, both of these aspects converge in Polanyi’s claim that markets for labour, land and money simply require public guidance, as their self-regulating adjustment would lead to disastrous social consequences. That is why market expansion usually implies a parallel expansion of rules and regulations that are set to enhance social protection.31 Yet this set of arguments requires further specifications. A first problem refers to the institutional substance that is involved in the embedding of economic processes. For instance, it has been argued that persistent efforts in the re-embedding of economic processes would allow for speaking of an ‘always embedded market economy’, which Polanyi allegedly overlooked while he was coping with the drive for embedding market forces in social protectionist measures and the obstructive impact of these measures on the self-regulation of markets.32 In this view, markets are always politically embedded in legal rules and institutions. Yet they are also always morally embedded in specific values and norms that support rule compliance and trust. In this constellation of ideational embeddedness there is no disembedding of the market sphere but only its persistent re-embedding in different sets of institutions, including ideas, discourses and ideologies that are part of the normalisation of market processes.33

30 Jens Beckert, ‘The Great Transformation of Embeddedness: Karl Polanyi and the New Economic Sociology’ (2007) MPIfG Discussion Paper 07/1, 8 www.mpifg.de/pu/mpifg_dp/ dp07-1.pdf. 31 Block, ‘Introduction’ in Polanyi, The Great Transformation (n 2) xxv–xxvii. 32 Fred Block, ‘Karl Polanyi and the Writing of The Great Transformation’ (2003) 32 Theory and Society 275, 297–98. 33 Margaret R Somers and Fred Block, ‘From Poverty to Perversity: Ideas, Markets, and Institutions in Over 200 Years of Debate’ (2005) 70 American Sociological Review 260, 263–64.

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From this self-labelled Neo-Polanyian thesis follows that fully disembedded markets cannot exist, as markets always require some type of institutional underpinning to sustain their operation, which also shapes the varieties of market systems.34 This view of the Polanyian double movement of disembedding and re-embedding currents in the social regulation of markets informs the impression that all economies are embedded all the time, as wide-ranging social and political regulations of the market mechanism are constitutive for their operation.35 Yet such a perception of embeddedness rather tackles the institutional order of markets, that is the legal rules and social norms that institutionalise the competitive order of market exchange, instead of addressing the embeddedness of the market process in non-market modes of social integration. It is the latter aspect that allows for the de-commodification of fictitious commodities as a key aspect of embeddedness in Polanyian terms.36 In fact, given Polanyi’s thesis that the institutionalised market logic decomposes the fabric of society, this amounts to saying that markets are ‘always precarious’ despite the persistence of regulatory efforts.37 At this point, another problem with the interpretation of Polanyi’s notion of embeddedness comes into play, which is related to the characterisation of markets as void of social relationships. This interpretation is implicit in the claim that the integration modes of reciprocity and redistribution would differ from exchange in that they represent specific social relationships such as kinship or political–religious affiliation, whereas market exchange would stand out as a merely economic interaction among anonymous actors.38 Obviously, such a view of markets contradicts current reasoning in economic sociology with its claim that every market transaction is a social process involving a history of struggle, contestation, understandings and rules, thus making state, politics and culture inherent components of any market.39 Accordingly, markets emerge out of social relationships, that is, they resemble open-ended social spaces that contain persistent struggles over the organisation and regulation of the market process.40 Such a politicised 34 Fred Block, ‘Understanding the Diverging Trajectories of the United States and Western Europe: A Neo-Polanyian Analysis’ (2007) 35 Politics and Society 3, 5–6. 35 Kurtuluş Gemici, ‘Karl Polanyi and the Antinomies of Embeddedness’ (2008) 6 SocioEconomic Review 5, 9–10. 36 Alexander Ebner, ‘Transnational Markets and the Polanyi Problem’ in Joerges and Falke (eds) (n 3) 27–28. 37 Gareth Dale, ‘Lineages of Embeddedness: On the Antecedents and Successors of a Polanyian Concept’ (2011) 70 American Journal of Economics and Sociology 306, 331–33; Gareth Dale, Karl Polanyi: The Limits of the Market (Cambridge, Polity, 2010) 200–03. 38 George Dalton, ‘Introduction’ in Dalton (ed), Primitive, Archaic, and Modern Economies (n 12) xiv–xv. 39 Greta Krippner, Mark Granovetter, Frank Block et al, ‘Polanyi Symposium: A Conversation on Embeddedness’ (2004) 2 Socio-Economic Review 109, 112. 40 Robert Boyer and Daniel Drache, ‘Introduction’ in Robert Boyer and Daniel Drache (eds), States against Markets: The Limits of Globalization (London and New York, Routledge, 1996) 11.

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understanding of socio-economic integration mechanisms allows for the differentiation of various types and levels of embeddedness whose variability reflects hegemonic manifestations of fragile social compromises. Such an effort would also counter critical claims on the detection of an allegedly ‘gradational’ and therefore unsound conceptualisation of embeddedness in Polanyi’s reasoning.41 Indeed, a reconsideration of the social structures of markets still actually echoes Polanyi’s own reasoning on public policy as a major factor in the regulation and embedding of market processes.42 In more detail, Polanyi entertains a distinct theory of public policy, based on a portrayal of the state as an indispensable factor in regulating the complex affairs of modern society.43 In acknowledging this often neglected aspect of Polanyi’s thought, however, recent institutionalist interpretations have focused almost exclusively on the matter of state interventions in regulating market processes.44 An underlying argument suggests that the Coasean solution to the externalities problem is misconceived, for its emphasis on the introduction of property rights is meant to promote a withdrawal of the state from the regulated area of the market, whereas such an extension of property rights in fact also implies a parallel extension of state interventions due to the need for organising their enforcement.45 Yet Polanyi’s theory of public policy reaches beyond these limitations and instead takes its point of departure in the proposition that states are at the very beginning of market evolution by providing legal frameworks and enforcement mechanisms that are indispensable for procedures of disembedding commodification. In this sense, the Polanyian perspective is well aligned with those strands of institutionalist reasoning that view the state as a generative force of market exchange. In particular, Polanyian ideas may be directed against those variants of property rights theory, which assume the primacy of markets and derive the role of the state from its functions in maintaining the market process. In Polanyi’s view, states serve as major driving forces in the evolution of markets, as they promote the political–administrative construction of markets and the regulation of market competition. Thus, the matter of public policy addresses the disembedding and re-embedding of market processes in both types of market and non-market institutions. In this sense, public policy fulfils a key function in the Polanyian account of the evolution of the

41

Gemici (n 35) 10–11. Fikret Adaman, Pat Devine and Begum Ozkaynak, ‘Reinstituting the Economic Process: (Re)embedding the Economy in Society and Nature’ (2003) 13 International Review of Sociology 357, 357–58. 43 Polanyi, ‘Our Obsolete Market Mentality’ (n 12) 73. 44 Geoffrey M Hodgson, ‘The Enforcement of Contracts and Property Rights: Constitutive versus Epiphenomenal Conceptions of Law’ (2003) 13 International Review of Sociology 375, 389. 45 Geoffrey M Hodgson, Economics and Institutions: A Manifesto for a Modern Institutional Economics (Oxford, Polity Press, 1988) 152–53. 42

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market system. This is well illustrated by Polanyi’s general assessment of the role of the state in cultural evolution. The state is viewed as a decisive factor in organising the economic field by institutional means that involve the rule of law: according to Polanyi, ‘justice, law, and freedom, as institutionalized values, first make their appearance in the economic sphere as a result of state action’.46 Tribal relations in stateless societies highlighted custom and tradition as means for embedding economic affairs in the wider domain of social and political organisation and thus rather obstructed exchange transactions. In contrast to that, the emergence of territorial rule paved the way for their promotion, as market transactions needed to be made gainless in order to become acceptable as a generalised mode of exchange in a non-market setting. This would be typical of irrigational empires with their extensive infrastructures and regulations of vast territories as promoted by centralising rulers—perceived as historical alternatives to the strictly regulated and limited transactions that remain typical for peasant communities and their pattern of market evolution.47 Indeed, according to Polanyi, the ruler—usually a god-king as in the ancient Mesopotamian states—provided basic supplies of goods for a community threatened by loosened kinship ties. Economic transactions were characterised by formalised equivalencies and thus became just and lawful, for they were made gainless through the actions of the ruler who would head the taxational and redistributional apparatus of the state and whose declaration of equivalencies could legitimise exchange behaviour—and accordingly act as a source of economic justice and formalised fairness in exchange. The rule of law evolved later on from trade regulations for guilds.48 Thus, according to Polanyi, the irrigational empires served as a crucial historical terrain for the formation of justice, law and freedom as creations of the state, while stimulating a trajectory of well administrated dispositional exchange.49 Even the taxation systems of modern states resemble redistribution as a principle of social integration that implies the collection and redistribution of resources from a political–administrative centre.50 Statebuilding in archaic societies thus resembles a major secular force of economic organisation, fuelled by aspects like the provisioning of an expanding military through means of taxation. Perceiving the circulation of a currency as an instrument of taxation points to further efforts at standardisation and market-making, which are part of the state-building process, basically contributing to the replacement of status-orientation in transactions by statute law that evolved in the state sphere.51 46 47 48 49 50 51

Polanyi, The Livelihood of Man (n 7) 16. ibid 73. ibid 16–17, 61. ibid 73–74. ibid 41. Polanyi, Dahomey and the Slave Trade (n 14) 186–87.

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Based on these assessments, Polanyi approaches the mercantilist promotion of market exchange as well as related efforts in protective regulation as a manifestation of moves and counter-moves in the evolution of the market system. While foreign trade had been largely a local phenomenon only, Polanyi claims that internal trade in Western Europe was created by interventions of the state, transposing the mechanism of municipal trade to a national level. The mercantilist state of the fifteenth and sixteenth century thus resembled a major ‘instrument of the “nationalization” of the market and the creator of internal commerce’ as it forced protectionist towns and principalities into nationwide market competition.52 In turn, implying a co-evolutionary pattern in the relationship between states and markets, the centralised state of the mercantile system was historically created by the Commercial Revolution that led to the economic dominance of the Western European countries since the fifteenth century, promoting state sovereignty over extended territories that became subject to political–cultural unification. Underlying administrative techniques of the public policies of central government were usually adapted from a diversity of municipal practices, thus shaping distinct national patterns in state-building.53 Moreover, during the mercantilist epoch, interventionism was not only characteristic of government involvement in the formation of markets—due to the forced dissolution of potentially obstructive institutional constellations—but it also typified public policy in the maintenance and expansion of the institutional conditions of market exchange. State interventions in the formation of national markets would herald persistent regulations of the economy, coping with both the sustainability of competition and the ensuing problem of monopoly as a potential result of competition. Interventions were even extended over time, while markets remained submerged in social relations that were moulded by a mercantilist state whose authority over the institutional setting of society became ever stronger. Polanyi therefore suggests that ‘[t]he “freeing” of trade performed by mercantilism merely liberated trade from particularism, but at the same time extended the scope of regulation’.54 Markets that were absorbed into the social system would still thrive as they were subject to the control of the centralised public administration of the mercantilist regimes. It follows that ‘[r]egulation and markets, in effect, grew up together’.55 The actual role of government in the evolution of market systems thus contradicts liberal beliefs in the spontaneity of socioeconomic development. Indeed, policy interventions tended to alter the rate of change by either speeding it up or slowing it down in accordance with well-articulated societal demands.56 52 53 54 55 56

Polanyi, The Great Transformation (n 2) 68–69. ibid 69. ibid 70. ibid 71. ibid 39.

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Polanyi discusses these aspects by invoking the example of the Tudor and early Stuart regimes in England, which are said to have followed an adaptive and gradualist approach to structural change by slowing down the process of enclosures until the shift from arable land to pasture became socially bearable. Given an understanding of enclosures as a major institutional factor of industrialisation, which enabled the emergence of a competitive cotton industry endowed with mobile surplus labour, this implies that the mercantilist strategy of the English Crown shaped institutional adjustments to new conditions brought about by the disruptive impact of economic development.57 Yet this type of government intervention was far from reactionary. Rather, it exercised leadership functions in innovatively managing socio-economic change. Indeed, at this point, Polanyi underlines the potentially innovative character of government: Their chancelleries and courts of prerogative were anything but conservative in outlook; they represented the scientific spirit of the new statecraft, favoring the immigration of foreign craftsmen, eagerly implementing new techniques, adopting statistical methods and precise habits of reporting, flouting custom and tradition, opposing prescriptive rights, curtailing ecclesiastical prerogatives, ignoring Common Law. If innovation makes the revolutionary, they were the revolutionaries of the age.58

According to Polanyi, then, the mercantilist state could exercise its leadership function in managing socio-economic change by creative as well as protective means in a coherent manner, because its political–administrative apparatus was relatively autonomous from the special interests of powerful social classes. This amounts to a distinction between ‘government of the Crown’ committed to general welfare and ‘government by a class’ committed to particular class interests.59 Despite the advantages of a relatively autonomous political–administrative apparatus, Polanyi suggests that the paternalism of mercantilist regulations was misplaced in the setting of an industrial economy. Still, its administration of labour and industry could be perceived as a model for the social administration of the emerging welfare state in the late nineteenth century that followed a brief interlude of liberal hegemony in English policy-making.60 The heyday of liberal public policy hit England in the 1830s, carried by a liberal ideology which rejected any political–administrative measure that could obstruct the unimpeded flow of marketable resources and their selfregulation by market prices. Public policy was viewed as a supporting device for the self-regulation of markets, based on a strict separation of economic

57 58 59 60

ibid 39–40. ibid 40. ibid 40–41. ibid 41.

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and political spheres.61 This ideological outlook contradicted the fact that the evolution of the market system and persistent interventionism were not exclusive, for the formation and maintenance of market institutions requires persistent interventions, involving antitrust regulations as well as union laws. Even violent means were applied in facilitating social and political conditions for promoting the market mechanism, at last also including the option of civil war as a means for dissolving obstructive social relationships and their institutional carriers.62 The establishment of markets is thus not the result of spontaneous institutional change; ‘[o]n the contrary, the market has been the outcome of a conscious and often violent intervention on the part of the government which imposed the market organization on society for noneconomic ends’.63 Indeed, when viewed as a historical sequence, the institutional design of the market system in England during the first half the nineteenth century proceeded primarily through legal instruments. The Poor Law reform of 1834 promoted a deregulated labour market and the commodification of labour, followed by the Bank Act in 1844 that established the gold standard for the self-regulation of the monetary sphere, whereas the repeal of the Corn Law in 1846 allowed for free trade in grain, thus promoting the transformation of land into a marketable commodity.64 During the same period of liberal restructuring, the contradiction between the formation of markets and political democratisation became apparent. While the Chartists demanded universal suffrage, which could potentially empower those strata of society that were to be turned into wage labourers, the separation between an economic and political sphere became decisive for upholding the market system under democratic conditions. Liberal ideas of constitutionalism, which were originally directed against the danger of the confiscation of private property through despotic rulers, were now reinterpreted for safeguarding private property against the impoverished masses. In particular the United States Constitution represents such a type of ‘legally grounded market society’ with its separation of powers that could hold voters relatively powerless against the interests of owners.65 At this point, the political dimension of the co-evolution of states and markets becomes crucial once again, as it addresses both the prospects and limits of public policy in coordinating the drive for a market system and parallel efforts in social regulation. The double movement of market liberalisation and social protectionism is thus accompanied by increasing difficulties with the effective implementation and democratic legitimisation of policy interventions. In consequence, the institutional stability of the market system is at stake.

61 62 63 64 65

ibid 72. ibid 155–56. ibid 258. Polanyi, ‘Our Obsolete Market Mentality’ (n 12) 67–68. Polanyi, The Great Transformation (n 2) 233–34.

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IV. THE DOUBLE MOVEMENT AND THE PROBLEM OF POLICY INTERVENTION

Polanyi outlines two paradoxical aspects in the co-evolution of market and state that contradict liberal ideologies of the market system. First, as the English example illustrates, laissez-faire principles were historically enforced by the state and did not evolve spontaneously in a natural market order. Even utilitarian liberalism of the Benthamite creed would favour strong government as the most indispensable agency of knowledge and power needed to make markets work.66 In practice, as the expansion of markets required a massive restructuring of social affairs, particularly in the public treatment of poverty, it was paralleled by an extension of interventions and regulations that eventually fuelled a bureaucratisation of government, endowed with extended powers for social control: in Polanyi’s words, ‘[t]he road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism’.67 Second, while the establishment of the laissez-faire economy was the product of deliberate state action, the political counter-movement in England since the 1860s resulted from spontaneous activities scattered all over society, pragmatically assembling diverse social interests and political ideologies ranging from socialism to conservatism. It follows that ‘[l]aissez faire was planned; planning was not’.68 This claim is rooted in Polanyi’s thesis that the counter-move against the expansion of markets resulted not from the impact of distinct social forces and ideologically fuelled political movements but from the cumulative increase of insights into the problems of socially disembedding market forces.69 Accordingly, Polanyi rejects an analytical emphasis on the particular interests of social groups and classes in the political assessment of the counter-movement, for the latter would reflect a general interest that spans diverse social classes, based on insights on the required maintenance of the human and natural substance of society and thus highlighting broader social interests that are not to be defined in terms of narrow economic interests.70 This rather idealistic depiction of the counter-move as a project of societal enlightenment against the market society resembles a Hegelian idealism that points to cumulative insights into the laws of motion of society—and indeed it has been criticised as such. Decisively, it is claimed that Polanyi provides an apolitical theory of the welfare state, viewing it as a societal response in the spontaneous counter-movement against a market society, which is

66 67 68 69 70

ibid 145–46. ibid 146. ibid 147. ibid 156. ibid 160–62.

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not subject to particular interest group interventions.71 These problematic aspects in Polanyi’s approach imply that society is perceived as having a reality of its own, seemingly acting as a self-conscious entity.72 Still, the impact of social forces in the formation and crisis of the market society does not remain uncovered at all. This is well exemplified by Polanyi’s discussion of the persistent influence of feudal culture and landed interests in the drive for the market society, which is explained by their protective functions in the restriction of disembedding processes. The fixing of human resources in a particular place is typical for the feudal mode of life, contradicting mobility and adaptation that become typical for the market system. The corresponding drive for a spatial fix also explains the territorial character of sovereignty in the modern nation-state.73 Furthermore, feudal sentiment and agrarian protectionism contributed decisively to the containment of the commodification of land in Western Europe, although in a rather accidental manner that served common social interest non-purposefully. In their general outlook, these sentiments preceded progressive projects in socio-economic regulation like Roosevelt’s Tennessee Valley Authority during the New Deal. Indeed, while landed interests on the European Continent rejected liberal ideas, they would promote social protectionist approaches, as implemented in Germany during Bismarck’s Chancellorship.74 This is in line with the basic observation that social protectionist measures that should limit the expansion of the market society were promoted by rather broad social and political coalitions, involving both landed and working classes.75 Nonetheless, during political turmoil, the involved landed interests would rather defend the market system than side with the labour movement, primarily due to the pressing question of private property and its political defence that would split landed and labour interests.76 This societal divergence of political orientations regarding the transformation of the market system points already at the political and economic instability that resulted from protectionist disturbances, furthered by the counter-movement against the market system in Western Europe since the 1880s. Paralleling this advance of protectionism, the nation-state became the decisive terrain for political identity. Ensuing patterns of national rivalry together with prolonged economic and political crises culminated in World

71 Santhi Hejeebu and Deirdre McCloskey, ‘The Reproving of Karl Polanyi’ (1999) 3–4 Critical Review 285, 295. 72 Michael Burawoy, ‘For a Sociological Marxism: The Complementary Convergence of Antonio Gramsci and Karl Polanyi’ (2003) 31 Politics and Society 189, 193–99. 73 Polanyi, The Great Transformation (n 2) 192–93. 74 ibid 194–95. 75 ibid 138–39. 76 ibid 200.

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War I, followed by unsteadiness and reorientation afterwards.77 Polanyi explains this permanence of instability by referring to the interconnectedness of the separated political, social and economic domains that would become subject to protectionist policies. As protectionism encouraged the monopolisation of market structures, interventions in support of a competitive order became ubiquitous, leading to an increasingly bureaucratic and corporatist setting that persistently distorted prices and prolonged recessions. The institutional separation of economic and political spheres intensified the disruptions emanating from destabilised markets. Thus, the transformation of the market system towards an authoritarian solution following World War I was not driven by new economic motives, but by new institutional mechanisms in coping with the market civilisation.78 Due to the actual interconnectedness of societal domains, market strains would affect other institutional zones such as national government and thus even affect international politics: Each field was comparatively independent from the other and tended toward an equilibrium of its own; whenever this balance was not achieved, the imbalance spread over into the other spheres. It was the relative autonomy of these spheres that caused the strain to accumulate and to generate tensions which eventually exploded in more or less stereotyped forms.79

Policy interventions into the market system escalate a socio-economic destabilisation that leads to the ‘great transformation’ of the market society with the option of an authoritarian solution. This perspective is informed by Polanyi’s belief in the socially disruptive yet economically equilibrating capacities of markets that are unhampered by policy interventions; a position which contradicts contemporary Keynesian ideas on the endogenous instability of markets.80 Indeed, with regard to the self-stabilisation of markets, Polanyi remains close to the positions of the Austrian School in the manner of Mises and Hayek and their rejection of policy interventions into market processes. In other words, Polanyi is overdoing the case of market distortion by policy interventions, as he seemingly relies on an ideal type of flawless market process.81 Yet Polanyi’s reconsideration of structural tensions arising from the separateness as well as connectedness of the diverse domains of economy, polity and other spheres of society which follow a distinct functional logic may also be interpreted in terms of systems theory. The market system is accordingly viewed as an autopoietic system which

77 78 79 80 81

ibid 210–12. ibid 227–28. ibid 220. Dalton (n 38) xxv. Hejeebu and McCloskey (n 71) 302.

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functions according to its own rules and logics that conflict with the alien rationale of those systems from which outside interventions emerge.82 For Polanyi tensions arising from the protective regulation of the market system have consistently fuelled a transformation of the liberal bourgeois civilisation that had become prominent during the nineteenth century, leading to an upsurge of socialism and fascism as conflicting solutions to the turmoil of the 1920s. Socialism represents an inherent tendency of industrial civilisation towards a conscious subordination of the market to democratic principles by means of adequate public policies, basically confronting private efforts in achieving monetary gain as an exclusive motivation for productive activity, while abolishing private property of the means of production.83 Fascism, however, as a non-socialist response to the failure of the market society resembles an interventionist reform of the market economy on the condition of eliminating democratic institutions in economy and polity.84 Polanyi’s own normative position highlights the socialist option, yet amended in terms of safeguarding ‘freedom in a complex society’ that would restore the ‘habitation’ of society through a democratically regulated industrial system.85 Moral freedom and independence of mind would represent values of the market economy and its system of private enterprise that should be preserved, set in a different context that fosters the common good while confronting bureaucratisation.86 Indeed, markets for goods and services would persist as allocative mechanisms for signalling consumer choices, while remaining framed by the regulations of non-market institutions.87 This reference to a mixed economy with democratic planning in a setting of industrial associations has been prevalent with Polanyi’s thought ever since his first major publication addressed the socialist accounting debate in the theoretical discourse of the Austrian School, stimulated by Mises, among others, in response to the socialist advance after World War I.88 While acknowledging the infeasibility of accounting in a socialist command economy, Polanyi proposes a decentralised model of guild socialism that should combine elements of market supply and demand with sociopolitical regulations, thus satisfying the diverse needs of society as articulated by industrial associations and consumers. According to Polanyi, the

82 Bob Jessop, ‘Regulationist and Autopoieticist Reflections on Polanyi’s Account of Market Economies and Market Society’ (2001) 6 New Political Economy 213, 222–23. 83 Polanyi, The Great Transformation (n 2) 242. 84 ibid 245. 85 ibid 257. 86 ibid 263–64. 87 ibid 260. 88 Marguerite Mendell, ‘Market Reforms and Market Failures: Karl Polanyi and the Paradox of Convergence’ (1989) 23 Journal of Economic Issues 473–481.

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differentiation between capitalism and socialism should not be reduced to the dichotomy between market and plan, for it is rather to be associated with aspects of social productivity and the societal character of production and distribution at large, meant to benefit the common good.89 Polanyi’s advocated type of guild socialism thus resembles a corporatist system of industrial democracy with communal property of the means of production that is governed by industrial associations and consumer organisations. Wages and prices are regulated in terms of social values, subject to bargaining arrangements among the involved associations.90 In accordance with these political leanings, also Polanyi’s early German comments on Roosevelt’s New Deal highlight the indispensability of participative and transparent democratic procedures.91 Indeed, Polanyi is persistently sensitive to the danger of an insulation of the state from society that would parallel the separation of market system and political sphere, resembling the evolution of a ‘selfregulating state’ that combines the political power of a welfare bureaucracy with extended social control and undemocratic authoritarianism.92 The formation of the welfare state is thus a decisive component in Polanyi’s approach to comparative economic systems, as it directly affects the status of labour—the crucial characteristic for specifying the rationale of an economic system. The actual modes of ending the self-regulating market system may vary over time, involving both authoritarianism and democracy, yet in any case, the status of labour as a fictitious commodity is abolished with far-reaching consequences for society at large: To take labor out of the market means a transformation as radical as was the establishment of a competitive labor market. The wage contract ceases to be a private contract except on subordinate and accessory points. Not only conditions in the factory, hours of work, and modalities of contract, but the basic wage itself, are determined outside the market.93

The social counter-movement that accompanied the evolution of the market economy since the mid-nineteenth century thus advanced a self-protection of society that promoted welfare states combined with a democratisation of industry. In particular, Polanyi suggests that the formation of the welfare state represents a protective venture that would offer workers ‘the mixed motives of status, security of income, teamwork, and a creative role

89 Karl Polanyi, ‘Sozialistische Rechnungslegung’ (1922) 49 Archiv für Sozialwissenschaft und Sozialpolitik 377, 378–79. 90 ibid 403–05. 91 Karl Polanyi, ‘Amerika im Schmelztiegel’ (1935) 27 Der Österreichische Volkswirt 763, 763–65. 92 Jacques Godbout, ‘The Self-Regulating State’ in Marguerite Mendell and Daniel Salée (eds), The Legacy of Karl Polanyi: Market, State and Society at the End of The Twentieth Century (London, Macmillan, 1991) 128–29. 93 Polanyi, The Great Transformation (n 2) 259.

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in industry.’94 Historically, these endeavours are most positively associated with the experience of ‘Red Vienna’, that is the socialist municipality of Vienna after World War I with its extended welfare programmes. As a major cultural achievement, it differed from the reactionary Speenhamland system due to the efforts of the Viennese socialists in transcending capitalism while retaining positive effects of the industrial system of labour and technology.95 However, Polanyi’s policy proposals reach well beyond the domain of the welfare state, for they challenge industrial civilisation at large, that is, the ‘Machine Age’: The search for industrial democracy is not merely the search for a solution to the problems of capitalism, as most people imagine. It is a search for an answer to industry itself. Here lies the concrete problem of our civilization.96

Again, this line of reasoning points to the persistent relevance of Polanyi’s normative concerns regarding the fundamental question of how to organise the societal provision with material means of life in a sustained manner that allows for both social and ecological concerns.97 In this manner, Polanyi does not provide a simple market failure argument in outlining the logic of market regulation. Rather, he stresses that markets should be fenced off from certain societal domains.98 The double character of the state then contains the facilitating of market exchange through adequate rules and enforcement procedures as well as the mitigating of the most disruptive consequences of markets by promoting welfare supports.99 Yet this consideration should not be perceived as an unconditional appraisal of the welfare state and its social protectionist measures that have become prominent in various types of welfare regimes. First of all, from a Polanyian viewpoint, social disruptions caused by the commodification of labour exhibit a cultural dimension of degradation, divisiveness, and potential loss of self-respect.100 Certain types of social protectionism have the potential to even aggravate these cultural disturbances. Indeed, Polanyi’s fierce critique of the pre-industrial Speenhamland system of social benefits refers to its paternalism and the ensuing spread of passivity and immobility among the beneficiaries that would come to decompose collective action for social reform.101 Polanyi’s concept of the double movement thus allows for 94

Polanyi, The Livelihood of Man (n 7) 1. Polanyi, The Great Transformation (n 2) 298–99. 96 Polanyi, ‘Our Obsolete Market Mentality’ (n 12) 59–60. 97 Robert Latham, ‘Globalisation and Democratic Provisionism: Re-reading Polanyi’ (1997) 2 New Political Economy 53, 58. 98 Richard R Nelson, ‘Introduction’ in Richard R Nelson (ed), The Limits of Market Organization (New York, Sage, 2005) 19. 99 Kathryn Ibata-Arens, Julian Dierkes and Dirk Zorn, ‘Theoretical Introduction to the Special Issue on the Embedded Enterprise’ (2006) 7 Enterprise and Society 1, 3. 100 Dalton (n 38) xx–xxi. 101 Burawoy (n 72) 218–19. 95

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highlighting the cultural dimension of socio-economic change by pinpointing the variability of social needs and their articulation.102 Accordingly, the double movement may be viewed as a conflict between the market system and the welfare state in terms of a clash of specific cultural systems, involving ideological and motivational patterns that strive for institutional hegemony. These arguments underline the appropriateness of the suggestion that a Polanyian perspective on comparative institutional analysis needs to address the aspects of power and politics in historically specific cultural settings.103 In consequence, the double movement is to be understood as a clash of social principles resulting from the contradiction between the market system and the persistence of modes of social integration beyond market exchange and commodification. A frictionless harmonisation of market system and policy interventions thus remains out of sight.104 Indeed, the notion of the double movement rather resembles a perception of the economy as a loosely coupled system, in which no pre-stabilising forces exist, although buffer components and backup mechanisms may provide temporary coherence in the face of developmental uncertainty.105 Depending on the actual historical context, market expansion may be followed by reaction or withdrawal, that is, by a great transformation or a great involution of society with far-reaching consequences for the social fabric and its political articulation at large.106 As the state provides a decisive terrain for these conflicts, the double movement is reflected within the state apparatus itself, shaping the overall profile of public policy. Policy implications that may be distilled from Polanyian considerations then highlight a reflexive, dialogical mode of governance as the solution to a sustained co-existence between market economy and the wider social and ecological system.107 What enters as a key component in these undetermined evolutionary processes is the impact of discourses on the social construction of market liberal moves and social protectionist counter-moves. This contributes to the specification of the ‘Polanyi problem’ which has been singled out recently, asking how the globalisation of the market system as a disembedding process is to be reconciled with re-embedding moves that aim at the provision of social security and cohesion in the face of the uncertainty related to international markets.108

102 Anne Mayhew, ‘Polanyi’s Double Movement and Veblen on the Army of the Commonweal’ (1989) 23 Journal of Economic Issues 555, 560–61. 103 John Harriss, ‘Institutions, Politics and Culture: A Polanyian Perspective on Economic Change’ (2003) 13 International Review of Sociology 343, 347. 104 Kari Polanyi Levitt, ‘Keynes and Polanyi: The 1920s and the 1990s’ (2006) 13 Review of International Political Economy 152, 162–63. 105 Block (n 34) 7. 106 Burawoy (n 72) 243. 107 Jessop (n 82) 228–29. 108 Ronaldo Munck, ‘Globalization, Labor and the “Polanyi Problem”’ (2005) 45 Labor History 251, 251–52.

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In effect, all of these issues contribute to an evolutionary understanding of the Polanyian approach to the regulation of markets, quite in line with recent institutionalist reasoning on the institutional evolution of capitalist market economies.109 Current reasoning on the matter of regulation and governance highlight transnational affairs that transcend the domain of nation-state. Indeed, quite in line with Polanyian reasoning on the institutional mechanisms of re-embedding markets in non-market modes of coordination, these argumentations on transnational governance reconsider the transformation of state capacity to the benefit of an extended private sector and multiple civil society organs, which is said to be mediated by both hard and soft law in a setting of transnational interactions.110 Accordingly, applied to key areas of regulation that cope with the uncertainty of market economies such as the area of transnational risk regulation, Polanyian reasoning would accentuate that transnational governance mechanisms involve a complex diversity of actors from all domains across society. The steering capacity of the nationstate needs to be enhanced by specific kinds of transnational governance mechanisms that combine local, national and transnational aspects of risk regulation. All of this resembles a regulatory strategy that would allow for a re-embedding of market interactions, by doing so redefining the relationship between market economy, polity and civil society at large.

V. CONCLUSION

Polanyi’s reconsideration of the embeddedness of market operations in nonmarket institutions provides arguments for perceiving the regulation of markets as a persistently contested process that involves the organisation of the market system and its demarcation with societal spheres of non-market coordination. Therefore, according to Polanyi, it is not the failure of markets to function in line with the ideal of perfect competition that requires regulation, as claimed by neoclassical economics. Rather, the impact of market competition on social areas that are decomposed by the market mechanism itself should be the primary domain of regulatory efforts. However, these regulatory efforts are bound to fail under conditions of an institutional separation of political and economic affairs. Accordingly, the regulation of markets may be explored in terms of co-evolving states and markets. 109 Alexander Ebner, ‘Introduction: The Institutions of the Market’ in Alexander Ebner and Nikolaus Beck (eds), The Institutions of the Market: Organisations, Social Systems, and Governance (Oxford, Oxford University Press, 2008) 8–11. 110 Marie-Laure Djelic and Kerstin Sahlin-Andersson, ‘Introduction: A World of Governance— The Rise of Transnational Regulation’ in Marie-Laure Djelic and Kerstin Sahlin-Andersson (eds) Transnational Governance: Institutional Dynamics of Regulation (Cambridge, Cambridge University Press, 2006) 8–9.

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Decisively, the state is not only concerned with embedding types of market regulation but also in the constitution of markets by means of disembedding procedures that promote the institutional and social conditions of market exchange. Therefore, it is a key Polanyian insight that the regulation of markets is intimately related with the institutional range of market competition in society at large. Applied to the matter of transnational risk regulation, a Polanyian view would clearly need to accentuate the multi-level and multi-actor character of regulation, perceived in terms of transnational governance mechanisms that include not only government but also diverse economic and social actors with their particular interests and claims. In this manner, the regulation of risk and the reduction of uncertainty might be realised by means of a re-embedding of the market process in non-market schemes of economic, social and political interaction. Thus, transnational risk regulation resembles a re-embedding governance procedure that redefines the relationship between the market economy, polity and civil society at large.

3 Economics and Transnational Risk Regulation CHRISTOPHER DECKER

I. INTRODUCTION

I

N 1936, KEYNES famously observed that the ideas of economists were more powerful than commonly believed; that practical men who believed themselves exempt from intellectual influences were usually the slaves of some defunct economist, and that ‘madmen in authority’ were often ‘distilling their frenzy from some academic scribbler of a few years back’.1 The influence of the ‘academic scribbler’ (including Keynes himself), has endured to this day. In this sense, economic knowledge, and ‘the economists’ perspective’ has, for many years, formed part of a particular method for conceiving of, and responding to, economic activity, including the regulation of national and transnational risks. Karl Polanyi, writing in The Great Transformation in 1944,2 implicitly accepts that economists substantially influence political and social affairs, and identifies what he considers to be the principal deficiency of liberal economic thinking as a method of conceiving of, and responding to, social issues, as well as the ultimate danger of the influence of such thinking. The centrepiece of Polanyi’s critique, as distilled in subsequent work, is that the (neo) liberal economists’ vision of an autonomous, self-regulating economy ‘disembeds’ the economy from underlying social and political relations. The result of this dislocation, in Polanyi’s view, is socially catastrophic. In this chapter, Polanyi’s contention is explored, and consideration is given to the continuing relevance of his concerns, and the implications this may have for how transnational risks are addressed. More specifically, the Polanyian critique of economic thinking is characterised as being principally concerned with the methodology of economics, and accordingly the chapter 1 JM Keynes, General Theory of Employment, Interest and Money (Macmillan Cambridge University Press, 1936) 351. 2 K Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston, Beacon Press, 2001).

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goes on to consider how some of these methodological issues are being addressed in current economic work and, specifically, in addressing issues of transnational risk regulation in the area of concentrations of economic power. In general, this chapter concludes that economic discourse has evolved since the time of Polanyi’s writing, such that economists recognise the limitations of self-regulating markets and, indeed, devote much effort to identifying how these limitations are best addressed. Nevertheless, some of Polanyi’s concerns regarding the methodology of economics persist to this day; in particular, in relation to the abstractions employed in economic theory regarding the nature of human behaviour, and the limited analytical focus of economics on issues of equity or fairness. In relation to the former, this chapter discusses how abstraction plays a necessary role in analytical tractability, but how insights from psychology and sociology are increasingly being used by economists to provide richer analytical frameworks for human behaviour. In relation to the latter, this chapter concludes that issues of equity and fairness continue to play a limited role in the methodology of economics, and this is seen to have important implications for how economic research is interpreted and used in policy prescriptions, as well as what separate interventions may be required to address social or distributional issues. These general conclusions are then considered in the context of one particular issue: how economics addresses the risks associated with transnational concentrations of economic power. In this respect, the chapter finds that competition policy has long been informed by economic theory and concepts, including the idealised abstraction of the ‘rational agent’, but that insights from behavioural economics are gaining influence in competition policy discourse. In relation to questions of equity and the wider impacts of competition policy on different groups in society or the achievement of other policy goals, this chapter concludes that these issues may be served less by the altering of the methodology of economics than by providing for separate policy interventions to address the specific issues that arise in particular contexts.

II. POLANYI’S CRITIQUE OF THE EARLY ECONOMISTS

In The Great Transformation, Karl Polanyi challenges the writings of some of the major economic thinkers of his time, and earlier centuries, a group who collectively are responsible for the development of what is now mainstream economic doctrine in industrialised economies. The scope of Polanyi’s critique is wide, capturing prominent eighteenth, nineteenth and early twentieth century political economists whom he associates with the teachings of economic or market liberalism. It starts with British political economists such as Adam Smith, John Stuart Mill, Thomas Malthus and David Ricardo, but also includes later economists of the ‘Austrian school’ such as Ludwig von Mises (and implicitly Frederick von Hayek). Given the influence and importance

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of the writings of these political economists in contemporary economic work, the challenge is, therefore, directly to the predominant orthodox economic theory in industrialised economies. The unifying critique offered by Polanyi is that these economic thinkers all mistakenly support the development of a utopian vision: the notion that society should be, and is capable of being, subordinated to self-regulating markets. It is Polanyi’s thesis that proponents of this theory commit an error in conceiving of a place for economic theory which allows society to be subordinated to the logic of the market, or where society becomes merely an adjunct to the market. The principal danger identified by Polanyi in this thinking, is an economy which is ‘disembedded’ from underlying social and political relations. The notion of ‘embeddedness’, and the manner in which economic theory is argued to be disembedded from society is not explored in any detail in The Great Transformation, however the implication of the term appears to be that mainstream economic theory is disconnected from the true features of the world for which it makes prescriptions. This feeds into and supports a second, more general, strand of Polanyi’s work: the contention that economists ignore the distributive and social effects of their theories and are accordingly unsympathetic to the plight of individuals and the overall welfare of society.3 Since the publication of The Great Transformation, Polanyi’s arguments have been subject to debate across a range of social sciences from sociology to law and, to a lesser extent, economics. Some of this work has sought to discount his main contentions, while other work has sought to elaborate on, or refine, the various notions he introduced. It is not the purpose of this chapter to revisit the thinking of early liberal economists, each of which would necessarily require a detailed examination of historical context, nor to present a detailed view on the veracity of each of Polanyi’s contentions or those of his adherents or critics. Rather, this chapter focuses on two areas. Firstly, it examines how economic thinking has changed between the time that Polanyi wrote and the current day, and how these changes bear on Polanyi’s concerns. Secondly, it argues that some of Polanyi’s concerns regarding the dislocation of the economy from society can be characterised, as, in essence, methodological. In particular, as will be discussed in detail, his concerns relate to the appropriateness of the methods and conceptual devices used by economists in their writings and analysis and, specifically, the extent to which the simplified and highly abstract conceptual devices and 3 A distinction should be drawn here between the interest of economists in issues related to aggregate or total economic welfare, and issues associated with the relative welfare position of different groups or members of a society at any particular time. Economists have long been concerned with issues relating to the aggregate economic welfare of society, and a considerable body of economic research focuses on how different economic structures and behaviour, or different public policies, can impact on aggregate economic welfare using well-established welfare criterion.

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models used in economics adequately capture and reflect broader factors of relevance such as societal and political impacts (for example, the relative impacts on different groups in society).

III. THE EVOLUTION OF ECONOMIC DISCOURSE

Polanyi’s critique was formulated against a contemporary vision of the selfcorrecting nature of market mechanisms. Today there is a reasonable degree of consensus among professional economists that markets are not always self-correcting, and that in some cases this precipitates a role for government intervention and regulation. Joseph Stiglitz, writing in the Introduction to the 2001 edition of The Great Transformation, captures the point well: Today, there is no respectable intellectual support for the proposition that markets, by themselves, lead to efficient, let alone equitable outcomes.… We have moved, by and large, to a more balanced position, one that recognises both the power and the limitations of markets, and the necessity that government play a large role in the economy, though the bounds of that role remain in dispute.4

Robert Solow, another Nobel laureate, made a similar observation when commenting on the 2008 financial crisis: Today, of course, no one is against markets. The only legitimate questions are: What are their limitations? Can they go wrong? If so, how can we distinguish the ones that do from the ones that don’t? What can be done to fix the ones that do go wrong? When is some regulation needed, how much, and what kind? More broadly: how to protect the economy and society against specified tendencies to market failure without losing much of either the capacity of a market system to coordinate economic activity efficiently or its ability to stimulate and reward technological and other innovations that lead to economic progress?5

More generally, in their book published following the 2008 financial crisis, Akerlof and Shiller (also Nobel laureates) note: Capitalist societies, as correctly seen by the old economics, can be tremendously creative. Government should interfere as little as possible with that creativity. On the other hand, left to their own devices, capitalist economies will pursue excess, as current times bear witness.… The proper role of government, like the proper role of the advice-book parent, is to set the stage. The stage should give full rein to the creativity of capitalism. But it should also countervail the excesses that occur because of our animal spirits.6

4

JE Stiglitz, ‘Foreword’ in Polanyi (n 2) viii. RM Solow, ‘Hedging America’ The New Republic (12 January 2010) 3. 6 GA Akerlof and RJ Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism (Princeton University Press, 2009) x. 5

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Taken together, these statements from some of the most senior and influential members of the economic profession, suggest that modern economists openly recognise the limitations of the market, while also emphatically accepting the usefulness of market mechanisms and the deficiencies of monopoly and central planning. Accordingly, in professional economic discourse at least, binary questions such as ‘are you for or against the market?’ typically no longer arise. Rather, the discourse is more nuanced and sophisticated in recognition of the fact, that as Solow notes ‘…being for or against “free markets” does not come close to being an adequate response to the problems that arise in a complex modern economy’.7 It could be argued therefore that Polanyi’s vision has been fulfilled insofar as the market has largely been subordinated to the political/social system, rather than the other way around. Indeed, in many industrialised market economies there is evidence that recognition of the limits of markets is feeding through into policy making and regulation. For example, labour conditions in most industrialised economies are heavily regulated, including through the setting of minimum wage rates and working conditions, restrictions on child labour, and prescribed employment termination and dismissal procedures. Similarly, concerns about the future consequences of environmental externalities associated with industrial production is an area of active economic and policy research, with a focus on how best to accommodate these externalities within the market mechanism (eg, through the use of cap and trade based trading schemes). Finally, as discussed in section V below, there is widespread recognition across many countries of the need for industrial markets to be regulated to ensure that companies and firms do not exercise undue market power, and therefore harm both consumers and citizens. In many ways then, the discourse has moved in a new direction since the 1940s.8 While the principal intellectual debate among most political economic writers at the time when Polanyi was writing could be characterised as a binary battle between advocates of two utopian (or dystopian) visions: the unfettered market or socialist/fascist models based around central planning, the debate since that time has come to accept the necessity and inevitability of government intervention in some activities. Simply put, the intellectual debate is no longer whether government should intervene, but rather the form, scope and nature that the intervention should take. There are differences of opinion as to why the intellectual debate in economics has changed. Some commentators attribute the change in focus to

7

Solow (n 5) 4. As Joseph Stiglitz again observes in the Foreword to the 2001 edition of The Great Transformation: ‘Today, however, the battlelines are drawn at a far different place than when Polanyi was writing.… Everyone is aware of the power of markets, all pay obeisance to its limitations.’ Stiglitz (n 4) ix. 8

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the ‘victory’ of Polanyi’s ideas in mainstream economics. For example, Stiglitz argues that: ‘Economic science and economic history have come to recognise the validity of Polanyi’s key contentions’.9 Others present the alternative explanation: that it was the patent failure of the socialist model that led to a greater appreciation of the importance of properly regulated markets as a means of organising production.10 A modern view of why the market mechanism is so influential derives, in large part, from its pluralistic and coordinating properties. The British economist John Kay attributes the triumph of the market system over the planned economy to what he calls ‘disciplined pluralism’ noting an ‘inevitable association between the successful market economy and the other components of an open society—freedom of expression, and democratic institutions’.11 Moreover, he argues that the success of markets stems directly from their disorderly properties, which allow them to adapt to uncertain and risky circumstances.12 Irrespective of questions about who ‘won’ the intellectual battle, the fact remains that the focus in mainstream economic science is different today than it was in the middle of the twentieth century. Generally speaking, mainstream economics now devotes much effort to identifying the limitations of self-regulating markets, and in proposing ways in which these limitations are best addressed. In some cases, it is widely recognised that the limitations may require some form of government intervention. However, differences of view continue to exist about the scope and form in which intervention should take, and, as will be discussed below, examples of these differences can be seen in current debates in the areas of competition policy.

IV. POLANYI’S CRITIQUE AND THE METHODOLOGY OF ECONOMICS

While the debate as to whether the market can or cannot be truly selfregulating has largely dissolved in mainstream economic discourse, some of Polanyi’s concerns regarding the methodology of economics persist to this day. In particular, questions continue to arise as to the appropriateness of the simplified and highly abstract conceptual devices and models used by

9

ibid xiii. Principal among these commentators is the economist, and self-described lifetime socialist, Robert Heilbroner, who, writing in 1989, noted: ‘Less than 75 years after it officially began, the contest between capitalism and socialism is over: capitalism has won … Capitalism organizes the material affairs of humankind more satisfactorily than socialism’. R Heilbroner, ‘No Alternatives to Capitalism’ (Fall, 1989) New Perspectives Quarterly 4. 11 J Kay, ‘The Future of Markets’ (Wincott Annual Lecture, 2009) 2. 12 Kay notes: ‘Markets are not a well oiled physical machine: they are a constantly changing, adaptive biological system. Pluralism is their motive force, their essence chaotic, their development inherently uncertain. If we could predict the evolution of markets, we would not need markets in the first place’ ibid 8. 10

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economists, and whether these adequately capture the range of impacts that arise under specific economic structures or follow specific economic policy prescriptions. These issues are central to some of the criticisms of economics following the 2008 financial crisis,13 and, as we will see below, in the area of most importance to regulating markets: competition policy. In his work, Polanyi took particular issue with two conceptual aspects of economic theory which, he argued, collectively sustained the view that the economic system can be divorced from the social sphere. The first conceptual issue concerned a tendency to over abstraction, and in particular, the illusory distinction between real and fictitious commodities in economic theory; the so-called ‘commodity fiction’.14 He argued that the economic theory underpinning market liberalisation was wrong insofar as it considered land, labour and money to be capable of being bought and sold in a market as if they were ‘real’ commodities.15 The consequences of such an error were, in Polanyi’s view, likely to be nothing short of catastrophic.16 Polanyi’s second conceptual concern was with what he termed the tendency toward a ‘zoological determinism’ in the methods of economic theory. This involved the casting of the motivations of individuals in terms of the ‘natural’ laws, or tendencies, associated with the animal kingdom.17 As Polanyi notes: ‘[E]ssentially economic society was founded on the grim realities of nature … the laws of a competitive society were put under the sanction of the jungle.’18 On closer inspection, Polanyi’s argument is not so much that the early economists were not concerned with social and human aspects of economic policy,19 but rather that the particular methodological characterisation of social systems and human behaviour was inappropriate. In particular, Polanyi challenged Smith’s conception of the economic psychology of ‘early man’ and the claim that throughout history, and across societies, ‘man’ had a natural propensity to barter, truck and exchange one thing for another.

13 See, in particular, J Cassidy, How Markets Fail: The Logic of Economic Calamities (Farrar, Straus and Giroux, 2009) which draws a distinction similar to Polanyi between ‘Utopian economics’ and ‘reality-based economics’, the former of which is traced from Adam Smith’s conception of the Invisible Hand. Also, D Brooks, ‘The Failures of the Dismal Science and the Return of History’ International Herald Tribune (27 March 2010) 4. 14 Polanyi (n 2) 76. 15 ibid xxv. 16 ibid 76: ‘[T]o allow the market mechanism to be the sole director of the fate of human beings and their natural environment indeed, even of the amount and use of purchasing power, would result in the demolition of society. For the alleged commodity ‘labor power’ cannot not be shoved about, used indiscriminately or even left unused without affecting the individual who is the bearer of this commodity’. 17 ibid 119. 18 ibid 130. 19 A position that would be untenable to anyone familiar with the work of Adam Smith and other early political economists. See in particular A Smith, The Theory of Moral Sentiments (Oxford University Press, 1976) 9.

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Polanyi argued that, on his reading of history and social anthropology, personal ‘gain’ had not been a prominent behavioural motivation across time and that, as a general contention, ‘human passions, good or bad, are merely directed toward non-economic ends’.20 Most importantly, Polanyi argued that Smith’s mistaken characterisation of the psychology of early man had been enormously influential in the subsequent development of the notion of the economic man (or homo economicus) and of market liberalism. As described above, a central plank of Polanyi’s critique of liberal economic theory was that it employed a series of inappropriate and mistaken abstractions regarding the nature of human behaviour, psychology and motivation. Modern economics too is sometimes charged with employing ‘unreal’ assumptions about the nature and characteristics of human behaviour and interaction, although modern critiques of economic theory do not typically share Polanyi’s concern about a mischaracterisation of human motivation (ie: the importance of gain),21 but argue more generally that the economic method, by its nature, is forced to employ a series of highly simplified and abstract behavioural assumptions which are removed from the practicalities of day to day life of humans operating in a complex society. At heart, a criticism common to both Polanyi’s time and our own is that economic theory is too removed from the actions of ‘real’ human behaviour and motivations, and that it pays insufficient attention to distributional impacts. As discussed in the next section, this is important insofar as it relates directly to the appropriateness of using the conclusions of economic theory and models to address various forms of transnational risks, including, for example, risks associated with global concentrations of economic power.

A. Abstraction from the ‘Whole of Man’ Perspective With few exceptions, the dominant methodology of mainstream economics is to abstract from observed human and social behaviour and employ a series of idealised and artificial assumptions about rationality and human behaviour.22 The current practice of economics has, if anything, become even more removed from the observed behaviour of individuals and societies than in

20 Polanyi (n 2) 57. Polanyi goes so far as to claim that all economic systems up to the end of the feudalism in Western Europe were organised on the principles of reciprocity or redistribution, or householding. 21 Note, however, that behavioural economics has introduced other motivations for behaviour, such as altruism. 22 This concern about the over-abstraction was one noted by Polanyi, and indeed one of the strengths he saw in ‘Owenism’ was its appreciation of man as a whole.

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Polanyi’s time. In practice, this is the result of the use of various conceptual devices—such as behavioural assumptions regarding rationality—to assess the likelihood and effects of specific policies. The assumptions about human and social behaviour in mainstream economic theory are based on the characterisation of actors as a variant of ‘homo oeconomicus’ (the economic man alluded to by Polanyi). Homo oeconomicus is characterised in these economic models as a rational, self-interested utility maximiser, who has well defined preferences, and is involved in a complex maximisation problem. The use of ‘as-if ’ assumptions, which infer motives and intentions to economic agents, is another standard methodological tool in economics used to obtain more generalised predictions of behaviour. Milton Friedman first advocated the approach to allow for greater predictive potential, noting that: ‘the relevant question to ask about the “assumptions” of a theory is not whether they are descriptively “realistic”, for they never are, but whether they are sufficiently good approximations for the purpose in hand’.23 The limitations of this methodological approach have long been recognised by some economists, and in particular, concerns have been raised that such an approach results in the development of ‘pure’ economic theory; theory so disconnected from observation as to be of limited practical usefulness for ‘real world’ applications.24 Such disconnection has led some to argue that economics is not a ‘science’, but rather is better classified as a branch of applied mathematics.25 A perceived effect of this disconnection is

23 M Friedman, Essays in Positive Economics (University of Chicago Press, 1953) 14–15. Compare also F Machlup, Methodology of Economics and other Social Sciences (New York, Academic Press, Inc, 1978) 79. This approach of inferring behaviour rather than observing behaviour is, contrary to the methodological approach of other social sciences which more closely reflect the Verstehen doctrine, and refer to introspection and empathy as sources of knowledge and assumptions about behaviour. 24 Wassily Leontief in his 1971 Presidential Address to the American Economic Association submitted that ‘the consistently indifferent performance in practical applications is in fact a symptom of a fundamental imbalance in the present state of our discipline’; while Frank Hahn in his Presidential Address to the Econometric Society speaks of ‘something scandalous in the spectacle of so many people refining the analysis of economic states which they give no reason to suppose will ever, or have ever, come about’: W Leontief, ‘Theoretical Assumptions and Nonobserved Facts’ (1971) 61 The American Economic Review 1; FH Hahn ‘Some Adjustment Problems’ (1970) 38 Econometrica 1; Also EH Phelps Brown, ‘The Underdevelopment of Economics’ (1972) 82 The Economic Journal 1. 25 A Rosenberg, Economics: Mathematical Politics or Science of Diminishing Returns? (The University of Chicago Press, 1992) 311. Compare Maurice Allais who in his Nobel Prize lecture notes: ‘When neither the hypothesis nor the implications of the theory can be confronted with the real world, that theory is devoid of any scientific interest. Mere logical, even mathematical, deduction remains worthless in terms of an understanding of reality if it is not closely linked to that reality.… Any theory whatever, if it is not verified by empirical evidence, has no scientific value and should be rejected’: M Allais, ‘My Conception of Economic Science’ (1990) 2 Methodus 5.

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the creation of large gaps between ‘the level of sophistication of high theory and its naivety in application to the real world’.26 It is important, however, to recognise the obvious trade-off in economic work between analytical tractability and policy relevance. Many professional (academic) economists would argue that, as in other sciences, abstraction and simplification is a necessary requirement to allow for analytical tractability. That is, assumptions, although unreal, are conceptual devices to allow for theories to be developed and tested, which over time, and allowing for other parameters, may provide for useful insights. In this way, the parallel sometimes drawn is with the natural sciences where experiments undertaken in a particular simple environment are used to draw insights and conclusions about the expected effects in other, richer environments. In this respect, the problem of the abstract nature of economic methodology is arguably not so much with the nature of the assumptions and conceptual devices employed by economists in their own research, but whether the conclusions of this research can then be applied in contexts for which they were not intended or designed (ie: in the design of public policy) and, if so, what separate, additional, policy interventions may be required to address the specific impacts of economic prescriptions in real world contexts.27 As discussed in section VI below, in recent times, there has also been a greater professional focus in economics on the development of richer analytical frameworks, and on the refinement of the standard assumptions of homo oeconomicus with more complex assumptions based on psychological or sociological insights about observed patterns of behaviour. This can be seen, in particular, in the work of behavioural economists and neuroeconomists—both of whom have developed models that employ richer assumptions of human behaviour informed by the cognitive sciences.28 Such work is now becoming more mainstream, and the influence of this

26 HKH Woo, What’s Wrong with Formalization in Economics? (Newark, Victoria Press, 1986) 96. In a more recent article it was noted: ‘The study of the economy has not developed as have other sciences, in which direct observation and data collection by the scientists themselves play a large part. Most members of the economics profession study and create economic theory that is neither validated nor inspired by observation’: BR Bergmann, ‘The Current State of Economics Needs Lots of Work’ (2005) 600 The ANNALS of the American Academy of Political and Social Science 53. 27 In this respect, the increasing use of regulatory impact assessments are relevant not just for ascertaining which public policy to adopt, but also to highlight areas where separate interventions may be required, for example to address the impact of a particular public policy on certain groups, or another market. 28 Work in modern behavioural economics is often attributed to work by Amos Tversky and Daniel Kahneman, in particular see: D Kahneman and A Tversky, ‘Prospect Theory: An Analysis of Decision under Risk’ (1979) 47 Econometrica 263. See also: S DellaVigna, ‘Psychology and Economics: Evidence from the Field’ (2009) 47 Journal of Economic Literature 315. Recent work in Neuroeconomics is being undertaken by economists such as Ernest Fehr, see for example, PW Glimcher, C Camerer, R Poldrack and E Fehr, Neuroeconomics: Decision Making and the Brain (Academic Press, 2009).

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work can increasingly be seen in areas of public policy such as competition and consumer policy as well as in relation to regulation (including financial regulation).29

B. Accounting for Distributive and Other Impacts A related methodological criticism outlined by Polanyi in The Great Transformation was the limited attention economists typically afforded in their work to the systematic examination of issues of distribution, and in particular, to issues relating to the impacts of economic policies on different groups or individuals. At the time he was writing, Polanyi’s concern was that the work of the early economists paid insufficient attention to the social consequences of their doctrines, and in particular overlooked the fact that the ‘risks’ associated with the market economy were borne disproportionately by the poor.30 While there has been a steadily rising concern by some economists for assessing the distributional impacts of particular policies, and most economic policies in industrialised economies are now considered against the potential impacts on different sectors of society,31 it is fair to say that issues of equity or fairness are still not a central analytical aspect of the work of professional mainstream economists. This is not because fairness and equity concerns are not seen as potentially legitimate issues, but rather that the expertise to address them is perceived to lie outside the professional sphere of the economist. The traditional view is that economics is not equipped, and does not have the conceptual apparatus, to deal satisfactorily with such ethical issues. In the eighteenth and nineteenth century, for example, it was common for economists to decline to enter into overt discussions relating to income distribution, or the distributional impacts of specific policies.32 In the twentieth

29 The newly established Financial Conduct Authority in the UK has, for example, noted ‘behavioural economics enables regulators to intervene in markets more effectively, and in new ways, to counter such business models and secure better outcomes for consumers.’ See Financial Conduct Authority, ‘Applying Behavioural Economics at the Financial Conduct Authority’ (2013) Occasional Paper No 1, 3. 30 While Polanyi saw a consideration of redistribution as being an important factor associated with the enmeshing of the economic system in social relationships, he recognised that redistribution can involve a measure of exploitation as in feudalism, where the pattern of redistribution is ‘determined by the Lord, the despot or the priest’. Polanyi (n 2) 54–55. 31 Although the processes for the introduction of new policies vary across jurisdictions, a common high-level objective is to introduce ‘evidence-based’ policy making by requiring that the potential economic, social and environmental impacts of proposed regulations be examined. See, for example, European Commission ‘Better Regulation and Enhanced Impact Assessment’, Information note from the President to the Commission (Brussels, 19 June 2007). Also, European Commission, ‘Impact Assessment Guidelines’ (2008) 35. 32 George Stigler refers to it as ‘the rule of near silence on the redistribution of income’. GJ Stigler, ‘The Economist as Preacher’ Centre for the Study of the Economy and the State Working Paper Series, Working Paper no 011, University of Chicago, April 1980, 16.

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century, mainstream economic analysis supported its detachment from issues of equity or distribution on the basis of the notion of the Wertfreiheit scientific method.33 One economist neatly summarises the reasons for the economist’s reluctance to enter into matters of justice or equity: First, we are suspicious of the search for configurations that claim to be the uniquely just solution. Second, we are afraid that an evaluation of equity forces the economist to inject his own value judgments into the analysis, rather than using as the standard of evaluation the preferences of persons affected—as we do in our analysis of resource allocation. Third, we seem to have no effective analytic machinery capable of yielding illuminating results about equity like those that the theory of allocation has provided us.34

This general reluctance of economists to attempt to incorporate equity or distributional effects in their analysis has important implications for the way in which economic research should be received and interpreted in responding to social issues, including, as will be discussed in the next section, transnational risks.

V. TRANSNATIONAL RISKS ASSOCIATED WITH CONCENTRATION OF ECONOMIC POWER

In the previous sections, we noted that Polanyi’s critique of liberal economic theory and its conceptual reasoning could be characterised as being methodological in nature, and we briefly considered the contemporary relevance of this critique at a general level. In this section we consider aspects of the critique in the particular context of the ability of economics to provide an appropriate method for responding to transnational risks, and, in particular the risk of exploitation of global concentrations of market power, through its influence on competition policy. Competition policy is a fundamental area of government intervention into the market. It sets out the competitive rules for the market economy, and therefore limits the scope for the unfettered operation of the market.

33 Loosely speaking, this refers to the doctrine of ‘value free’ research and analysis in economics, and the social sciences more generally. See IM Kirzner, ‘Philosophical and Ethical Implications of Austrian Economics’ in EG Dolan (ed), The Foundations of Modern Austrian Economics (Kansas City, Sheed and Ward, 1976). 34 W Baumol, Superfairness: Applications and Theory (MIT Press, 1986) 1. Although the same author goes on to note that this is a serious methodological limitation of economics, noting: ‘I … believe that applied microeconomists will have to devote more attention to fairness analysis than they have in the past because without the ability to make some well-founded comments on the relevant fairness considerations it will remain difficult for them to persuade others of the virtues of their recommendations relating to economic efficiency, and because fairness is the area in which advice is often most urgently desired by policy makers and the general public. Without such work, those who seek the help of microeconomists are likely to continue to feel that they have asked for bread and we have given them only stone’ (page 14).

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The potential for exploitation of global concentrations of economic power represent a substantive current concern. The risks of such for society are manifold, and can involve: inflated prices; reduced availability of products and choice; lower levels of quality and service; and limited incentives for firms to innovate to develop new products and services. There are many ways in which positions of market power can be exploited including via conduct by a dominant supplier of a product aimed at squeezing competitors out of a market, or via agreements between ostensibly competing companies to coordinate their behaviour to the detriment of consumers. As will be discussed, the work of economists plays a substantive, and influential, part in responding to this risk. This influence arises in a number of ways. Firstly, competition policy norms and enforcement practices across many jurisdictions are heavily influenced by a corpus of economic theory and concepts. Secondly, the risk of transnational exploitation of economic power has led to the development of a number of multilateral institutional arrangements, and the work of such institutions is substantively influenced by economists and economic research. Thirdly, informal initiatives have developed in response to the risk, principally a process of ‘competition advocacy’, which has involved the exportation of competition policies based on particular economic models and theory around the world. Accordingly, this area is one in which we can explore the potential methodological merits and deficiencies of economics in satisfactorily responding to one particular transnational risk.

A. Role of Economic Theory in the Development of Competition Policy In most jurisdictions around the world, the substantive development of competition law norms has generally occurred as a result of interpretation by the Courts and the relevant enforcement agencies of relevant statutory provisions. Economic theory plays an important role in this process of interpretation.35 Firstly, economic theory is seen to address the generality of the laws by providing a ‘vision’, or a high-level framework, for interpreting the statutory provisions relating to competition.36 In particular, economic theory is seen to provide a system of meaning for the wording of the relevant laws.37

35 On the more general role of economics in competition law, see C Decker, Economics and the Enforcement of European Competition Law (Edward Elgar, 2009). 36 A former Chairman of the Federal Trade Commission in the USA has noted that the ‘power of economics’ in US Antitrust has been described as its ability to provide ‘visions of the world’ through its theories: TJ Muris, ‘Economics and Antitrust’ (1997) 5 George Mason Law Review 303. 37 Compare Yeung who identifies a role for economists as ‘interpreters’ of statutes, who use economic theory to elucidate, and provide meaning to, the concepts embodied in statute in Australian competition law: K Yeung, ‘The Court-Room Economist in Australian Antitrust Litigation: An Underutilised Resource?’ (1992) 20 Australian Business Law Review 470–72.

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Secondly, economic theory presents an analytical ‘frame’ for an investigation. It tells practitioners what to look at in the investigation, by presenting a ‘theory’, and specific predictions, of what competitive outcomes might emerge from specific types of economic behaviour (ie: different types of agreements among competitors), or in particular industrial structures (ie: highly concentrated structures). It also provides a set of concepts and a terminology that allows for the identification and collection of economic facts. Thirdly, economics presents a method, or an approach, upon which an investigation can be structured—it gives practitioners a programme for how to analyse information relevant to an investigation. That is, it brings conceptual and descriptive tools to the process of enforcement.

B. Institutions and Networks to Address Concentrations of Transnational Economic Power Societal concerns about the concentration of economic or market power in a small number of individuals or organisations is an ancient one, dating back to the time of Aristotle who condemned monopoly on the basis that it resulted in prices that were ‘unjust’.38 Concerns about the risks associated with monopoly power, or tight oligopoly, continued to feature in the writings of economists and social commentators, including Saint Thomas More in 1516, John Stuart Mill and, of course, Adam Smith.39 In this sense, the risks associated with concentrations of economic power (in terms of excessive prices, productive and allocative inefficiency, limited incentives to innovate, all of which can reduce economic welfare) are not new. However, concern about the potential for global economic power to be exploited is generally a contemporary one.40 It is almost trite to say that the global economy is more interdependent now than it was in the past. In part, this is a result of advances in information and communications technology. However, changes in regulatory arrangements surrounding cross-border transactions and the movement of

38

JA Schumpeter, History of Economic Analysis (London, Routledge, 1954) 61. Polanyi mentions monopoly at a number of points in The Great Transformation. However, he appears to look upon this market structure favourably. For example, at page 70, he argues in favour of monopoly because of concerns about unregulated competition and ‘the interloper who scooped the market but offered no guarantee of permanency’. Similarly, at page 44 when discussing the perils of competition and the market economy, he notes: ‘But the most startling peculiarity of the system lies in the fact that once it is established, it must be allowed to function without outside interference. Profits are no more guaranteed, and the merchant must make his profits on the market. Prices must be able to regulate themselves. Such a self-regulating system of markets is what we mean by a market economy’. 40 While past concerns had been limited to the effects of such power on specific townships, or perhaps regional national markets—with the notable exceptions of companies such as the East India Company—in recent times these concerns have taken on a transnational dimension. 39

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capital (including human capital) are also undoubtedly contributing factors. These factors have combined to facilitate greater numbers of large transnational transactions, including cross-border mergers and international licensing arrangements, with the result that most multi-national companies now have operations that involve a range of products and span many countries across the globe. Accompanying the increasing interdependence of the global economy have been concerns that economic power will become concentrated in a small number of firms that operate globally, and are therefore not adequately regulated by the competition laws of any one jurisdiction.41 To address these transnational risks in a systematic way, there have been a number of institutional developments.42 In particular, there has been the emergence of multi-national fora for the discussion and development of enforcement approaches in competition law. The International Competition Network (ICN) was established in 2001 for exactly that purpose. Likewise, the European Competition Network—which is designed to improve coordination and consistency in enforcement approaches across the European Community—was established in 2004. Finally, organisations such as the Organisation for Economic Co-operation and Development (OECD) and the World Trade Organization (WTO) have played a prominent role in the setting out of policy principles for the design and enforcement of competition laws in member countries. In Polanyi’s terms, all of these institutions might represent examples of a form of planned global economic cooperation, albeit ones which exist within a context of competitive markets. These transnational forums present a mechanism by which transnational norms and standards are developed, largely on the basis of a common corpus of economic theory and research.43 41 See in this respect, D Gerber, Global Competition: Law, Markets and Globalization (Oxford University Press, 2010), who notes: ‘Global competition now shapes economies and societies in ways unimaginable only a few years ago, and competition (or “antitrust”) law is a key component of the legal framework for global competition.’ 42 Increasing transnational activity among industry is seen to require an increasingly coordinated and consistent response to the potential for transnational risks by competition authorities in different countries. The desire for consistency in the application of competition laws has led to a great expansion in the number of countries that have a competition law regime, with the number of jurisdictions with competition laws estimated to now exceed 100 (including China and the Russian Federation). 43 The process by which an organisation such as the ICN operates is through the development of a series of benchmarking exercises of ‘best-practices’. Its focus is to facilitate cooperation and to work towards ‘consensus rules, principles, methodologies and procedures’. The process by which organisations such as the OECD Competition Committee influence policy is somewhat different, in that it is not so much a network as a forum of senior representatives of competition authorities in OECD countries who come together to make policy recommendations. The OECD Competition Council has adopted a number of non-binding recommendations on competition law and policy. In addition, the Competition Committee publishes papers highlighting ‘best practices’. As the OECD Competition Council recognises these documents are ‘often catalysts for major change by governments’. See generally, EM Fox, ‘Linked-In: Antitrust and the Virtues of a Virtual Network’ New York University Center for Law, Economics and Organization, Working Paper No 09–27, July 2009, 160.

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While the structures, membership and processes of the multilateral institutions differ, a unifying aspect of these organisations is that a substantial component of their work and recommendations draws upon research undertaken by academic economists. The OECD competition policy council, for example, is supported by a competition division which comprises professional economists. In many cases, members of this division, or external academics, are tasked with drawing up briefing and background papers which identify and discuss the key issues on a particular topic. The ICN operates slightly differently, and comprises a number of trans-jurisdictional working groups on specific topics. However, a review of working papers and documents setting out recommended practices in areas such as mergers and agreements between firms clearly indicate that the positions have been influenced by mainstream thinking in industrial economics. In short, the work of these transnational institutions represents one way in which the transnational risks associated with global economic power are being addressed. In the work of these institutions, economic research and scholarship performs an important role in the development of transnational norms which are diffused through institutional channels to a very large number of jurisdictions.44

C. Competition Advocacy Alongside the institutions that are tasked with producing reports and guidelines setting out consistent norms to address the transnational risks of economic power, there are other, more subtle, initiatives that influence the development of norms to address these risks across jurisdictions. Loosely speaking, these initiatives can be described as ‘competition advocacy’. Such competition advocacy generally involves initiatives by competition authorities from major industrialised countries aimed at promoting the development of norms consistent with their own competition policies. Importantly for this discussion, the competition policies that are typically the subject of such advocacy and exportation have generally been derived from particular economic models and theories. Antitrust authorities in the United States have, in particular, seen it as their role at various points to act almost as ‘competition evangelists’, travelling the world and trying to influence the development and enforcement of competition law in specific ways. The enforcement of laws relating to cartel behaviour provides a prominent example.45 Competition evangelism 44

Such transnational norms are, in this way, often becoming national norms. The introduction of criminal sanctions in countries such as the UK and Australia is a good example of how US antitrust policy in respect of cartels has influenced enforcement activity in a number of countries. 45

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is not, however, limited to the United States and there is often an element of regulatory competition among the major agencies to be seen to be the most vigorous in terms of enforcement. It has been noted, for example, that the jurisdiction with the most intervention-minded policy generally has the power to set the global norm or standard in a particular area, which gives it both greater influence and more recognition.46 In response to the 2008 financial crisis, the issue of competition advocacy has taken on a new urgency for many competition authorities, and at the global level.47 In particular, many competition authorities now see part of their function as making a strong case for what competitive markets can deliver—both in political circles and by seeking to influence public opinion. This is, in part, because of a perceived risk that the 2008 financial crisis will be interpreted as a failure of the market and the competitive process, rather than a failure of regulation.48 In sum, the discourse of economics, and in particular, the economic theory underlying competition policy, is substantively influencing responses to the risk of transnational concentrations of power both through multi-national standard setting institutions and through informal channels of competition advocacy. The question therefore arises as to the extent to which economics can satisfactorily respond to these risks, having regard, in particular, to the methodological issues discussed earlier in this chapter.

VI. THE ABILITY OF ECONOMICS TO ADDRESS THE TRANSNATIONAL RISKS ASSOCIATED WITH CONCENTRATION OF ECONOMIC POWER

As discussed earlier, Polanyi had a number of conceptual concerns regarding the liberal economic methodology which, he argued, divorced the economic system from the social sphere. Two of these methodological issues, identified 46 See W Kovacic, ‘Competition Policy in the European Union and the United States: Convergence of Divergence?’ (Presentation to Bates White Fifth Annual Antitrust Conference, 2 June 2008). 47 See M Monti, ‘Competition Authorities of the World Unite’ (Address to the American Antitrust Institute Conference, 18 June 2009) 4. 48 A former chief economist of the Antitrust Division, a distinguished economist in his own right, has noted: ‘In this regard, it seems clear to me that the crisis in the financial sector primarily reflects a failure of government regulation, not any underlying failure in the ability of well-regulated competitive markets to serve consumers and promote economic growth.… Nor does the current crisis call into question the basic utility of neoclassical microeconomics for understanding how firms behave and how markets perform. In particular, notwithstanding great advances in the field of behavioral economics, I have seen nothing in the past year that would cause me to depart from the tried and true working assumption in antitrust economics that for-profit firms generally seek to maximize profits and that this quest usually benefits the public in a myriad of ways. Adam Smith’s teaching in this respect remains as valid as ever.’ See C Shapiro, ‘Competition Policy in Distressed Industries’ (Remarks as Prepared For Delivery to ABA Antitrust Symposium: Competition as Public Policy, 13 May 2009) 1–3.

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earlier, may impact on the ability of economics to satisfactorily address the transnational risks associated with the exploitation of global economic and market power: (1) the assumptions regarding human and firm behaviour adopted in mainstream competition policy (which may be incorporated into multilateral standards or exported through competition advocacy); and (2) the limited consideration given in economics to the distributive and social impacts of different policies.

A. The Assumptions of Rationality and Information In the general discussion above, it was noted that one criticism of economic methodology is that it is removed from the observed behaviour of individuals and societies, and that it focusses too greatly on artificial assumptions about behaviour. This criticism is one that has been levelled, in particular, at the use of economics in competition policy, with specific claims that competition policy has incorporated unreal assumptions regarding the rationality of economic actors, and their ability to comprehend and make decisions. One economist has described the ‘agents’ used in the economic models that underpin some competition policies as: ‘bloodless, personalityless, passionless maximising machines’,49 while another has described the consumers modelled in neoclassical economics as ‘consumers without humanity’.50 The ‘rational agent’ assumption adopted in competition policy reflects the mainstream perspective adopted in teaching economics in business and policy schools and which has come to dominate much of economics as well as the conduct of much public policy.51 It is important, however, to consider precisely what rationality means in this context. As Joseph Stiglitz describes it, rationality means that people weigh the costs and benefits of each possibility. This assumption is based on the expectation that individuals and firms will act in a consistent manner, with a reasonably well-defined notion of what they like and what their objectives are, and with a reasonable understanding of how to attain those objectives.52

An alternative exposition of rational behaviour is that agents accumulate an ‘optimum amount of information’ and ‘maximise utility from a stable set of preferences’.53 49 M Shubik, ‘Game Theory, Law, and the Concept of Competition’ (1992) 60 U Cincinnati Law Review 291. 50 RH Coase, The Firm, the Market, and the Law (The University of Chicago Press, 1988) 3. 51 E Shafir, ‘A Behavioural Background for Economic Policy’ in Behavioural Economics and Public Policy: Roundtable Proceedings, Productivity Commission Working Paper, April 2008, 9. 52 J Stiglitz, Economics (Stanford University Press, 1993) 28–29. 53 G Becker, The Economic Approach to Human Behavior (University of Chicago Press, 1976) 14.

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In general then, the economic assumptions which underpin conventional industrial economic theory and mainstream competition policy typically do not recognise imperfections associated with human decision-making. Such assumptions also typically do not account for the differences in the psychological profile of individuals, or the fact that humans often operate in the context of bounded rationality with imperfect information and can display different levels of risk aversion. There is, however, increasing interest in competition policy discourse about the limitations of the conventional economic approach in this respect, and insights from behavioural economics are gaining influence. The behavioural economics literature focuses on circumstances where the behaviour of people is systematically subject to biases, inconsistencies and errors. For example, consumers can adopt inconsistent attitudes to risk, uncertainty, and discounting, that lead them to make imperfect decisions when making purchases or comparing alternative offers from firms. This inconsistency is seen to have various effects on the operation of competitive markets, including making consumers less ‘engaged’ with the market, which, in turn, can reduce the pressure placed on suppliers, and allow them to exploit various biases in consumer decision-making.54 A recent survey on behavioural economics sponsored by the UK Competition Authority concluded that, contrary to the established orthodoxy of economic theory, increasing competition may not always make consumers better off, and that, in specific circumstances, may make consumers worse off.55 The influence that this literature will have on standard economics is difficult to assess at this stage, and it is already clear that the acceptance of such assumptions is being seen by some as a re-casting of the old debate about the appropriate limits of markets.56 Nevertheless, as some commentators have noted, the 2008 financial crisis has precipitated greater interest in the methods and reasoning adopted by economists generally and this is likely to have implications in relation to competition policy.57 54 See, in this context, Office of Fair Trading, ‘Consumer Behavioural Biases in Competition: A Survey’ A Report by Steffen Huck, Jidong Zhou, and London Economics Charlotte Duke, OFT 1324, May 2011, which notes that ‘Consumer behavioural biases imply that consumers may not behave in the fully rational way that many economic models presume.’ See also the Financial Conduct Authority (n 29). 55 See Office of Fair Trading (n 54) 7. 56 See, for example, M Salinger, ‘Behavioral Economics, Consumer Protection, and Antitrust’ (2010) Competition Policy International. 57 A recent head of the US Federal Trade Commission noted in a recent speech: ‘One thing is clear to me: the orthodox and unvarnished Chicago School of economic theory is on life support, if it is not dead. Antitrust enforcement principles over the last forty plus years have been heavily influenced by this school of economic theory, which has its origins in, among others, Friedrich von Hayek’s and Milton Friedman’s views.… At a minimum we need to be more humble. We can’t make orthodox and unvarnished Chicago School of economics claims with the same authority. This does not necessarily mean that antitrust based on Chicago School economics is dead wrong. But the message needs to be fine-tuned. In terms of economic theory,

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B. Distributional and Social Impacts Polanyi’s second principal methodological criticism of economics is that it systematically eschews the examination of issues relating to distribution, or the impacts of economic policies on broader society. This is an important issue in the context of competition policy, and there are two aspects of this methodological issue that have particular contemporary relevance. The first concerns whether the goals, or objectives, of competition policy should be narrowly defined to focus only on competition, as mainstream economics would suggest, or whether such policy should consider and balance multiple objectives including wider policy objectives. The second issue concerns how the temporal aspects of distributive fairness are dealt with in competition policy. In particular, whether competition policy should seek to maximise the total welfare of society (ie, current and future consumers), or simply seek to improve the welfare of current consumers. i. Consideration of Other Policy Objectives aside from Competition Competition authorities across a number of jurisdictions are sometimes asked to consider, and balance, a range of diverse social and policy objectives in their decisions. The specific ‘other’ objectives that competition authorities are asked to fulfill vary from context to context, but have typically involved an extension of the remit of the authority to include objectives relating to distributional impacts, national development, strategic interests, broader economic stability and other community issues. In some cases, the requirements to take account of wider considerations are contained in the empowering statute for a competition authority. In Canada, for example, among the stated purposes of the Competition Act is to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian Economy. In South Africa, the preamble to the Competition Act 1998 notes that, because of the discriminatory laws and practices of the past, which resulted in excessive concentrations of ownership and control within the national economy, the Competition Act should: promote and maintain competition to promote employment, advance the social and economic welfare of South Africans, ensure that small and medium sized enterprises can participate in the economy, and promote a greater spread of ownership, particularly among historically disadvantaged persons.

we may need to move more towards what has been called “behavioral economics,” based on the facts about how individuals are behaving rather than on how Chicago School of economic theory would predict they will behave. This would require some adjustments in how we apply the antitrust laws.’ JT Rosch, ‘Implications of the Financial Meltdown for the FTC’ (Speech at the New York Bar Association Annual Dinner, 29 January 2009) 2, 7–8.

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Requirements to take account of other considerations can also arise in enforcement practice. For example, at different points, the UK Competition Commission has been asked to consider: wider public policy considerations (the groceries and home credit inquiries), national strategic interests (the Cadbury/Kraft merger and train rolling stocks), media policy, and the securing of the financial system (Lloyds/HBoS).58 The accommodation of wider social and policy objectives, alongside the more narrow objective of ‘the promotion of competition’, can raise a number of challenges for competition policy. First, the wider objectives are typically more general, and arguably more political, in nature. Second, the wider objectives tend to be focused on particular outcomes; this differs from the traditional competition-type objectives which are focused on fostering a competitive process. Finally, the number and diversity of objectives can create substantial challenges for competition authorities in making decisions without compromising one or another objective. In the view of some, such compromises can ultimately alter the character, and indeed undermine the original purpose, of the policy.59 Despite these concerns, it is arguably true that competition issues arise in an increasingly interdependent policy environment, and that it is almost impossible to consider issues, such as competition, in isolation from the effects it may bring in other areas of social activity. In this respect however the relevant debate has not been about whether the mainstream economic theory, which underpins competition policy, is adequately equipped to deal with multiple, and potentially competing, non-economic objectives (which it almost certainly isn’t) or how economics may be adapted in order to be able to deal with such, but rather how institutional responsibilities and powers are delineated to ensure that the wider social effects of competition policies (determined in accordance with economic principles) are dealt with by other public policies and institutions (for example, if there are concerns that a particular transnational merger will have adverse effects on

58 See PJ Freeman, ‘Supervision of Competitive and Regulatory Processes: The Role of Legal Frameworks–Robin Hood or Thomas Cromwell?’ (Speech presented at the conference on the role of competition in public policy, London, 8 March 2010) 4–6. 59 The OECD has highlighted some of the risks of the inclusion of multiple objectives in the remits of competition authorities: ‘The inclusion of multiple objectives, however, increases the risks of conflicts and inconsistent application of competition policy. The interests of different stakeholders may severely constrain the independence of competition policy authorities, lead to political intervention and compromise and adversely affect one of the major benefits of the competitive process, namely economic efficiency. In most cases the conflicts between economic efficiency and other policy objectives either are insignificant or can be balanced. Nevertheless, the rank and weights attached to the multiple objectives of competition policy remain largely ambiguous and need to be defined. This is necessary to ensure both business certainty and public accountability.’ See OECD, ‘Objectives of Competition Policy’ (2003) 5 Journal of Competition Law and Policy 8–9.

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domestic employment, this might be dealt with through employment and other policies rather than through competition policies). ii. The Welfare of Current or Future Consumers A second issue relates to how the temporal aspects of distributive fairness are dealt with in the economic theories that underpin competition policy. At a general level, Polanyi saw grave risks in such temporal issues not being satisfactorily addressed.60 He noted, in particular, that the institutional separation of the economic and political spheres can create perpetual ‘strains’ between short-term political and social needs and longer-term economic prescriptions.61 At core, this issue concerns the well recognised trade-off in economics between the short-term (or static) gains associated with particular economic policies, and the longer-term (or dynamic) gains associated with such policies. In competition policy, the trade-off often manifests itself through the assessment of the static and immediate gains associated with mandating low prices that always closely reflect underlying costs, and the longer-term (or dynamic) gains associated with allowing prices to (temporarily) deviate from underlying costs, which, in some settings, can encourage innovation and entry into the production of a service (ie, firms are incentivised to innovate and invest so as to capture the rewards of such actions). Competition authorities are therefore faced with a tension between delivering immediate benefits to consumers and local industry, while at the same time ensuring that the longer-term benefits of competition and the competitive process are preserved. A former head of the UK Competition Authority has described this tension in the following way: ‘There is a temptation to trade off competition benefits in the longer term (low prices and innovation) against what may be more appealing in the short term—keeping jobs “at home” and creating “big players” to survive the recession.’62 There is a related debate about whether consumers are adequately protected by competition policy in the sense that markets may be well-functioning from an economic perspective, but effects may differ between consumers. In particular, it is sometimes highlighted that, although there may be substantial competition for the supply of a particular service, all consumers do not benefit from such competition equally and to the same degree (for example, vulnerable groups). Again, however, the debate around this issue is typically not about altering the methodology of economics and what it prescribes for

60 In particular, he recognised the potential short-term effects of social dislocations when longer-term economic policy was being followed. See Polanyi (n 2) 224. 61 ibid 220, 228. 62 PJ Freeman, ‘Competition Advocacy in Time of Recession: The UK Competition Commission’s Approach’ (International Competition Forum, Warsaw, 15 April 2009) 4.

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well-functioning markets in competition policy, but rather, again, about providing for separate institutional and policy intervention in the form of appropriate consumer policy.63 That this debate has transnational significance is evidenced by the fact that the OECD Global Forum on Competition has had a dedicated section focusing on this particular issue.64 In this respect, it is arguable that, as competition policy converges across jurisdictions, other areas of policy will also need to come into alignment. In sum, the ability of economic theory and concepts to address the risks associated with transnational concentrations of economic power has, historically, been criticised on the basis of two aspects of its methodological approach: the strong assumptions made regarding human and firm behaviour, and the limited consideration given to any wider distributive and social impacts. While recent work in behavioural economics is gaining some influence in competition policy discourse, the orthodox view on questions of equity and the wider impacts of competition policy on different groups in society, is that these concerns are best served through separate policy interventions and not through competition policy.

VII. CONCLUSION

Economic knowledge, and ‘the economists perspective’ has long represented a particular method for conceiving of, and responding to, the risks associated with economic activity, including the regulation of national and transnational risks. It was the perceived adverse influence of this perspective on political and social affairs—particularly the vision of an autonomous, selfcorrecting market economy—that was challenged by Polanyi in The Great Transformation. Notwithstanding a renewed interest in the influence of the economist’s perspective on social and political affairs following the 2008 financial crisis, in the time since Polanyi published his work, the discourse in economics has largely moved in a new direction. There is now widespread acceptance among professional economists that some markets—particularly those with specific cost/demand conditions giving rise to a concentrated supply structure, such as natural monopolies, or those where there are significant

63 The general position of many economists is that well-functioning markets can provide sufficient consumer protection insofar as only firms which provide consumers with what they want can survive or prosper. On this basis it is argued that there is only a limited need for any additional government regulation to protect consumers. See, for example, the discussion in M Armstrong, ‘Interactions between Competition and Consumer Policy’ (2008) 4 Competition Policy International 100. 64 OECD, ‘Roundtable on the Economics of Competition and Consumer Policy, Seventh Global Forum on Competition, Introductory Note’ (2008), available online at www.oecd.org/ dataoecd/24/24/40094392.pdf [Accessed 15 November 2013].

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externalities—have limitations, and that in these circumstances, there is a proper role for government intervention and regulation. The question is no longer whether government should intervene, but rather the scope and nature of the intervention. In this chapter, Polanyi’s critique of economic thinking is characterised as being principally concerned with the methodology of economics; how economists view the world and investigate social phenomena. In this respect, it is noted that, although there is now a general acceptance in economic discourse of the importance of properly regulated markets in society, there remain a number of general methodological limitations in the way in which these markets are conceptualised and examined in economics. Specifically, some of Polanyi’s concerns regarding the use of simplified and highly abstract conceptual models and unreal assumptions about human behaviour persist to this day, as do concerns about the limited attention economists afford to issues relating to social distribution and impacts in their work. These issues also have relevance when considering the influence of the economists’ perspective on the identification and management of transnational risks. One area where these questions are currently arising is in the context of the influence of economics on competition policy in providing an appropriate response to the transnational risks associated with exploitation of global concentrations of market power. As has been discussed, the work of economists is currently influential in determining the public policies, and relevant legal norms, across many jurisdictions in relation to this risk. As the thinking and conceptual devices of mainstream economics are being carried into the transnational sphere (either through incorporation in multilateral standards or competition norms), the methodological limitations are carried with them. While discussions about developments in behavioural economics and the interaction between competition/consumer policy in the context of the transnational risk of excessive concentration of economic power may appear far removed from the concerns of Polanyi in The Great Transformation, the outcomes of these discussions are likely to have implications for the ability of the economists’ perspective to remain relevant and influential in the management of transnational risks. However, these discussions reflect precisely the shift that has occurred in the economic discourse since Polanyi’s time, where debates in economics are no longer focussed on being ‘for or against’ markets, but rather on more nuanced and complex questions about the design and implementation of regulatory policies that best address the potential limitations associated with an unconstrained market.

Part II

Harnessing the Capacity of a Social Sphere for Regulating Corporate Actors

4 Export Credit Agencies and Human Rights Abuses: Flux and Friction in Regulation FIONA HAINES AND SAMANTHA BALATON-CHRIMES

They just spoke to the important men and they signed an agreement. After that they came to the village and spoke with the people, but they’d already signed the document. So even though the communities complained, it was over, because [the men] had already signed it. Salome, woman affected by PNG LNG Pipeline1 The Export-Import Bank of the United States (Ex-Im Bank) has approved the largest financing transaction in its 75-year history—$3 billion to support U.S. exports for a liquefied natural gas (LNG) Project in Papua New Guinea. Workers at over 55 U.S. companies will provide goods and services for the Project. ExIm Bank announcement2 It was better in our old village […] Our fields and orchards were there. They are all gone now. Zekine, woman affected by Ilisu Dam, Turkey3

I. INTRODUCTION

T

HE NEGATIVE HUMAN rights impacts of transnational business activity, and the complicity of financing bodies in human rights harms, have attracted increasing regulatory attention in recent decades.

1 Cited in Jubilee Australia, Risky Business: Shining a Spotlight on Australia’s Export Credit Agency (Jubilee Australia, 2009) 27. 2 Cited in Jubilee Australia, Pipe Dreams: The PNG LNG Project and the Future Hopes of a Nation (Jubilee Australia 2013) 29. 3 Cited in Susanne Güsten, ‘Construction of Controversial Turkish Dam Continues’ New York Times (February 27, 2013) www.nytimes.com/2013/02/28/world/middleeast/constructionof-disputed-turkish-dam-continues.html?pagewanted=all&_r=0> accessed 20 May 2013.

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Significant sums of money are involved and are likely to increase as the contest over resources continues. Non-government organisations (NGOs) and social movements have appealed for greater protections for vulnerable workers and communities against common human rights abuses such as illegal or irregular land alienation, associated loss of livelihoods, labour rights abuses, and violations of indigenous rights. Yet, despite the increasing attention paid to these issues by not only civil society, but also development financing bodies, aid agencies, governments and corporations, effective control of and by financing bodies to enhance human rights protections in large-scale projects remains elusive. This chapter explores the regulatory environment surrounding one particularly unique kind of financing body: export credit agencies (ECAs). Most developed countries have an ECA whose role is to support risky overseas ventures for private sector businesses domiciled in their country, with the ultimate aim of contributing to home-country economic development. This nationalist orientation has led to some tension between capitalist and, to an extent, neoliberal objectives related to free-market capital accumulation, and nationalist objectives related to home country jobs and economic growth. Regulation of ECAs historically has focussed on managing this tension. More recently, a further area of regulation has emerged. In the provision of financial support for home-country businesses, ECAs find themselves implicated in serious negative consequences of overseas business activity, particularly human rights abuses and other forms of social disruption, environmental damage, and the accumulation of developing country debt. As a result, ECAs have more recently been enrolled in the regulation of human rights and environmental impacts of business activity they support overseas. This adds a third dimension to their regulatory environment and requires them taking the position of a regulator, rather than just being regulated. The UN Special Representative for Business and Human Rights, John Ruggie,4 has stated that: Home-governments, from the capital on down to embassies, are fully geared up to promote business abroad, but generally lack the capacity or interest to help companies address the fall-out generated by the very projects those governments support. There is something fundamentally wrong with this picture. And ECAs, as key enablers, need to play a role in correcting it.

Tensions between the economic and the social are, then, at the heart of ECAs. These institutions are involved in multiple, overlapping and sometimes competing regulatory networks with different objectives and different

4 John Ruggie, Engaging Export Credit Agencies in Respecting Human Rights (Remarks at OECD Export Credit Group’s ‘Common Approaches’ Meeting 2010).

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degrees of effectiveness, and as such are ripe for analysis. Further, Polanyi’s work seems eminently suited as a theoretical aide to begin such a task. However, traditional Polanyian notions of the double movement of embedding and disembedding of the economy in the social do not fully capture the nature of ECA regulation. Rather, the unique position of ECAs in the global economy and their conflicting mandates highlight the ways in which human rights and free market norms operate in sometimes ambiguous and contradictory ways. For this reason, we find more richness in a post-Polanyian perspective on the tension between ‘the economic and the social’ most particularly in the work of Holmes5 and Randles.6,7 In doing so, we see the ‘social’ and ‘economic’ as ideational tendencies rather than substantive material realms.8 This less binary approach to understanding the social and the economic allows us to analyse ECAs as occupying a multi-dimensional role as both regulated and regulator, in relation to multiple risk areas including finance, national interest of home countries, and human rights risks abroad. These roles are enacted through ECAs’ engagement in multiple, sometimes conflicting transnational regulatory networks.9 A networked regulation approach to interrogating ECA regulation further enables an analysis of the fluctuating differences in power and influence between the different networks engaged in regulating different risks. This approach goes further toward explaining how and why regulation of the human rights impacts of ECA-supported projects remains problematic. Our chapter begins with a brief outline of ECAs’ nature and function with a particular focus on the Export Finance and Insurance Corporation (EFIC), the Australian ECA.10 This section is followed by analysis of the emergence of ECAs, drawing out the context of regulation and two ways in which ‘re-embedding’ can be understood: as the imposition of a home country national benefit mandate, and as the less well-integrated imposition of

5 Christopher Holmes, ‘Problems and Opportunities in Polanyian Analysis Today’ (2012) 41 Economy and Society 468. 6 Sally Randles, ‘Issues for a Neo-Polanyian Research Agenda in Economic Sociology’ (2003) 13 International Review of Sociology 409. 7 While Holmes uses the term post-Polanyian, Randles prefers neo-Polanyian. We depart from Polanyi more than Randles, but nevertheless include her work here for its important insights. 8 Randles (n 6). Of course this does not mean that the ideational does not have material consequences, clearly it does through the medium of politically oriented activity as we explain below. 9 Scott Burris, Peter Drahos and Clifford Shearing, ‘Nodal Governance’ (2005) 30 Australian Journal of Legal Philosophy 30. 10 Our chapter is primarily based on analysis of existing academic literature, government inquiries and NGO reports as referenced in the chapter. It is supplemented by interviews and informal conversations with key informants within Australia and the UK: NGOs, EFIC, government and OECD officials and OECD members as well as observation of committee hearings associated with a governmental review of the UK ECA, UK Export Finance (UKEF) (previously the Export Credits Guarantee Department (ECGD)).

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responsibility for host country human rights risk management. We then go on to develop our critical post-Polanyian analysis using nodal governance11 theory. Finally, we outline four distinct ways in which ECA regulation exhibits the ambiguities, contradictions and flux developed in the theoretical analysis. We conclude with some brief comments about prospects for more effective protection of human rights in ECA-supported projects.

II. WHAT IS EXPORT FINANCE?

ECAs play a unique role in domestic and global economies, offering financial services to private corporations in order to promote exports and therefore domestic economic growth and job creation. As instruments of national economic policy, institutions of this kind have featured in international trade for nearly 80 years. The Export Import Bank of the United States (Ex-Im Bank) was created by President Franklin Roosevelt in 1934 to promote US trade in the midst of the Great Depression.12 Many other ECAs were developed from that time each with a mandate to promote national exports.13 As time went on, some ECAs have adopted an international development mandate, or second export finance-like organisations have been initiated for this purpose, such as the Overseas Private Investment Corporation (OPIC) in the United States.14 Today’s ECAs provide financial support to exporters domiciled in their country in a variety of ways, ranging from direct loans (credit) to various bonds, guarantees and insurance products that facilitate and reassure business of the viability of a particular commercial project. In this they are arguably more accurately understood as export finance providers, since their role extends beyond the provision of credit. ECAs exist in various legal configurations and institutional locations including departments within a ministry, separate government departments, independent government agencies, semi-public joint stock companies and private institutions operating under agreement with government.15 11

Burris, Drahos and Shearing (n 9). GC Hufbauer and RM Rodrigues (eds), The Ex-Im Bank in the 21st Century (Peterson Institute, 2001). 13 Edna Schöne-Alauf, Victoria Bittner and Pablo von Waldenfels, ‘Global Social and Environmental Standards for Officially Supported Export Credits’ (2011) 12 Zeitschrift fur Wirtschafts und Unternehmensethik 123; Scott Hickie, ‘The Export Credit Rennaisance: Challenges for Ecologically Sustainable Development in the Global Economic Crisis’(2009) 32 University of New South Wales Law Journal 587; Markus Knigge and others, The Use of Environmental and Social Criteria in Export Credit Agencies’ Practices: A Study of Export Credit Agencies’ Environmental Guidelines with Reference to the World Commission on Dams (eco-logic, 2003). 14 Development-mandated ECAs are not the central focus of this chapter, as their mandate raises a different series of questions regarding their regulation and human rights responsibilities, which is beyond the scope of this piece. 15 Knigge and others (n 13); Jubilee Australia, Risky Business (n 1); Hickie (n 13). 12

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ECAs provide support for exporters. Often exports are of goods or services (such as machinery or technical support) for large infrastructure or extractives projects such as dams, pipelines and mines, the kinds of projects that carry risks associated with political instability and host-country regulatory barriers that deter private financiers. ECAs also play an important role in providing financial support for the arms industry. Though it is notoriously difficult to obtain information about the use of ECA finances, particularly about arms as many ECAs exclude arms support from any transparency policies on the ground that it is a security matter, one estimate is that 30 per cent of ECA finance from European countries supports the arms trade.16 Australia’s export credit agency, EFIC, was established in 1957. EFIC has existed under a number of different statutory frameworks, but it now exists as a statutory corporation and a separate legal entity from executive government.17 EFIC operates two separate accounts: the Commercial Account and the National Interest Account. The Commercial Account is under the control of EFIC both in terms of its operations and administration. Whilst it is underpinned by government in the form of access to consolidated revenue (specifically a callable credit facility from consolidated revenue), it returns a dividend to government based on the profits it accrues from its investments.18 The National Interest Account is administered by EFIC but the investments made in this account are under the control of the Minister for Trade. Money and guarantees drawn from this account are then freed from some of the commercial constraints that apply to commercial account transactions. This is justified because, in the view of the Minister for Trade and despite the risks involved, these projects are in the national interest and should be supported.19

III. ANTI-PROTECTION REGULATION AND THE ROLE OF THE OECD

To date, the tension of most concern to states has been around the role of ECAs as agents responsible for supporting domestic economic growth in an international free market dominated by neoliberal principles of minimal state interference. The history of ECAs shows their close ties to the provision of national security most particularly in the form of jobs. As seen above, the United States’ Ex-Im was an initiative in the wake of the

16 Trade European Network Against Arms Trade (ENAAT), European Export Credit Agencies and the Financing of Arms Trade (ENAAT, 2007). 17 Hickie (n 13). 18 ibid. 19 For this reason, the financial support given to projects drawing on the National Interest account is larger than would be permitted under the Commercial Account.

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Great Depression. The Norwegian ECA Eksportfinans ASA20 historically supported shipbuilding, a major employer in that country at that time. Promotion of domestic economic growth and the preservation of jobs were of critical importance. During the 1970s and, in particular following the first oil crisis in 1973, different countries’ ECAs began to compete with each other to promote their domestic corporations’ exports by providing finance on increasingly competitive terms. ECAs began taking on exaggerated risks, offering very low premiums and subsidised interest rates, and tying the provision of aid to parallel acceptance of private investment from their domestic corporations.21 ECA activity reflected a protectionist government policy. This raised concerns within a number of different countries that were becoming increasingly committed during this period to neoliberal principles of market competition as the primary driver of economic (and social) benefit. The relevant ministers of Germany, France, Italy, Japan, the United Kingdom and the United States began a discussion during the International Monetary Fund conference in Nairobi in 1973. Their discussions centred on two things. First was in-principle agreement about and concern with the distorting effects of ECA activity on the market. Second was concern about the increase in lending for exports to countries unable to pay their debt. ECA competition was inadvertently leading to a debt problem which was undesirable for both exporting and importing countries.22 In 1976 these discussions resulted in the Organisation for Economic Co-operation and Development (OECD) Arrangement on Officially Supported Export Credits (or OECD Consensus), a set of voluntary guidelines seeking to influence the nature and conditions of finance.23 These guidelines aimed to establish a level playing field between those ECAs that adopted them, thereby fostering ‘free trade’, albeit amongst a small group of countries, including Australia.24

IV. ENROLLING ECAS AS REGULATORS—THE RISE OF HUMAN RIGHTS CONCERNS IN HOST COUNTRIES

Over the 1980s and 1990s it became clear that ECAs, like the World Bank and other International Financial Institutions, had funded or acted as a guarantor in projects that resulted in serious human rights abuse in host countries. Because of this they have come under criticism by NGOs arguing that, as an important funding source for resource and/or infrastructure projects, ECAs can be seen as complicit in the social and environmental destruction such

20 21 22 23 24

Eksportfinans ASA has been superseded by Export Credit Norway. Schöne-Alauf, Bittner and von Waldenfels (n 13). ibid. ibid. ibid.

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projects can wreak on local communities. Some of the more controversial projects funded by ECAs include the Ilisu Dam in Turkey, the Baku-TblisiCeyhan Pipeline in Azerbaijan, Georgia and Turkey, and the Papua New Guinea LNG Pipeline. In these and other cases civil society organisations have expressed serious concern about a range of human rights violations, including in particular irregular or even illegal acquisition of land and subsequent displacement and loss of livelihoods, inadequate consultation with affected communities, violation of indigenous rights, and intimidation of affected communities by local authorities, corporate security forces, or others. Domestic and transnational civil society organisations25 have pushed for increased transparency in ECA dealings, and increased responsibility for ECAs to ensure human rights (and environmental) protections. In response to this pressure, the mid-1990s saw the emergence of regulation aimed at reducing the environmental and social impacts of ECAsupported exports. Within the OECD standards addressing these issues did not emerge until 2003 when the OECD Common Approaches, a set of guidelines around environmental and social standards, were agreed to by OECD members and applied to their respective ECAs.26 The Common Approaches have a suite of objectives that blend together concerns with a ‘global level playing field’ for officially supported export credits, an orientation towards sustainable development and coherence in the various policies and procedures ECAs adopt with respect to environmental and social standards. The basic process contained within the Common Approaches begins with screening and classification whereby projects are classified according to the environmental and social risk they pose. Category A projects pose significant adverse risks, Category B a medium level risk in terms of both impact and reversibility and Category C projects have minimal or no potentially adverse environmental and/or social impacts. Category C projects require no further action. Category A and B projects are subject to an environmental and social review with Category A projects requiring a detailed and extensive environmental and social impact assessment and development of a plan for mitigation measures. To comply with the Common Approaches, most OECD ECAs require that clients adhere to the IFC Performance Standards, the World Bank Group’s main form of social and environmental regulation for private financing. ECAs typically review all assessments associated with Category A

25 Including a consortium of European NGOs called ECA-Watch and a consortium of British NGOs called Clean Up Britain’s Exports (CUBE), Jubilee Australia and Oxfam Australia. 26 The Common Approaches began as a draft recommendation in 2003 that were entitled the ‘Draft Recommendations on Common Approaches to Environment and Officially Supported Credits’. These recommendations were updated in 2005 and 2007. They were renamed and extended in 2012 and were entitled ‘Recommendations of the Council on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence’.

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and sometimes B projects for compliance with these standards. The IFC Performance Standards comprise eight separate standards covering: environmental and social risks and impacts; labour and working conditions; resource efficiency and pollution prevention; community health, safety, and security; land acquisition and involuntary resettlement; biodiversity conservation and sustainable management of living natural resources; indigenous peoples and finally cultural heritage. Each standard sets out its objectives, scope and the requirements to be met to meet those objectives. A range of documentation is available to assist both credit agencies and companies develop policies and practices to meet each of the performance standards. With the Common Approaches (and more specifically the IFC Performance Standards), the role of the ECA shifts. ECAs move from being the subject of regulation to the body responsible for its implementation. As such, ECA activity in this area fulfils Julia Black’s27 definition of regulation—namely the agency’s activity attempts to reduce an unwanted risk, through action that is intended and purposeful with a particular instrumental goal in mind. ECAs are part of a network of actors that administer a soft law regime with control techniques that involve audit and monitoring across a range of social and environmental issues with an ultimate available sanction: removal of their finance or insurance cover.

V. POLANYI AND HUMAN RIGHTS REGULATION IN THE CONTEXT OF TRANSNATIONAL FINANCE

The challenge, then, is how to understand the complex and transnational regulatory context of ECAs. The role of ECAs as regulators of human rights raises particular concerns that can be, to a degree, helpfully assessed by drawing on Polanyi’s thesis that economic processes become disembedded and then re-embedded in the social sphere. However, a deep analysis requires more nuance than a simple understanding of the double movement can offer. The international and trade focus of ECAs means that ideas around networked and, in particular, nodal governance provide critical additional analytical leverage. This literature is specifically focussed on international regulatory and governance regimes where not only the influence of governments, but also that of international institutions and NGOs (amongst others) requires consideration in understanding the impact and effectiveness of regulatory efforts. Further, nodal governance28 can be used to extend

27 Julia Black, ‘Critical Reflections on Regulation’ (2002) 27 Australian Journal of Legal Philosophy 1. 28 Burris, Drahos and Shearing (n 9).

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and problematise key Polanyian29 terms whilst retaining his key insights. It provides a coherent way to focus attention on the political nature of embedding practices as they relate to export finance. Nodal governance terms key actors that influence regulatory outcomes as nodes, where nodes are positioned within a network of other nodes that collectively exert control over risks. It is through this network that a node can exert influence to achieve identifiable outcomes. The implications of this are that any disembedding or re-embedding processes are likely to take place through a network of actors, not through the influence of a single institutional actor or node. Nodal governance theory elucidates particular characteristics of nodes, including: the availability and use of particular methods or strategies of control; the importance of institutional as well as material resources; and, finally, a mentality of governance that characterises that node.30 Each of these attributes individually and collectively, and the relations between nodes in various networks, are useful analytical tools. Both can be used to explore nuance in how we understand the economic and the social whilst also providing a vehicle to broaden the analysis of transnational human rights risk regulation. In terms of ECAs, nodal governance theory has particular resonance for our analysis. It can bring into focus the methods available to a node like an ECA that can be employed in order to further a particular outcome consistent with its governance mentality. Nodal governance also highlights the importance of access to resources. An important consideration for regulatory analysis is assessment of the material and immaterial resources available to an ECA as a governmental institution, including how its institutional position (that includes its relationship to government) assists or undermines ECAs’ latest role as a ‘regulator’ of transnational businesses. Our central concern in this chapter, however, is to interrogate the mentalities of governance of the particular node in question, namely the ECA. That is, our aim here is to reflect on how the ECA as a node understands its own role, and how this fits within the aims of the various networks, including particularly that which is concerned to regulate human rights risks. When combined with a post-Polanyian perspective such a theorisation of ECA regulation becomes quite illuminating. Polanyi’s categories of the economic and the social have been significantly advanced in conceptual terms since the publication of Polanyi’s original work. A post-Polanyian perspective highlights two particular advancements of ideas of ‘economic’ and ‘social’: that they are not spheres, but rather ideational tendencies; and

29 Karl Polanyi, The Great Transformation: The Political and Economic Origins of our Time: Forward by Joseph Stiglitz and Introduction by Fred Block (Boston, MA, Beacon Press, 2001). 30 Burris, Drahos and Shearing (n 9) 37–38.

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that they do not have any necessary moral quality, but can both have more or less ‘progressive’ moral content. Holmes31 states: … Understanding the embeddedness/disembeddedness dualism as ideational rather than material might therefore lay the foundations for new strains of distinctively Polanyian scholarship while leaving behind the contradictions of the concepts as Polanyi himself deployed them.

This understanding of the ‘social’ and ‘economic’ as competing perspectives or orientations which influence processes of exchange, accumulation and distribution enables a more sophisticated understanding of ‘embedding’ and ‘disembedding’. It allows the relationship between the social and the economic to be multiple not singular,32 and thus the influence of one on the other need not be unidirectional and fixed. This understanding resonates with ‘mentalities of governance’ as a feature of nodes in networked regulation theory, where nodes can be oriented towards or away from more ‘social’ goals, rather than fixated on a singular, regulatory goal that can be classified as either clearly social or clearly economic. Further, an exploration of mentalities and general societal tendencies allows us to look beyond an a priori categorisation of either the social or the economic as inherently desirable or moral. As Holmes33 states, it is more helpful for analytical purposes to think of ‘…marketization and social protection as general societal tendencies without any intrinsic institutional or moral content’. Both economic-oriented and social-oriented mentalities or tendencies can be interpreted and judged in multiple ways, depending on their context, their nature, and the person making the judgment and any ideology that person may adhere to. An analysis of processes of embedding and disembedding that can shed a commitment to an inevitable historical trajectory is better equipped to identify the political nature of various mentalities and tendencies, and then to make an argument for, rather than to assume, the positive or negative moral quality of those tendencies and their outcomes.34 It is this approach we take in this chapter. This orientation brings the politics of the relationship between the social and economic into sharper focus than a traditional Polanyian reading allows. Intentional political action is strangely precluded if we take up a traditional Polanyian view.35 Randles36 notes: … we are presented [in Polanyi’s work] with strangely a-political worlds, depleted of competitive struggle, or struggle over economic resources, or devoid of strategies of subjugation or intentional or unintentional strategic social stratification. 31

Holmes (n 5) 482. Randles (n 6). 33 Holmes (n 5) 482. 34 Discussion of an overarching historical trajectory is important, but beyond what is possible to address in this chapter. 35 Yet, as Holmes points out, Polanyi’s work is inherently political–it is just that the implications of political struggle are not spelled out. 36 Randles (n 6) 423. 32

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An analysis of the role of ECAs in the regulation of human rights risk requires a recovery of the political nature of the processes Polanyi describes, processes inherently characterised by political struggle of the socio-political and institutional kinds. In one sense, seemingly the sense Polanyi preferred, these struggles can be understood as social insofar as they relate to the way in which we normatively organise ourselves as communities, as essentially social beings destined to live in groups. Yet, these struggles are more than simply social, precisely because they are struggles. They are not necessarily about consensus and agreed upon norms, but about battles. Contests take place between individuals, and within and between groups, over what norms are most appropriate for us, and in this case, what norms are most appropriate for framing, constraining and perhaps re-orientating business. We use the term ‘socio-political’ to capture both the contested nature of social norms, and the intrinsic connection between these contests and our social, collective nature as human beings. In the context of evaluating regulation, our attention is drawn to the institutionalisation of social norms, and therefore also to what we call the institutional-political, that is, the struggles within (and between) institutions to exert influence and maintain their own existence. Perhaps the primary struggle in the battle to develop and sustain influence is the struggle for legitimacy. Legitimacy—or in this case political legitimacy— can be understood as an elusive characteristic of an institution that inspires confidence and belief in that institution among those over whom it aspires to have influence. Maintaining institutional legitimacy rests on managing competing demands, most particularly those around the need for financial solvency (accumulation) together with measures aimed at resonating with the concerns of key audiences37 in order to ensure their ongoing loyalty to that institution.38 Institutional mentalities of governance centre on the necessary management of these demands. The achievement of legitimacy in this way enables the institution to sustain its own existence, and garner the loyalty of citizens or other subjects (such as corporations) to support the institution and adhere to its associated laws, policies and/or practices. Regulatory nodes must, therefore, manage the tensions between two kinds of politics that can sometimes compete with each other or, at least, are not always complementary. On the one hand, nodes typically hold some

37 In the case of governments this would be the voting public, in the case of companies this would be a range of actors: workers, regulators, residence in the neighbourhood where the factory is located and so on. The institutional or organisational need for loyalty is patterned by whose support and loyalty needs cultivation to ensure ongoing survival of the institution. 38 Fiona Haines, The Paradox of Regulation: What Regulation Can Achieve and What it Cannot (Edward Elgar, 2011); Jurgen Habermas, ‘What Does a Crisis Mean Today? Legitimation Problems in Late Capitalism’ in Steven Seidman (ed), Jurgen Habermas on Society and Politics: A Reader (Beacon Press, 1989).

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kind of socio-political vision, aiming to entrench particular social norms. On the other hand, they are faced with the institutional-political challenge of having to ensure their legitimacy and ongoing existence—a task that can sometimes detract from, or at least have little relationship with, that institution’s socio-political vision. The strength of the imperative to retain political legitimacy is reflected in regulatory scholarship that reveals how regulatory actors can retain legitimacy without demonstrable impact with respect to their explicit regulatory remit.39 Indeed, the incorporation of particular methods or strategies (such as a novel form of penalty, adoption of particular standards or implementation of a new form of audit tool) may be part of the process of shoring up legitimacy, a demonstration of ‘modernisation’ or a response to criticism,40 rather than an effort to, in this case, improve human rights outcomes on the ground. In the case of ECAs, the socio-political and institutional-political nature of the regulatory networks in which they are, as nodes, caught up are particularly complex and contradictory. Their traditional role as financier regulated by norms around fair competition is now in tension with their growing role as regulator of human rights risks in business. Given these competing goals, the regulatory regimes in which ECAs are involved may, then, not be set up for their instrumental effect (in this case on human rights problems for affected communities) but to allow other institutional practices to proceed (in this case provision of finance and insurance for exporters). In this regulatory terrain, there is a need to unpack the ways in which institutional-political effort by ECAs may compromise their capacity to implement optimal policies designed to ensure the reduction of human rights risk. It is this challenge that we explore in what follows, where the role played by civil society in highlighting the damage wrought by transnational corporations and the need for greater responsibility is weighed against the pressure on ECAs to enhance economic growth and development.

VI. POLITICAL STRUGGLES OVER SOCIAL AND ECONOMIC TENDENCIES IN ECA AND HUMAN RIGHTS REGULATION

Our analysis above reveals ECAs as regulated and regulators exhibiting contradictory and ambiguous efforts at embedding and disembedding economic activity from and in social norms. Arguably, we do not witness a ‘double movement’. Rather, the imposition of social norms on economic activity is 39 Haines, ibid; Mark Suchman, ‘Managing Legitimacy: Strategic and Institutional Approaches’ (1995) 20 Academy of Management Review 571. 40 Walter W Powell and Paul J DiMaggio (eds), The New Institutionalism in Organizational Analysis (University of Chicago Press, 1991); John W Meyer and Brian Rowan, ‘Institutional Organizations: Formal Structure as Myth and Ceremony’ (1977) 83 American Journal of Sociology 340.

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far less binary and politics (both socio-political and institutional-political) plays a far greater role that deserves explicit attention. Below we outline four distinct ways in which the intersection of the social and economic in ECA regulation is nuanced.

A. Disembedding of ECA Regulation? Or Different Forms of Embeddedness? The obvious reading of ECA resistance to adopting a role of human rights regulator, and corporate resistance to human rights standards emanating from ECAs, is to see that resistance as part of a broader effort to disembed financial activity from social norms. On this reading, ECAs and corporations simply pursue capitalist, free market goals, while civil society simply pursues socially progressive goals. In fact, the reality is more complex. One of the most helpful insights of recent work on Polanyi, discussed above, is to recognise that movements of embedding and disembedding can have various moral qualities. The social is not by definition progressive and tied to human rights, and neither is the economic necessarily anti-social. Indeed, understanding the economy as an ‘instituted process’ as Polanyi41 suggests points to the inevitability of economic activities taking place within particular institutional settings, institutions replete with their historical, normative and cognitive attributes.42 Economic activities, as instituted processes, necessarily capture some form of the social with the possibility of diverse norms underpinning those processes. This complexity is borne out in our analysis of ECA regulation. ECAs are nodes in a range of governance regimes or networks, each of which coalesce around different (and competing) ideas of the social and its relationship to the economic. Each network attempts to discipline ECAs towards their particular vision and exerts regulatory control through different regulatory strategies. In short, even though different networks may be ‘social’, they can be oriented toward different ends: national interest, free market competition or human rights protection, each constituting a different relationship between the social and the economic. When it comes to ECAs, there are at least three networks at play: a network where ECAs are regulated by government with the goal of enhancing the national interest; another where ECAs are regulated by the OECD (and others) with the goal of free market facilitated capital accumulation; and finally a network in which ECAs are regulators responsible for protecting human rights. 41

Polanyi 1957 cited in Randles (n 6) 415. Julia Black, ‘New Institutionalists and Naturalism in Socio-Legal Analysis: Institutionalist Approaches to Regulatory Decisionmaking’ (1997) 19 Law & Policy 51; W Richard Scott, Institutions and Organizations (Sage, 2001). 42

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B. Networks of National Interest and of Free-Market Capital Accumulation Two distinct ideal-typical visions of the relationship between the economic and the social are at play here, visions which take root in different networks. The national interest vision, tied to nation building and the provision of jobs in national infrastructure (for example shipbuilding) was evident in the earliest iteration of ECAs as outlined earlier in this chapter. ECA activity meant promotion of host country exporters and, through this, the promotion of employment for home country workers. Arguably, this vision can be understood as tied to social ends as much as to economic. There is a social vision (employment) which the economic is disciplined to serve. The second vision is that most closely tied to the ‘formal economic’ in Polanyi’s reading and hence, whilst it too is necessarily realised within a particular social vision (of economic growth and human development), it can be understood as requiring more ‘disembedding’ of the economic from the social and the collective. The latter vision is reflected in a number of contexts and documents. The first of these is at the supra-national level of the OECD. The analysis above has outlined the initial efforts of the OECD consensus to ensure a level playing field between OECD members. Part of the rationale for this43 was the tenets of neoclassical economic reasoning that dictated the advantages to all by limiting—or eliminating—any form of subsidy to exports (including support provided by ECAs). At the national level, the adherence to this neoclassical or formal economic vision differs between OECD member countries. There is no doubt that within some countries, such as Australia, ECAs have been subject to far greater criticism from influential bodies that cleave more tightly to this formal economic vision. In this vision, ECAs undermine the free market and competition. Such bodies argue that ECAs should be viewed with suspicion since they are a responsive target for special pleading by industry keen to avoid the rigours of a competitive market place. An excellent example of this view is provided by the recent Australian Productivity Commission report into EFIC.44 In this report, and the review that preceded it, the Productivity Commission was highly critical of EFIC. These concerns primarily centred on its perception of the limited number of projects EFIC supported. In keeping with its neoclassical economic roots, the Commission recommended that EFIC provide support only when

43 Of course, there were other elements at play not just adherence to formal economic prescriptions, such as a need to prevent another race to the bottom in terms of imprudent lending resulting in sovereign debt, as well as a concern that the ECA with the deepest pockets not seriously disadvantage all other contenders. 44 Productivity Commission, Australia’s Export Credit Arrangements (Final Report, 2012).

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there was clear evidence of market failure.45 EFIC should be constrained to ensure that it does not unfairly compete with the private sector. Further, it castigated EFIC for not acting more as a fully-fledged private financial institution. For example, it argued that EFIC was too risk averse, employing an overgenerous prudential margin on its overall assets that resulted in lost revenue for Australian taxpayers. In short, its capital was not made to ‘work’ hard enough. The Australian Government was also criticised for an inadequate explanation of what constitutes the ‘national interest’ in terms of using the National Interest Account.46 To this end it called for greater transparency in EFIC’s processes. Of the detailed findings and recommendations over some 43 pages, the vast majority confirmed the Productivity Commission’s primary orientation towards a neoclassical economic worldview. The Commission viewed EFIC as an insignificant actor in terms of its financial investment outlay, a body that provided poor investment returns to government and a (small) impediment to the benefits of a free trade agenda. However, the complexity of the relationship between these two networks— that oriented toward free market capital accumulation, and that oriented toward the national interest47—needs understanding. In particular, a view of a regime change away from ‘national interest’ to ‘free trade’ is unhelpful. Firstly, regime changes are, together with their ideological underpinnings, rarely total.48 Secondly, and more importantly, we see ECAs as situated at the heart of a great tension between a belief in neoliberalism as the key to global economic growth and concerns about their own home country’s national interest that sit in conflict with the goals of neoliberalism. Regulation of ECAs by the OECD, by their own governments, together with their respective networks, pull in both these directions.

C. Reluctant Human Rights Regulators Regulatory network(s) concerned to mitigate the negative human rights impacts of transnational business and industrial development form the final, and most recent, network within which ECAs are now situated. The 45 Market failure here is understood as the incapacity or unwillingness of private financial firms to offer financial services to viable home country (in the case Australian) export-oriented firms. 46 The National Interest Account is defined above. This account is controlled by government but administered by EFIC. Hence, this criticism is directed towards the Government. 47 Clearly, at an organisational level the networks share many of the same actors, however, departments within organisations may lean towards one or other networks with some organisations, such as the Productivity Commission, primarily belonging to the neoliberal network. 48 Daniel Wincott, ‘Images of Welfare in Law and Society: The British Welfare State in Comparative Perspective’ (2011) 38 Journal of Law & Society 343; WG Carson, ‘The Institutionalization of Ambiguity: Early British Factory Acts’ in Ezra Stotland and Gilbert Geis (eds), White Collar Crime: Theory and Research (Sage, 1980).

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influence of this network represents a more conventional ‘re-embedding’ of the economic in the social, as human rights goals are unambiguously ‘social’ in their ideational content. However, this process of ‘re-embedding’ is far from straightforward. Rather, the extent to which ECAs have welcomed this new socio-political orientation in their activity is limited not only by a preference for privileging the economic but, as we have seen immediately above, by the pre-existing presence of other competing social goals. ECAs are, by and large, reluctant to become more involved in raising human rights standards. This is particularly true of ECAs that do not have a development mandate, such as EFIC or UK Export Finance. This reluctance emanates from their conflicted position within these three networks. A self-assessment by EFIC suggested that the institution sees itself as a financier, not a regulator. Though it has implemented some policies and practices to enhance human rights protections, including a grievance mechanism, EFIC is ultimately keen to keep projects at arms-length, insisting that primary responsibility for activities on the ground belongs to the exporters it supports. The aim is to enhance self-regulation by those businesses, not to share oversight. This is an attitude consistent with a history in which the primary socio-political goals of the institution (economic growth and the national interest) have been achieved through financial means. Further, ECAs therefore see themselves as bound by national policies, and certainly EFIC does not see itself in the position to exert leadership based on its own or others’ views of what is most consistent with the promotion of human rights. If government has decided on a certain policy direction, EFIC argues it is not in a position to choose otherwise. This may be appropriate since government agencies are not in a position to go beyond their constitutional and legislative limits, but it is indicative of a conservative approach towards trade and an unwillingness to push boundaries in pursuit of a socio-political vision such as human rights, despite EFIC’s formal subscription to a vision of environmental and social sustainability. As a node in multiple networks, then, EFIC and other ECAs are required to hold competing mentalities of regulation and advance often competing visions: the predominantly socio-political visions of nation building and the promotion of host country human rights; and the predominantly economic vision of capital accumulation in a global free market. The ideational vision of the social is therefore not singular. Finally, whilst the ideational economic vision of neoliberal networks can be viewed as most closely tied to the formal economic, and hence to comprise a disembedding impetus, caution is still required. As Polanyi argued, economic processes in practice are always instituted within social arrangements of one sort or another. Hence, even here the pull of the ‘formal economic’ will be met by counteracting social demands.

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VII. DIFFERENCES BETWEEN HOME AND HOST COUNTRIES

The complexities for a Polanyian analysis posed by ECAs’ position in multiple governance networks extends to differences in the way ECA regulation operates and impacts upon home and host countries. In both home and host countries ECAs exhibit a combination of embedded and disembedded regulation. While in home countries there has historically been a high degree of social embedding through the nation-building project, the result in host countries can be the opposite: a radical disembedding of on-the-ground corporate activity that radically reshapes local economies away from subsistence livelihoods towards cash economies with sometimes devastating consequences for directly affected populations as well as host country more generally. Harms have arisen not only in terms of significant human rights problems, described above, but the problem of debt. ECAs have been a primary contributor to sovereign debt in poor countries. When an ECA-supported project collapses, and the ECA pays out insurance to the company, that money gets added to the sovereign debt of the host country. In the UK, for example, 95 per cent of developing country debt owed to the country has arisen from the UK Export Credit and Guarantees Departments, some £2.4 billion.49 In this sense ECA regulation, to the extent that it fails to regulate human rights and debt risks adequately in host countries, exhibits a profound contradiction. While the social embeddedness of the ECAs’ function in the home country (to promote national economic interest and provide jobs) has long been accepted, and indeed is a core aspect of what makes an ECA distinct, until recently few social norms have restrained ECA activity in host countries.

VIII. EMBEDDING OF ECA HUMAN RIGHTS REGULATION

Civil society has mobilised in response to the negative human rights, environmental and debt consequences of ECA activity for host countries. Civil society organisations have pushed for recognition of human rights obligations on the part of business as an intrinsic part of ECA-supported economic activity. This has been realised through the obligations of the IFC Performance Standards (where applied by ECAs) and the OECD Common Approaches (at least those pertaining to social and environmental sustainability) as

49 CUBE, ‘Clean Up Britain’s Exports’ (2013) http://cleanupexports.org.uk. The complications added by debt markets are extensive, and these may well place significant constraints on the capacity of ECAs to reorientate their focus towards the reduction of human rights abuse. This aspect requires more research.

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explained above. The obvious Polanyian reading here is that these efforts are a re-embedding of the economic in the social. However, again we see that this binary approach fails to capture the nature of ECA human rights regulation. In the case of human rights regulation, particular attention must be paid to the political (socio-political and institutional-political) inequalities within networks of actors concerned with human rights regulation, and between these networks and other, more influential networks (concerned with capital accumulation and home country national interest). Only attention of this kind can help us understand why human rights regulation of ECA-supported activity has been relatively ineffective in practice. One issue is that, even within networks that are concerned about human rights, power over interpretation of what counts as successful human rights outcomes or human rights regulation is distributed unequally. Certainly, at one level, there has been a significant improvement and awareness of the problems associated with ECA finance and the need for sustainable economic development together with proper processes of review and audit. As such, the ‘human rights’ regulatory network has come to encompass actors not normally associated with it: businesses and ECAs. Yet, even when different actors share in the same network, the perceptions of success of these processes differ widely. A useful illustration here is provided by the Baku-Tbilisi-Ceyhan and Chad-Cameroon pipelines. NGOs saw both these pipelines as mired in controversy, citing, among other abuses, instances of environmental devastation and increases in sexual assaults and sexually transmitted diseases as the development progressed. However, others saw it differently and pointed to a trust fund set up in an offshore bank account in order to fund priorities such as health, education, rural development, infrastructure, water and environment. A report put out by the Halifax Initiative50 pointed to a lack of progress on social spending enabled by this fund whilst infrastructure spending was successfully deployed. In short, whilst there was an agreement between the parties on the need for sustainable development, perceptions of what actually constituted good outcomes varied widely. The quote below from the Halifax Initiative51 illustrates this well: One representative from ABN Amro, a large international commercial bank, even said that ‘The strategic imperative (for financing projects) should be placed on sustainable development’. But then he highlighted the BTC and Chad Cameroon pipelines as the quintessential projects to back. These projects have been so mired in controversy, human rights violations and questionable process, that it seems

50 Halifax Initiative, Risk Responsibility and Human Rights: Assessing the Human Rights Impacts of Trade and Project Finance (Final Report for A Panel Discussion and Expert Meeting on Developing a Human Rights Impact Assessment Framework, 2004). 51 ibid 1.

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clear that even though it seems we may now all be reading from the same page, the words still mean very different things to different people.

Though civil society organisations like the Halifax Initiative can speak out on these issues, they have had little success in preventing the negative impacts of many projects, and almost no impact on altering the overall agenda of capital accumulation through industrial development. A second issue is the exclusion of affected communities from the regulatory networks associated with ECAs52 that could be of most benefit to them. As argued above, those at greatest risk of human rights violations from largescale ECA-funded industrial projects are local communities, particularly those with subsistence livelihoods. These citizens disproportionately suffer the negative consequences of industrial development projects, including particularly displacement and land alienation, and typically enjoy few of the benefits. Yet, these citizens and the local NGOs and civil society organisations that support them are largely excluded from the networks of regulation in which ECAs operate, including often the regulatory networks relating to human rights risk. To give a concrete example, though EFIC is often hailed as a particularly socially progressive ECA, in part because it has a relatively new grievance procedure available to host-country citizens affected by EFIC-supported projects, EFIC relies on NGO networks to alert it to significant human rights abuses that would warrant use of the process.53 Consequently, access to the grievance procedure for communities affected by EFIC-supported activities is contingent upon the unlikely good fortune of a community being sufficiently connected to NGO networks in the host country, and on those networks to be connected with NGO networks in Australia that can advise on and support a grievance process. It is no surprise, therefore, that since the grievance process has been put in place it has not received a single complaint. In relation to debt, a further inequality emerges. While wealthy countries can gather and advance their common interests through numerous coalitions and organisations, including importantly the OECD, poor countries that are often the hosts of the most problematic ECA-supported projects, and that bear the most risk from the failure of those projects (as the inheritors of associated debt), have little or no presence in these networks. As such, they are denied any opportunity to advance their interests through influencing the nature of ECA regulation. Further, even home-country based civil society working in solidarity with host-country interests occupies weaker positions in ECA regulatory 52 Of course there are multiple levels of regulation at play here. Our focus in this chapter is merely on the ECA regulatory regimes. 53 Interview data. EFIC is one of only three ECAs to have such a grievance procedure, the others being Japan’s Nexi and Canada’s Export Development Canada.

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networks and has far fewer material and immaterial resources with which to exert influence. Struggles between networks which have coalesced around ideas of human rights protection and protest against unjust sovereign debt accumulation have been dominated by NGOs and social movements with limited material and institutional resources, lacking funds and human resources to sustain campaigns, and often lacking personal and institutional connections to exert informal influence on ECAs and business. They have been pitted against powerful networks of business interests that have applied the opposite pressure on ECAs, drawing on their extensive resources and personal and professional networks. Recently, the networks pursuing human rights and environmental regulation have made some headway, in part because they have enhanced their networks with allies in organisations like the OECD: economic and social impact professionals who share their concerns. This goes some way to explaining the progress in securing wider adoption of more rigorous standards (the IFC Performance Standards), and the implementation of human rights and environmental grievance mechanisms in some ECAs. Yet, the differences in power and resources between networks, and the make-up of networks themselves continue to advantage corporate interests. The networks oriented against unjust debt or human rights harms remain isolated and lacking in the material and institutional resources to influence ECA activity to mitigate the debt risk. Perhaps more worrying, host country communities, civil society and host governments (particularly at local levels) remain either on the periphery or completely excluded from all networks involving ECA regulation, including the OECD, and are thus unable to influence regulation to meet their needs, economic or social. The potential for ECAs to become important players in networks of human rights regulation is also limited in another important way: ECAs, and small ECAs in particular, such as EFIC, see themselves as having limited traction in terms of overall control of large international projects. This needs to be understood in its economic context. ECA funding does legitimate projects, especially in their early stages. It provides a cheap source of finance (although fees can be quite high in the case of EFIC) and the presence of a financing agency related to a northern government reassures other investors that the project fundamentals are sound. This is particularly important when it is understood that a large project often has multiple ECAs involved, as well as several sources of private finance and IFI finance. The contracts involved are large and complex and any one ECA may have only a limited control over the eventual resources of a particular project. A good example of this is the current building of the Papua New Guinea LNG pipeline, supported in part by EFIC, together with four other ECAs from the US, Japan, China and Italy. The project involves five joint venture partners: ExxonMobil (through Esso Highlands Ltd), Oil Search, Santos, JX Nippon Oil & Gas Exploration Corp and the Government of the State

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of PNG.54 Its position both in collaboration and in competition with other ECAs restricts its capacity to exert influence and the methods it has access to. All ECAs compete vigorously to fund high profile infrastructure and energy projects and as such participate in the ‘nation building’ and ‘neoliberal’ networks. This limits ECA influence with respect to the businesses they support. Should businesses pay back the money, or find new or greater sources of financial or insurance support outside of the ECA, the influence of the ECA is significantly diminished. ECAs therefore see their capacity for regulation toward social goals beyond those they are familiar with— domestic economic growth and the national interest—as limited.

IX. TRANSPARENCY

Another example where regulatory networks coalesce around objectives that obscure the social–economic divide is in the push from multiple networks for increased transparency of ECA transactions. In Australia we see shifting alliances between Jubilee, one of the principle NGOs pushing EFIC towards greater social and environmental responsibility, and the Australian Productivity Commission, discussed above as a determined free market critic of EFIC. At first blush, there would appear to be little in common between Jubilee and the Productivity Commission. Yet, Jubilee and the Productivity Commission came together to agree on the importance of transparency in details of the arrangements between EFIC and those they support. In the Commission review (discussed above) one of the 43 recommendations related to environmental and social impact and called for greater transparency of EFIC’s operations. A major criticism of ECAs by NGOs has surrounded their lack of transparency. NGO concern relates in particular to the detail of the contracts that dictate the levels of oversight and monitoring that an ECA will expect and will undertake over a particular high-risk project. Greater transparency would allow for greater access to information, at least at the level of what is written down. Transparency, however, is also a dominant motif within neoliberal/neoclassical conceptions of effective competition. For this reason, NGOs have found unlikely alliances with bodies such as the Productivity Commission, that wish to see greater transparency not only in ECA dealings but also definitions of what constitutes national interest. Bodies such as these, particularly in the Australian context, can exert considerable influence over legislative reform that underpins ECA activity. The Productivity Commission and NGOs share a common interest in this regard but for completely different ends. While for NGOs it is to ensure scrutiny of human rights and environmental impacts, for the Productivity 54

Jubilee Australia, Pipe Dreams (n 2) 24–25.

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Commission it is because it is anti-competitive to obscure information. Strangely, the NGOs find themselves in alliance with actors pushing for a principle which is fundamental to the very capitalist impulses they hold responsible for the human rights and environmental abuses and hostcountry debt accumulation in the first place. Ultimately, a hard-edged neoliberal worldview sees little or no role for ECAs, or indeed governments, in the provision of finance to support exports beyond a thin notion of supporting property rights and the rule of (contract) law. Arguably, if ECAs strive more to emulate private sector finance they may well develop into a peculiarly disembedded institution. In this form, EFIC would be rendered more and more redundant in the Australian export context and theoretically could cease to exist. If this were to happen, NGOs would lose an important node, albeit a reluctant one, in the push to improve respect for human rights. In this vision, private markets with their assumption of the inviolability of the privacy of contracts would entrench further dominance in international trade. Global regulatory regimes may then be required to meet the full force of private interests unhindered by considerations of politics and national interest. Certainly Northern nation states have not proved themselves as entirely siding with the oppressed and marginalised in their consideration of the national interest either within or outside of their borders. Yet, they do require the consent of the governed—at least in some form—for their continued legitimacy. Because of this, Northern NGOs are in a position to exert some leverage in this space even as they target companies more directly through their campaigning.55

X. CONCLUSION

In this chapter we have highlighted the role of one institution, ECAs, and their role in maintaining transnational business and with it the problems of illegal or irregular land acquisition, displacement, loss of livelihoods, violation of indigenous rights, social dislocation and environmental degradation associated with large-scale mining and infrastructure projects. Subjecting ECAs to a Polanyian analysis highlights the significance of enrolling ECAs as regulators, and as such ameliorating (at least to an extent) the social and environmental impact of the businesses they support and improving their human rights practices. A Polanyian analysis points us in the right direction, but a refinement of his concepts and ideas are needed for us to understand the challenges involved in turning ECAs into regulatory and human rights champions. 55 Of course a perennial risk is that the control regime becomes ritualistic and perfunctory, able to enhance legitimacy of ECAs yet have little impact within host countries.

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In particular, we have shown the importance of understanding the tension between the socially progressive and capitalist influences on regulation of and by ECAs. To appreciate the importance of this tension requires breaking down a binary distinction between ‘the social’ and ‘the economic’ and taking better account of the multiple ways in which embedding is possible. ECAs sit at the intersection of economic and social environments at multiple national and international locales. Each of these locales is ambiguously located within an economic or social frame, frames themselves that are highly politicised and constantly shifting. In order to tease out these complexities we have drawn on nodal regulation and an understanding of ECAs as nodes. In doing this we have highlighted how ECAs need to be understood as nodes in more than one network and, because of this, the current demand by NGOs that ECAs act as regulators to reduce social and environmental impact is resisted by ECAs. Rather, ECAs continue to understand their role primarily as economic enablers for the home country and therefore as economic rather than regulatory agents. Yet, this is not a ‘disembedded’ worldview. Rather, this economic role is understood by ECAs as fundamentally social in a different way: as an important source of national wellbeing in a globalised world. In short, ECAs already held a multi-dimensional role with many tensions around their function, between national interest (a variety of ‘social’) and capital accumulation (the ‘economic’). The human rights variety of the ‘social’ brings in yet another tension. Our analysis above also points to a refining of the social to highlight distinctly political elements at play. The political enters in two distinct ways: the first is socio-political in which different actors push to have their conception of the relationship between the economic and the social hold pride of place. In doing so, each actor or node draws on a network of relationships, utilising the network’s resources and arguments to advance their ideological positions, with varying degrees of success. The second is the institutional-political where ECAs as nodes need to be sensitive to their ongoing legitimacy. This is no mean feat since their legitimacy depends on their involvement not in one network of control but (at least) three. Hence, they must appear to disparate audiences alternatively as acting in the public (read national) interest, to be economically efficient and competitive and finally to embrace an enlightened worldview in which sustainable social, environmental and economic practices dominate.

5 Transnational Business and the Politics of Social Risk: Re-Embedding Transnational Supply Chains Through Private Governance KATE MACDONALD AND SHELLEY MARSHALL

I. INTRODUCTION

T

HROUGHOUT RECENT ECONOMIC history, social struggle over the regulation and distribution of social costs, benefits and risks associated with capitalist economic relations have been both pervasive and continually evolving. Such contestation surrounding how capitalist forms of accumulation, production and exchange are constituted and regulated by broader social norms and relationships has often been characterised as a struggle over the terms on which capitalist economies are ‘socially embedded’—in Karl Polanyi’s influential language. These regulatory processes draw on state and non-state actors, a range of formal organisations and social institutions, as well as broader and more nebulous features of the social environment.1 Importantly, the concept of embedding also entails a particular normative view of how the costs, benefits and risks associated with participation in capitalist economic relations should be managed and distributed. The normative view usually associated with a Polanyian concept of embedding has tended to stress the value of reducing or at least more fairly allocating relevant social costs and risks.

1 For example, Stewart conceptualises the ‘macro-environment’ as encompassing ‘the norms and political economy prevalent in a society—that is it includes the manifold influences—economic, political and social—to which individuals and groups are subject by the environment in which they operate.’ Frances Stewart, ‘Why Groups Matter’ in EVK Fitzgerald (ed), Social Institutions and Economic Development: A Tribute to Kurt Martin (Kluwer Academic Publishers, 2002) 27.

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Analysis of embedding and disembedding has also provided a framework for understanding the societal dynamics through which large-scale patterns of economic regulation and distribution have evolved within capitalist political economies. In The Great Transformation, originally published in 1944, Karl Polanyi gave us perhaps the most vivid account on record of historical shifts in the regulation and governance of markets.2 For Polanyi, the rise of free markets was a process in which markets became disembedded from public control, such that the competitive pursuit of short-term profit became the primary logic governing social relations. Eventually, however, this provoked a societal response in which markets became re-embedded— at least until a renewed push for free markets emerged again. Political struggles over competing norms and institutions of economic regulation have continued to evolve through subsequent stages of global capitalist expansion. In the contemporary context, patterns of economic ‘disembedding’ and associated struggles to re-embed economic relations in norms of social protection and equality have taken some distinctive forms. Importantly for the concerns of this volume, there have been significant increases in recent years in social consciousness concerning various forms of ‘social risk’ associated with participation in capitalist economic formations. On the one hand, such social risk has been intensifying, as capitalist economic processes become larger-scale, more complex, and harder for traditional state regulators to control. In some respects, such patterns reflect a more generalised decline in the capacity of social institutions to control the forms of risk that capitalist economic relations generate. On the other hand, such patterns reflect instead the redistribution of control over such forms of risk away from state regulators and towards private actors, who seek strategically to transfer such risk away from themselves to other parties. Rising risk consciousness, together with visible failures of state regulation to appropriately manage distributions of risk, has been associated with increased demand for new forms of regulation capable of protecting citizens from the most harmful consequences of contemporary social risk. Our analysis in this chapter focuses on one context in which these processes of disembedding and re-embedding have been particularly visible and contested—the organisation and regulation of capitalist production within global supply chains. In this context, evolving strategies of embedding have relied importantly on private systems of supply chain governance and regulation. We focus on two contrasting private regulatory schemes which differ in the types of social risk and the patterns of social control that they seek to regulate, as well as the governance strategies they adopt. Our first case study examines supply chains in the garment industry, in which traditional forms 2 Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Beacon Press, 1944).

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of state-based labour regulation interact with a range of private governance initiatives. Our analysis in this first case focuses on one innovative multistakeholder regulatory initiative in this sector, which operates through the organisation Ethical Clothing Australia. We contrast this to a case study of social risk regulation within global coffee supply chains, in which the fair trade system seeks to govern economic relationships all the way from production to retail stages of the supply chain in accordance with norms of equality and social protection. Our analysis identifies some distinctive features of the regulatory strategies adopted by these non-state governance schemes, which enable them to directly tackle dispersed patterns of social risk and control. While traditional forms of state regulation have often been premised on assumptions about the centralisation of regulatory responsibility, these private mechanisms acknowledge the importance of multiple state and non-state parties in shaping distributions of social risk, and influencing the extent to which such distributions comply with prevailing regulatory norms. In other words, both of the private regulatory schemes that we examine here respond to the increased diffusion of control over social risk distributions by institutionalising a correspondingly broader distribution of responsibility for its regulation. However, these two regulatory schemes adopt different strategic responses to the challenge of regulating the mix of dispersed and concentrated distributions of social control and risk that they confront. In the garment sector, regulatory strategies are driven by the logic of locating and holding accountable a broader range of actors beyond the state that wield control over working conditions—in effect mirroring dispersed forms of control with an increasingly pluralised regulatory structure. Regulatory strategies adopted by the fair trade system in the coffee sector similarly disperse regulatory responsibility more broadly among private as well as public actors. However, compared with regulatory strategies adopted in the garment sector, the fair trade system attempts to build more collectivised institutions of supply chain governance, capable of performing a broader range of governance functions, and tackling a correspondingly broader range of social risks. The downside of this more ambitious strategy of private risk regulation is that it proves difficult to sustain beyond the boundaries of a niche system of production and regulation, thereby constraining the scope of what can be achieved. These contrasting strategies highlight some important tensions confronting those devising risk regulation strategies in the context of dispersed control over patterns of contemporary social risk.

II. EMBEDDING AND DISEMBEDDING IN A RISK SOCIETY

Before we move to discussing these emerging forms of private risk governance in more depth, it is useful to say a little more about the ways in which

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the embedding of social risk has traditionally occurred over much of the last century, and how this both parallels and differs from manifestations of disembedding within a contemporary ‘risk society’. Tendencies to inequality and commodification that are produced through the process of capitalist processes of accumulation and wealth generation have—throughout the history of capitalism—given rise to the demand for a range of regulatory and redistributive interventions to constrain and compensate for the more exploitative and commodifying tendencies of the system.3 During different phases of its development, and within different national and sub-national contexts, capitalism has been sustained and contained by formal and informal modes of regulation of varying kinds. For much of the last century or so the modern state has been understood to have primary responsibility for managing risk, particularly in relation to labour protection and social insurance functions. Governments have aimed to reduce or reallocate costs, risks and inequalities associated with participation in capitalist production relations, embedding social relations in values of social protection and equality. They also seek to reduce individuals’ exposure to the more harmful effects of the market, performing the decommodification of labour.4 A variety of laws and policies have been enacted to this end, depending on the style of governance or variety of capitalism in place. For example, states have offered unemployment benefits, and compelled both employers and employees to contribute to insurance schemes that employees can draw upon in the event of unemployment. In relation to labour and employment, states set minimum wages, thereby removing wages from market forces to some extent, and smoothing out the risk of wage fluctuations that workers experience when wages are entirely linked to the profits and losses of the businesses that employ them. States also create institutions which mediate risks associated with unequal bargaining power. States provide education, training, apprenticeship programs and structural adjustment programs to encourage movement of employment from one area to another. All of these policies are aimed at managing the risk that workers will not have sufficient skills to move from one sector of the labour market to another, or that labour markets will remain overly rigid, making workers unemployable. States also manage risks through a number of labour market institutions, including standard setting processes, and institutions that enforce and encourage compliance. Here, the state plays a role in distributing risk between parties. Rules regarding hiring and firing in labour law, for example, distribute risk by stipulating who bears the cost of financial downturns for an 3 Sean O’Riain, ‘States and Markets in an Era of Globalization’ (2000) 26 Annual Review of Sociology 187. 4 Gosta Esping-Anderson, The Three Worlds of Welfare Capitalism (Princeton University Press, 1990).

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organisation. Where the ease of firing is high, workers may bear the risk of a financial downturn as labour can be shed quickly and alternatives—such as drawing upon financial reserves or withholding dividends from owners—are not seriously considered. Where the ease of firing is low, the risk of financial downturns can be distributed to other stakeholders. In practice, societies balance this risk in a variety of ways, and buffer the risk of job loss as a consequence of hiring and firing rules with a range of social security schemes. In these ways, labour law and other social protections in the post war period have embedded capitalism by creating a social pact between labour and capital.5 Such regulatory systems have provided both an incentive to, and compensation for, participating in a risky system in which workers lend their labour power for the profits of business. However the state has been floundering in its role as embedder and risk redistributor during recent years. Labour market regulation, in particular, has been failing. Many narratives around embedding highlight an ideological unwillingness to employ the state to redistribute risk away from labour and small producers in the neo-liberal period. Also of central importance are the structural dynamics through which organisation of production has become more complex and diffused in organisational and geographical terms—undermining in important ways the state’s capacity to control and redistribute risk in conventional ways. These contemporary processes of structural change are clearly illustrated within globalising systems of production. There has been an important trend in recent decades towards increasingly globalised production systems in many labour intensive industries.6 Beginning in the 1970s and accelerating through the 1980s and 1990s, production of apparel and textiles, toys, footwear, home electronics and other consumer goods destined primarily for consumer markets in the industrialised world has spread throughout the world, with manufacturing tending to cluster in a range of developing countries.7 Such trends reflect both a geographical globalisation of production, and the organisational disintegration of units of production, whereby

5 Allain Supiot, ‘Introduction’ in Allain Supiot (ed), Au-dela de l’emploi, transformations du travail et devenir du droit du travail en Europe (Flammarion, 1999). 6 G Gereffi and Olga Memedovic, ‘The Global Apparel Chain: What Prospects for Upgrading for Developing Countries?’ www.unido.org/en/resources/publications/poverty-reduction-throughproductive-activities/agribusiness-and-rural-entrepreneurship/the-global-apparel-value-chainwhat-prospects-for-upgrading-by-developing-countries.html; Andrew Ross, No Sweat: Fashion, Free Trade, and the Rights of Garment Workers (Verso, 1997); Dorothy McCormick and Hubert Schmitz, Manual for Value Chain Research on Homeworkers in the Garment Industry (2002) www.ids.ac.uk/ids/global/pdfs/WiegoManualendNov01.pdf. 7 Richard Appelbaum, ‘Giant Retailers and Giant Contractors in China: Emergent Trends in Global Supply Chains’ March 9–11, 2006 Working paper prepared for Princeton University Conference, Observing Trade: Revealing International Trade Networks. Around 70% of global clothing exports now come from developing countries. Angela Hale andJane Wills, Threads of Labour: Garment Industry Supply Chains from the Workers’ Perspective (Blackwell, 2005) 17.

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functions that were once conducted within the one firm are now spread between multiple suppliers around the world. These forms of vertical disintegration—the breaking up of large, multifunction corporations into smaller units—have been importantly associated with changing distributions of economic and social risk. When one firm conducted a range of functions, including production, marketing, design and so on, that firm bore the risk that any or all of those functions would fail. In other words, the same firm bore the risk for producing the various components that go together in one good. These risks might include an increase in labour unit costs or production stoppages of various types, whether due to industrial unrest or machine breakdowns. Such firms would also bear the risk of reading the market correctly, designing goods with sustained demand, and maintaining cutting-edge technology in every field required for the success of their product.8 Vertical disintegration and outsourcing have allowed firms to share that risk—in many cases by passing it on to other less powerful actors within the supply chain. In this way, the practice of outsourcing production and service functions into a network of subcontractors and suppliers has offered more powerful firms a means of reducing exposure to certain forms of economic risk. For the core businesses that have cast off employees, this has been an important risk management strategy, enabling business to relinquish responsibility for continuing to uphold wages for workers, to maintain work space, desks, machinery of a safe standard and so on, regardless of fluctuations in working capital or customer demand. Indeed, many firms have been actively encouraged by consultancy firms and others to fracture into functional entities that are loosely connected in terms of contract and responsibility (in the sense that relationships between them can be instantaneously terminated), but tightly tied together in terms of control of the production process or product. The flipside to these processes of risk externalisation has been the corresponding growth of subcontractors—who are commonly firms that establish themselves in a relationship with a large transnational company with the precise aim of taking up the slack that is diffused in a lean production system. These firms, usually small and medium sized enterprises, but in some cases also large agents producing for multiple brands, absorb many of the risks displaced by their client firms.9 In some sectors, subcontractors in turn pass on the risk they have incurred from their client firms to home-based and sweatshop-based industrial outworkers—a particularly vulnerable category of worker. This process has resulted in an increasing diversity of arrangements in which businesses deal with outsourced 8 Ronald Gilson, Charles Sabel and Robert Scott, ‘Contracting for Innovation: Vertical Disintegration and Interfirm Collaboration’ (2009) 109(3) Columbia Law Review. 9 Louise Amoore, ‘Risk, Reward and Discipline at Work’ (2009) 33 Economy and Society 174, 189.

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companies and participate in supply chains and franchises. As a result, many workers who would previously have been regarded as employees of the core business become disassociated from it or associated in alternative ways, through what are regarded as independent contracts or independent businesses. In some agricultural sectors, similar processes have occurred in the form of reliance on short-term and arms-length contracts with smallholder farmers, who then find themselves bearing significant risks associated with both fluctuations in production yield, and widely variable market prices for the goods they produce. The diffusion of economic risks of these kinds, then, translates in many cases into intensified social risk, in the form of threats to wellbeing, life and livelihood for the less powerful and sometimes highly vulnerable workers and producers situated further down the global supply chain. In Amoore’s words, ‘The consultants’ representation of outsourcing as a means to share risk (with connotations of collaboration and risk pooling) is revealed in practice to displace and reallocate risk, with disproportionate effects on particular worker groups.’10 In the face of such intensification and redistribution of social risk, dynamics of ‘disembedding’ have been compounded by weakened state capacity to effectively manage such risk. State capacity to redistribute risk has been weakened in part by increased complexity and informality associated with post-fordist processes of capitalist development.11 Such complexity and informality make regulation increasingly difficult in part because of the increased organisational complexity of production,12 and also because of the pluralisation of the actors involved in driving the relevant economic relationships and outcomes. Such pluralisation has taken the form of both (a) a proliferation of corporate forms and relations; and (b) a proliferation of people who would previously have been employed inside a firm being engaged in alternative ways, including as dependent contractors, independent contractors, employees or contractors of labour hire agencies, or as part of their own businesses.13 The restructuring of supply chains in these organisationally complex and pluralised ways can make it very difficult for state-based regulators to identify a clear locus of power and control, and thus to determine appropriate regulatory subjects and agents. One dimension of this regulatory challenge

10

ibid 188. David Harvey, The Condition of Post-Modernity: An Enquiry into the Origins of Cultural Change (Blackwell, 1990). 12 Hugh Collins, ‘Independent Contractors and the Challenge of Vertical Disintegration to Employment Protection Laws’ (1990) 10 Oxford Journal of Legal Studies 353. 13 Shelley Marshall, ‘An Exploration of Control in the Context of Vertical Disintegration, and Regulatory Responses’ in Chris Arup and others (eds), Labour Law and Labour Market Regulation: Essays in the Construction, Constitution, and Regulation of Labour Markets and Work Relationships (Federation Press, 2006). 11

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relates to the informational problems that states increasingly confront in the presence of societal complexity and informational diffusion—characterised by Beck in the following way: In relation to the state and parliament, industry possesses a double advantage. It has autonomy in investment decisions and a monopoly on the application of technology. Politicians are in a bad position, struggling to catch up with what is going on in technological development.… Thus the division of power leaves the industries with the role of primary decision maker without responsibility for risks to the public. Meanwhile, politics is assigned the task of democratically legitimizing decisions that it has not taken and doesn’t know about, especially since the privatization of industries which were previously run by the state.

This regulatory challenge is compounded by an emerging disconnect between transnational control within supply chains and nationally bounded institutions of political governance. This disconnect has been driven in large part by extension of the geographical scope over which production is organised beyond the boundaries of the nation-state. This kind of disjuncture between the boundaries of social and economic interconnection and of political institutions has been widely identified within broader debates about globalisation and cosmopolitan governance.14 Such concerns have also been analysed through a risk-based lens—Beck suggesting that the nation state, which attempts to deal with global risks in isolation, resembles a drunk man, who on a dark night is trying to find his lost wallet in the cone of light of a street lamp. To the question: did you actually lose your wallet here, he replies no, but in the light of the street lamp I can at least look for it. In other words global risks are producing failed states even in the West.15

There are at least two divergent ways in which the implications of such trends for regulatory strategy can be interpreted. On the one hand, some analysts have emphasised the diffusion of control over relevant patterns of risk within these globalised production systems, and the associated difficulties in attributing causation, blame and responsibility for resulting risk distributions. Beck has argued that the complexity of social systems within a risk society mean that ‘risks that were calculable under industrial society become incalculable and unpredictable in the risk society. Compared to the possibilities of adjudging blame and causality in classical modernity, the world risk society possesses no such certainties or guarantees’.16 In contrast, others have claimed that the notion that markets are ungovernable is a ruse created as part of neoliberal ideology to legitimise and 14 See David Held, Democracy and the Global Order: From the Modern State to Cosmopolitan Governance (Polity Press, 1995); and David Held, ‘Regulating Globalization? The Reinvention of Politics’ (2000) 15 International Sociology. 15 Ulrich Beck, Living in the World Risk Society (2006). 16 Ulrich Beck, ‘Politics of Risk Society’ in Jane Franklin (ed), The Politics of Risk Society (Polity Press, 1998) 16.

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present as inevitable power relations associated with more traditional forms of capitalist relationships. Amoore for example has stated that ‘The manufacture of specific kinds of uncertainty is central to neo-liberal programs of the restructuring of labour and working practices’.17 On this view, the central regulatory problem within the contemporary risk society is not that the locus of control over risk allocation processes cannot be located, but rather that such control has simply shifted away from the state and towards an array of powerful transnational businesses. According to this interpretation, transnational businesses are now in some senses out of control, holding ‘positions of extraordinary power and equally extraordinary lack of accountability to anyone or anything except their shareholders’.18 If they are to be reined in, then what we need is tougher mechanisms of regulation and accountability that are capable of holding dispersed, corporate powerholders to account for the power they already wield over the generation and distribution of social risks and harms.

III. RE-EMBEDDING THROUGH PRIVATE REGULATION?

The particular balance struck between these overlapping but somewhat competing interpretations of the distinctive regulatory challenges of a ‘risk society’ has important implications for the design of corresponding regulatory strategies. These two divergent narratives have played a particularly important role in informing the logic of emerging systems of private regulation, which have attempted to forge new ways of regulating the distinctive patterns of social risk generated by reorganised global production. We illustrate some of the key features of these new regulatory forms with reference to two case studies. Ethical Clothing Australia regulates the working conditions within garment supply chains in Australia, while the fair trade system operates globally to regulate the living conditions and terms of trade experienced by smallholder farmers within coffee supply chains. In one important sense, these two private regulatory schemes share a common regulatory logic, which contrasts in some respects to that of traditional state regulation. While state mechanisms imagine that a single entity is responsible for driving allocations of risk (labour law for example focusing exclusively on regulation of the employer-employee relationship), these private schemes acknowledge that multiple parties can influence such distributions. Correspondingly, they recognise the multiple parties to whom responsibilities for influencing the conditions of workers and producers can

17

Amoore (n 9). IRENE, Controlling Corporate Wrongs: The Liability of Multinational Corporations: Legal Possibilities, Initiatives and Strategies for Civil Society (Report of the international IRENE seminar on corporate liability and workers’ rights, 2000). 18

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be assigned. In this sense, both regulatory schemes represent a shift towards a more pluralised logic of risk regulation within global supply chains. In another sense, however, the logic of the two schemes differs. The regulatory strategy adopted by Ethical Clothing Australia focuses on locating and holding accountable a broader range of actors beyond the state that wield control over working conditions—in effect mirroring dispersed forms of control with an increasingly pluralised regulatory structure. In contrast, the fair trade system attempts to build more collectivised institutions of supply chain governance, capable of performing a broader range of governance functions, and tackling a correspondingly broader range of social risks. These two approaches prioritise responsiveness to different elements of the regulatory challenge identified earlier, and as a result, experience different strengths and weaknesses as regulatory tools.

IV. ETHICAL CLOTHING AUSTRALIA

Ethical Clothing Australia is a regulatory innovation designed to improve the working standards of home-based industrial outworkers in the garment industry of Australia.19 It represents a distinctive regulatory strategy seeking to counter the processes of economic ‘disembedding’ that have been prominent within the global textile, clothing and footwear (TCF) industry. Supply chains in this sector have been particularly notable for their reliance on strategies of sub-contracting, described in more general terms above. Supply chains in this sector in Australia tend to be highly vertical—described by Gereffi as ‘retailer or brand led supply chains’.20 The use of homeworkers in processes of clothing and footwear production is widely entrenched. By the mid-1990s, the number of homeworkers and sweatshop workers working in the TCF industry in Australia was anywhere between 23,65021 and 329,000,22 depending on the source of the estimate. The Textile, Clothing and Footwear Union of Australia (the Union or the TCFUA) estimated that outworkers outnumbered factory workers by 12 to 1 by 1994.23 19 For a more thorough exposition of this regulatory initiative see Shelley Marshall, ‘Australian Textile Clothing and Footwear Supply Chain Regulation’ in Colin Fenwick and Tonia Novitz (eds), Human Rights at Work: Perspectives on Law and Regulation (Hart Publishing, 2010). 20 See Gary Gereffi, John Humphrey and Timothy Sturgeon, ‘The Governance of Global Value Chains’ (2005) 12 Review of International Political Economy; and Gary Gereffi, ‘Global Commodity Chains: New Forms of Coordination and Control Among Nations and Firms in International Industries’ 1 Competition and Change. 21 Industry Commission, The Textile, Clothing and Footwear Industries (1997). 22 Textile Clothing and Footwear Union of Australia, The Hidden Cost of Fashion (1995). 23 ibid. Figures are likely to be unreliable due to the informal, sporadic and seasonal nature of outworker employment, and the difficulty of documenting this work. Unfortunately, we have no more recent figures, but these numbers are likely to have shrunk with the contraction of clothing production in Australia, although industry insiders believe the proportion of outworkers compared with factory workers has continued to grow.

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The high incidence of homeworker employment in this sector is a product of precisely the strategies of risk externalisation by more powerful economic actors described above. In response to the import penetration that has followed Australia’s reduction of tariff and non-tariff protections, brands and manufacturers have pursued two strategies of outsourcing to increase competitiveness—one off-shore to low labour cost countries and one within Australia to industrial outworkers. Ethical Clothing Australia is concerned with the latter. Manufacturers engage middlemen or agents to contract work out to home- and sweatshop-based workers within Australia, setting a price per garment. They thus avoid the additional costs associated with adhering to labour and occupational health and safety laws, and pass on the risks associated with labour management to the middle person. Workers are drawn primarily from Vietnamese and Chinese immigrant and refugee communities. Workers tend to be isolated and have low legal literacy, making it easy to pass risk onto these workers regardless of ‘on paper’ labour laws. Important dimensions of social risk are transferred to vulnerable workers within these production systems. A 2001 study of pay and conditions suggested that homeworkers, on average, received around AUD 0.50 to AUD 5.00 an hour for their work—less than half the legal minimum—once piece rates were converted to hourly rates.24 Around 62 per cent of the workers who responded to Cregan’s study worked seven days a week and 95 per cent of respondents did not receive holiday leave, sick leave or public holiday pay.25 Another study comparing the occupational health and safety experiences of factory-based workers and outworkers in the clothing industry found that outworkers suffered three times the level of injuries experienced by factory-based workers. The two main reasons for the differences in injury rates were the use of a piecework payment system and the long hours worked by outworkers.26 Workers had little knowledge of their legal rights, and the work was largely occurring ‘informally’. In response to these distinctive regulatory challenges, Ethical Clothing Australia adopts an innovative regulatory response. In part it engages a form of private regulation—bringing new non-state actors into a web of control and influence over actors in the regulated community, overseen by a

24 Christina Cregan, Vietnamese Outworkers in the Australian Garment Industry: Sweated Labour and the Social Wage (IREC, 2011). 25 ibid. 26 C Mayhew and M Quinlan, Outsourcing and Occupational Health and Safety: A Comparative Study of Factory-based and Outworkers in the Australian TCF Industry (Industrial Relations Research Centre, 1998); Richard Johnstone, Claire Mayhew and Michael Quinlan, ‘Outsourcing Risk? The Regulation of Occupational Health and Safety where Subcontractors are Employed’ (2000) 22 Comparative Labor Law & Policy Journal 351; I Nossar, R Johnstone and M Quinlan, ‘Regulating Supply-Chains to Address the Occupational Health and Safety Problems Associated with Precarious Employment: The Case of Home-Based Clothing Workers in Australia’ (2004) 17 Australian Journal of Labour Law 137.

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multi-stakeholder industry body.27 It also draws in part on non-state regulatory instruments, harnessing market-based tools as a means of holding companies in the industry accountable for their labour practices (as explained further below). Although the regulatory scheme is in these ways private in character, its central objective remains bolstering the functioning of the existing statebased regime of labour law. In this sense it aims to harness new sources of norms and incentives from the broader societal sphere as a means of bringing a broader range of regulatory tools to the hands of state based and private regulatory agents. For this reason, understanding how Ethical Clothing Australia can contribute to processes of economic re-embedding requires analysis of both its distinctions from, and interactions with, traditional forms of state regulation, which have struggled in important ways to adapt to the challenges of regulating dispersed patterns of social control and risk within global production systems. In Australia, as in most jurisdictions around the world, labour laws are based on a narrowly conceived notion of the employment relationship. Various protections flow from being identified as an ‘employee’ and responsibilities flow from being identified as an ‘employer’. However, it is becoming increasingly difficult to identify an ‘employer’ who is the subject of regulation. Labour law in most jurisdictions centres on the idea that an employer ‘controls’ an employee.28 Because of the vertical disintegration identified in the previous section of this chapter, however, there is often no identifiable employer or employee. Or alternatively, the identifiable employer is not the controlling entity in the supply chain. Control may be shared between a number of key players in a supply chain, or wielded primarily by a party removed from the worker and outside of the ‘employment relationship’ that labour law regulates. As a result, labour law is ill-equipped to regulate the complex relations of production that are now commonly seen around the world. Increasing numbers of workers toil outside the reach of labour regulation and the social protections and welfare benefits that are most often attached to this legal relationship. In important respects, labour law is now failing to conduct the risk redistribution that it has traditionally carried out. This failing is deeply entrenched in the way that labour law is currently constituted. Labour law has been very narrowly established as a means of regulating the exercise of ‘control’ and ‘subjugation’ by an employer over an employee, and as such it does not recognise as within its purview the forms

27 Peter Drahos, ‘A Networked Responsive Regulatory Approach to Protecting Traditional Knowledge’ in Daniel Gervais (ed), Intellectual Property, Trade and Development (Oxford University Press, 2007). 28 International Labour Office, The Employment Relationship, Report V(I) (95th Session, 2005).

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of control and subordination exercised through market-based supply chain relationships such as those mapped out above. The legal consequence is that special intervention to address issues of fairness or inequality of bargaining power is not seen to be required, and labour law remains ill-equipped to regulate the distinctive kinds of economic relationships through which social risk is being intensified and distributed to vulnerable parties within contemporary global supply chains. The creation of Ethical Clothing Australia can be understood in large part as a response to these failures of state regulation in the face of reorganised patterns of risk and control within global production systems. In the mid1990s, the Textile, Clothing and Footwear Union of Australia came together with an alliance of community groups coordinating under the banner of ‘FairWear’ to develop a market-based mechanism designed to bolster the existing legal system. This mechanism is framed by a Homeworkers Code of Practice and overseen by Ethical Clothing Australia. Australian manufacturers, brands and retailers become accredited under the Code after showing that all suppliers in their supply chain are complying with the Award. Eighty seven brands and manufacturers were accredited as of August 2013.29 This mechanism has a number of notable features. First, the Code builds on the outworker provisions of the relevant labour laws as its base. Its aim is to enhance and complement the operation of labour laws. Common criticisms of voluntary Codes of Conduct are that they are inefficient regulatory forms because they are often company based, rather than industry wide, and draw away from public law, rather than bolstering it.30 Because it is Australia-wide and based on the Award standards, the Homeworkers Code of Practice is not subject to these criticisms. Second, the Code operates as a form of ‘co-regulation’—marshalling a dispersed array of social actors towards a common regulatory project.31 It draws on the power of private players—transforming them into private regulators. Ethical Clothing Australia oversees the operation of the Code. The relevant union is responsible for receiving complaints from outworkers and monitoring compliance with the Code. If a problem is not rectified within a reasonable period of time, the Committee is able to revoke a manufacturer’s accreditation, and the signatory or member brand or manufacturer must

29 See www.ethicalclothingaustralia.org.au/consumer/accredited-brands-full for a full list of accredited companies. 30 Adelle Blackett, ‘Corporate Codes of Conduct as a Regime of Labour Market Regulation’ in John J Kirton and Michael J Trebilcock (eds), Hard Choices, Soft Law: Voluntary Standards in Global Trade, Environment and Social Governance (Ashgate, 2004). 31 See Jeroen van der Heijden, ‘Friends, Enemies, or Strangers? On Relationships Between Public and Private Sector Service Providers in Hybrid Forms of Governance’ (2011) 33 Law and Policy 367 for an understanding of co-regulation from the regulatory literature. See Cynthia Estlund, Regoverning the Workplace: From Self-Regulation to Co-Regulation (Yale University Press, 2010) for an application of this idea in the labour law literature.

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stop giving work to the offending supplier. In these ways, the economic power of retailers and manufacturers is called on in the regulatory process, increasing the efficacy of the overall regulatory system. Third, as well as creating disincentives for non-compliance, the Code creates incentives for compliance. Manufacturers that complete the accreditation process are licensed to display the Ethical Clothing Australia label on their goods.32 In this way, the Code mobilises market power in the service of state-based regulatory norms. Because market power is so concentrated in the Australian TCF industry amongst a small number of retailers and large fashion houses, the survival of smaller manufacturers depends on receiving ongoing contracts for supply to these big players. If the brands and fashion houses will not order from them so as to maintain their accreditation, this functions as a powerful sanction. These aspects of the Code allow market power to be captured in the service of enhanced labour standards, reinforcing the signalling that the existing laws were sending to businesses to guide their behaviour. Moreover, the private Homeworkers Code of Practice has now been mirrored by mandatory codes in two states.33 The Federal Fair Work Act 2009 (Cth) makes provision for the creation of a mandatory code by regulation (s789DA) though no regulation had been passed as of August 2013. These mandatory codes encourage companies to opt into the voluntary code by allowing companies to avoid the scope of the mandatory codes if they join Ethical Clothing Australia. In these ways, Ethical Clothing Australia is able to recognise the responsibility of multiple parties wielding influence over distributions of social risk, and to hold this plurality of actors to account for such influence. Moreover, by mobilising the influence of private actors and incentives in support of state-based regulatory norms and instruments, the scheme has contributed to strengthened incentives for compliance, while maintaining broad regulatory coverage across the sector as a whole (strengths that are not shared by many voluntary mechanisms). Nevertheless, there remain important limits to the effectiveness and legitimacy of this type of private regulatory initiative. First, the job of monitoring supply chains has been given to the relevant trade union under the Code’s rules. This is an important feature of the mechanism as it strengthens the position of the union as a regulatory agent, and connects homeworkers to other workers represented by the union. However, it is an extremely difficult

32

See www.ethicalclothingaustralia.org.au/business/how-to-apply, accessed 16 August 2013. By 2012, three states had enacted mandatory codes, but one of the first steps undertaken by the newly elected conservative state government in Queensland was to repeal the mandatory code on 9 November 2012, see: www.justice.qld.gov.au/fair-and-safe-work/industrial-relations/ codes-of-practice-and-guidelines/mandatory-code-of-practice-for-outworkers-in-the-clothingindustry, accessed 3 September 2013. 33

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and time consuming job to track and visit various suppliers to ensure compliance with the standards, despite the supply chain transparency that the mechanism provides. The union is under-resourced and vastly overstretched in performing this regulatory role. Furthermore, there may be a conflict of interest for the union in conducting this role, as it has a large stake in broad industry acceptance of the mechanism. A second problem flows from the initiative’s reliance on market mechanisms of consumer preference to redistribute risk throughout the supply chain. One of the strengths of the initiative is that consumer power acts as a counterbalance to brand power. Yet as long as it is voluntary, the effectiveness of the ethical label depends on the goodwill of brands to seek accreditation, and consumers to shop ethically. Ethical Clothing Australia only applies to apparel manufactured in Australia, and Australian-made clothes account for around 10 per cent of clothes sold in Australia. As long as only a small number of brands have been accredited, the label will continue to appear on a very small proportion of all clothes for sale in Australia—weakening the signalling associated with ethical purchasing. It may be that there is a tipping point for Ethical Clothing Australia: when a sufficient number of companies have become accredited it will offer a real choice for consumers, and this in turn will put more pressure on those brands that remain outside the scheme. However, this tipping point has not yet been reached. Moreover, the initiative’s coverage of only a small proportion of supply chains means that although the scheme has been greatly beneficial for workers within the supply chains of accredited brands, it has so far improved the conditions of only a small proportion of workers it could potentially assist. A third problem with this regulatory initiative in its current form is that it lacks legitimacy amongst manufacturers, whose compliance with the Code is imperative for its effectiveness. It is often assumed in the regulatory literature that regulation that is more responsive to its context and voluntarily adopted will be more embedded in local or industry norms, and thus more legitimate. Yet, manufacturers, in particular, report feeling singled out by state and private regulation in an industry which is struggling to survive import penetration, compared with other industries that do not have similar private mechanisms.34 Manufacturers are already under great pressure from brands to deliver goods at ever cheaper prices, with ever shorter turnaround times. Instead of seeing this initiative as a way to lift some of this pressure and redistribute risk, many manufacturers see it as another source of costs

34 Oral submission of Jen Layton, The Ark, Fair Work Commission, ‘Transcript of Proceedings, Application by The Ark Clothing Co Pty Ltd (AM2012/93) Textile, Clothing and Footwear and Associated Industries Award 2010, Review of all Modern Awards after First 2 Years’ (Fair Work Commission, 2013) www.fwc.gov.au/documents/transcripts/070313am201293.htm, Thursday 7 March 2013, at PN369 to PN375.

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and reduced competitiveness. As a result, Ethical Clothing Australia remains highly contested and is often attacked in industry journals.35 Nevertheless, the initiative remains relatively new, and as it evolves it appears to be becoming more competent and effective, and expanding its legitimacy and ‘buy-in’ amongst industry players as well as consumers. As such, it provides a useful example of social re-embedding through private regulation of an industry in which supply chains are characterised by diffuse control, and pervasive failures of state-based regulation.

V. FAIR TRADE

The fair trade system differs from Ethical Clothing Australia not only in terms of the forms of social risk on which its regulatory activities focus, but also the regulatory strategies that it employs. Because patterns of risk and control within global supply chains vary significantly between sectors, we focus our analysis here on the supply chains of one particular product— coffee—which has been subject to extensive forms of private regulation in the form of fair trade sourcing. Viewed from a regulatory or governance perspective, fair trade can be characterised as a self-consciously ‘alternative’ normative and institutional system to both organise and govern production and trade of certain products. In this sense, its central aim is to establish an alternative market through which commodities can be produced and traded on terms that promote sustainable social development among marginalised workers and producers,36 particularly those in the global South. Both producers and consumers concerned about the ‘unfair’ terms on which conventional coffee is produced and traded can thereby at least partially opt out from conventional systems of capitalist economic relations, instead participating in production, consumption and exchange activities through fair trade sourcing systems that are governed according to norms favouring stronger social protections, and more equalising and development-oriented terms of exchange. To facilitate this alternative system of production and trading relationships, the fair trade system has created its own supply chain systems linking producers to participating fair trade buyers in countries where the products are consumed. The institutional core of the fair trade system is built around the so-called Alternative Trading Organisations that manage its trading activities, as well as the producer (and in some product sectors, also worker) organisations from whom the fair trade product is sourced. This 35 See for example, Dawn Adams, ‘Union is Exporting Jobs’ Textile Source www.textilesource. com.au/news/union-is-exporting-jobs-20130725-22219.html accessed 27 August 2013, and various other articles in this journal. 36 In the coffee sector, on which we focus, the fair trade system focuses almost exclusively on the certification of smallholder production.

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core institutional structure then has loose links with a broad collection of organisations and networks with wider ‘social movement’ characteristics. An increasingly formalised governance system has been built to facilitate and regulate these core activities. Formal certification systems have operated since 1997, when alternative trading organisations operating within consuming countries in North America and Europe formed an overarching international body to coordinate their activities: the Fairtrade Labelling Organization (FLO). Increasing volumes of fair trade coffee are now traded within the framework of this formal certification system, though more informal networks of fair trading continue. Implicit in the rationale for the formation of the fair trade system is a critique of mainstream capitalist economic relations, and the way that production and trade within conventional agricultural supply chains has been disembedded from norms supportive of social protection and development. For those sharing this critical view of mainstream economic relations, fair trade offers a means of producing and trading coffee through institutions that incorporate stronger mechanisms of risk regulation and governance. The forms of social risk that fair trade seeks to regulate are various. First, and most centrally in the eyes of many, fair trade aims to regulate inequalities (or ‘unfairness’) in the way that income (in the form of profit) is distributed through market and contractual relationships within global supply chains. Within conventional coffee supply chains (as in supply chains for many agricultural commodities), prices fluctuate widely based on prevailing market conditions, exposing producers to significant forms of risk vis a vis their levels of income in a given time period. The influence of global market conditions over the livelihoods of coffee producing communities was particularly visible, for example, during what has often been referred to as a global ‘coffee crisis’—the period of very low prices from 1999–2003 when prices fell to their lowest levels in 100 years.37 The central idea that fair trade guarantees a ‘fair price’ for products sold under its label is an expression of its desire to regulate distributions of social risk of this kind. For many small producers, instability of income is only one element of the vulnerability and insecurity that they experience. These difficulties are often compounded by lack of access to social infrastructure and services, and frequently, insecurity of land tenure.38 Many are also hampered by lack of access to credit and to the technical assistance necessary to support efficient and sustainable production and trading activities. Such problems 37 Christopher Bacon, ‘Confronting the Coffee Crisis: Nicaraguan Farmers Use of Cooperative, Fair Trade and Agroecological Networks to Negotiate Livelihoods and Sustainability’ (University of California Santa Cruz, 2005) 20. 38 Rikke Broegaard, ‘Land Tenure Insecurity and Inequality in Nicaragua’ 36 Development and Change; Jose Luis Rocha, ‘The Chronicle of Coffee: History, Responsibility and Questions’ (2001) Envio; Jon Jonakin, ‘The Impact of Structural Adjustment and Property Rights Conflicts on Nicaraguan Agrarian Reform Beneficiaries’ (1996) 24(7) World Development 1179.

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are typically underpinned by a lack of control over their material conditions, resulting from their lack of power within existing labour and market relations, and lack of sufficient resources and opportunities to escape or transform the terms of these relations. The unequal distribution of social risks of these kinds is intensified by weaknesses in conventional forms of state-based governance in the agricultural sectors of many producer countries. Government provision of social services and infrastructure, shaping of wider economic and sectoral policies and regulation of labour conditions all constitute important strategies through which states have traditionally sought to regulate social risks encountered by vulnerable coffee producers. However, the reach of these strategies has been constrained not only by political, administrative and budgetary constraints at local and national levels, but also by pressure on many producer governments to engage in liberalisation programs involving the dismantling of a range of institutions and policies designed to secure higher prices and profits for farmers.39 In the context of widespread liberalisation and deregulation of the sector, and associated patterns of corporate concentration at key points of the supply chain, control over the conditions experienced by vulnerable smallholders is now importantly influenced by the decisions of transnational corporate buyers and roasters. Increased corporate concentration has enabled the organisation of coffee production and trade within buyer-driven supply chains, which are controlled in important respects by roasting and retail companies based in the US and Europe.40 These actors can exercise significant influence over the prices (and associated incomes) received by farmers. They can also determine the extent to which private regulatory codes designed to influence broader social and environmental conditions of production are implemented in supply chains through which their coffee is sourced. At the same time, many social risks experienced by vulnerable producers continue to be shaped by the more diffuse influences of global market forces—as many corporate buyers of coffee continue to choose arms-length market institutions as their preferred means of sourcing large volumes of commoditygrade coffee. As a result of these parallel processes of both diffusion and concentration of influence, control over relevant forms of social risk has become highly fragmented—diffused through arms-length market relations,

39 Stefano Ponte, ‘The Latte Revolution? Winners and Losers in the Re-Structuring of the Global Coffee Marketing Chain’ (2002) Centre for Development Research, Copenhagen CDR Working Paper 01; Kate Macdonald, The Politics of Global Supply Chains: Power and Governance Beyond the State (Polity, 2013). 40 Stefano Ponte, ‘Brewing a Bitter Cup? Deregulation, Quality and the Re-Organization of Coffee Marketing in East Africa’ (2002) 2(2) Journal of Agrarian Change 248; JM Talbot, ‘Where Does Your Coffee Dollar Go?: The Division of Income and Surplus along the Coffee Commodity Chain’ (1997) 32(1) Studies in Comparative International Development 56.

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as well as distributed across both corporate and government actors in multiple countries. The way in which fair trade operates as a transnational regulatory mechanism can be understood in part as a response to these patterns of both concentrated and diffused risk and control. Yet the regulatory strategies adopted by the fair trade system tackle the challenge presented by dispersed control over social risk distribution in a distinctive way. Like Ethical Clothing Australia, the system establishes the capacity to isolate and hold accountable a plurality of responsible parties for their impact on the income and conditions of producers. Regulatory modes of governance play a central role in promoting this purpose, taking the form of standard-setting, auditing, and certification functions. Fairtrade standards regulate social, labour, environmental, and democratic standards at the producer level, and also require the direct buyers of fair trade products to comply with standards regulating issues such as payment of a ‘fair’ minimum price and social premium, pre-financing arrangements, and the stability of trading arrangements. Fair trade consumers and activists recognise their distinctive responsibilities to support fair trade principles through the act of participating in the scheme. In these ways, the plurality of economic actors who wield influence over relevant patterns of social risk are able to be held responsible for the way their power is exercised. The fair trade system goes further than simply enforcing minimum standards of rights-compliance against a pluralised array of responsible actors. Fair trade also embraces the rather more ambitious governance objectives of performing redistributive and capacity building functions, intended to support the broader socio-economic development and ‘empowerment’ of marginalised producers and workers. The required payment of a ‘fair price’—calculated for specific products and regions or countries on the basis of the estimated cost of sustainable production—is the system’s main instrument for mobilising financial resources for social development. Beyond this core mechanism of income protection, fair trade also seeks to bolster broader institutions of social protection for vulnerable producers. Central to fair trade’s strategy for promoting these broader kinds of risk management is support for strengthened organisational capacities among smallholder producers. The establishment of democratically operated producer organisations is a prerequisite for participation in fair trade coffee supply chains. Many alternative trade organisations operating as fair trade buyers provide direct training and capacity building opportunities for these organisations. In some cases this also enables producer organisations to access additional support from government or international development agencies outside of the fair trade system. Strengthened organisational capacity and increased access to external resources can then enable producer organisations to perform a range of governance functions related to the management of social risk. Of particular importance in this regard has been the provision

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of credit and technical assistance to participating producers, as well as basic social services and infrastructure. In some cases, strengthened smallholder knowledge and experience concerning production, trading, managerial, and community organising activities can also enable them to access wider income-generating opportunities within mainstream markets. In these ways, the fair trade system is able to help insulate participating producers from social risk of multiple kinds. The multiple dimensions of social risk that fair trade tackles is an important strength of the regulatory strategy it adopts. However, the impact of this regulatory breadth is limited by the fact that the social processes shaping producer access to amenities such as social services and infrastructure, access to credit and technical support, and often also security of income, can only be controlled in partial ways by participants in fair trade supply chains. For example, for many producers, the redistributive impact of the price floor and social premium is constrained by the very small percentage of total goods traded under the Fairtrade label in most product groups, and the small differences in income differentials between Fairtrade and conventional products during periods of high market prices. Stronger forms of social protection and risk insurance governing social risks in all of these domains would require much more extensive interaction and coordination between fair trade participants and other government and development actors. The dispersion of influence over many social conditions experienced by coffee producing communities means that advancing the wellbeing of these communities is not a task that can achieved by any single actor or intervention. Yet while individual cooperatives have often worked effectively with local and international non-governmental organisations, coordination with government and industry actors has tended to be much less developed.41 Like Ethical Clothing Australia, fair trade’s attempt to operate an ‘alternative’ institutional system within the terms of a broader market economy also encounters significant limits with regard to the numbers of producers reached by the system. The desire to widen the system’s impact by securing expanded fair trade markets for certified products has led to an increasing preoccupation with engaging large corporate buyers, a trend that some see as linked to a dilution of fair trade standards, particularly in relation to long-term trading relationships or pre-financing. Increasing influence of corporate buyers is also viewed by many as threatening both the integrity of the system’s democratic processes and the critical edge of the system’s political agenda.

41 Kate Macdonald, ‘Globalising Justice within Coffee Supply Chains? Fair Trade, Starbucks and the Transformation of Supply Chain Governance’ (2007) 25 Third World Quarterly: Special Issue on ‘Beyond CSR? Business, Poverty and Social Justice’ 793.

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The need for fair trade to survive within external market environments constrains the capacity of the fair trade system to effectively manage social risk on a larger scale within the capitalist political economy as a whole— despite the fact that the internal logic of the system possesses the right kinds of resources to tackle the distinctive dynamics of disembedding experienced within a so-called ‘risk society’. These continuing tensions demonstrate the deep contradictions entailed in operating an ‘alternative’ economic system within the normative and motivational structures of market capitalism.42

VI. LESSONS FOR RE-EMBEDDING DIFFUSE AND TRANSNATIONAL NETWORKS OF PRODUCTION

The case studies examined in this chapter suggest that private systems of transnational risk regulation are attempting to tackle distinctive patterns of social risk within global supply chains in ways that state-based regulation has so far failed to do. They may thus provide useful insights into how transnational networks of production can be re-regulated in accordance with the goals of strengthened social protection and increased equality. Both the private initiatives examined in this chapter aim to reflect and influence the dispersed loci of control of contemporary structures of production. They attempt to redistribute risk throughout the entire supply chain, so as to benefit those at the bottom—workers and smallholder producers. Finally, these private mechanisms harness consumer based market power as a counterbalance to other forms of private business power within supply chains so as to redistribute control and risk in accordance with social goals. A comparison of the strengths and weaknesses of the regulatory strategies examined in this chapter suggest that they possess distinctive assets which could be replicated in other regulatory initiatives. In some regards, the risk governance strategy adopted by fair trade is more ambitious than that of narrower regulatory schemes such as Ethical Clothing Australia. In particular, fair trade seeks to mitigate a relatively broader range of social risks, encompassing not only compliance with minimum standards regarding production and working processes, but also more equitable distributions of income or profit within markets, and the broader empowerment of marginalised worker and producer groups. Moreover, the Fairtrade initiative has transnational reach, which state regulation has rarely achieved in relation to re-embedding of the social relations of production. However, fair trade’s reliance on governance institutions contained within the tightly delimited ‘niche’ of an ‘alternative’ supply chain system in some respects constrains its influence over the dimensions of social risk it targets, as well as its capacity to reach a broader range of producers—given the constraints 42

Erik Olin Wright, Envisioning Real Utopias (Verso, 2010).

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of the wider capitalist political economy in which the fair trade system continues to operate. The Ethical Clothing Australia initiative, in contrast, enforces a more limited range of standards and, as a consequence, performs a narrower form of risk redistribution. One reason for this is that it draws entirely on existing state-based labour laws for its standards in relation to workers. These statebased standards are detailed and cover many aspects of the productive process and working relationship, but they do not address the bigger issue of equitable distributions of income or profit within markets. They require transparency from brands and fashion houses, but they do not intervene in the price setting function which these parties perform. As we have seen, by employing private governance, brands and fashion houses are able to put significant downwards pressure on the unit price of goods supplied to them. This, in turn, reduces workers’ pay and conditions. Without addressing this important factor, the power of the mechanism to redistribute risk throughout the supply chain remains limited. On the other hand, the initiative has the advantage of drawing in some ways on the legitimacy of state-based rules, and complementing existing state-based power. It supplements the existing regulatory system with additional regulatory instruments and new regulatory agents—bolstering the traditional system of labour law enforcement. Both private initiatives suffer from a limited capacity to reach and impact the lives of the majority of target workers and producers, because they depend on the voluntary participation of companies (except in two states of Australia). While state-based labour law operates on the basis of the principle of universality (at least within the relevant geographical jurisdiction), fair trade and Ethical Clothing Australia operate on the basis of exclusivity or exception. This is both a strength and a weakness of these systems. Consumers are willing to pay a little extra on the basis that the goods are distinguished from other ‘less ethical’ goods. However, as we have seen, the absence of universality not only limits their reach, it can also undermine their legitimacy. These initiatives provide lessons for both state and private initiatives. Perhaps the most important of these is that the notion that markets are ungovernable because control is dispersed is flawed. If transnational business holds a position ‘of extraordinary power and equally extraordinary lack of accountability to anyone or anything except their shareholders’,43 this is partly because regulatory systems have not adapted to the new multipolarity of loci of control in production systems. It may be true, as Amoore claims, that the ‘manufacture of specific kinds of uncertainty is central to neo-liberal programs of the restructuring of labour and working practices’.44 But this is only one aspect of the 43 44

IRENE (n 18). Amoore (n 9).

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restructuring of production processes that has resulted in the disembedding of the social relations of production from state control and regulation. The strategy of passing risk onto other parties in supply chains is not just for the purpose of creating uncertainty and avoiding regulation. It is an essential aspect of broader business strategies of cost reduction and increasing competitiveness in transnational markets. Thanks to the authority of the principle of ‘freedom of contract’ and ‘contract at will’ in common law jurisdictions in particular, states have generally been reluctant to intervene in the operation of supply chains to redistribute risk in accordance with norms of equality. Nevertheless, there are no fundamental legal barriers to states employing many of the regulatory strategies adopted by the initiatives examined in this chapter—though jurisdictional barriers to transnational regulation persist. More effective systems of risk regulation within contemporary capitalism require not only stronger enforcement, but an expanded range of influence over more dispersed loci of control. The systems of risk regulation examined in this chapter engage both state and private actors, and a diversity of regulatory instruments—at the very least, they can help guide some productive first steps along a pluralised regulatory pathway.

Part III

Regulating Trade in Fictitious and Risky Commodities

6 Making Sense of the WTO Sanitary and Phytosanitary Agreement: An Essay about Scholarly Expertise ELIZABETH FISHER*

I

N THE EARLY years of the new millennium I attended an academic workshop on the interrelationship between international trade law and social regulation. The workshop was one among a number on the topic at the time. The interrelationship between trade and regulation was of increasing interest to scholars because of a number of actual and potential conflicts between the two, particularly in regards to risk regulation.1 One of the most high profile conflicts was that between the European Community (EC) and the United States (US) concerning the EC’s ban on beef treated with growth hormones on the basis that the practice created human health risks. For lawyers, that conflict was played out in the forum of the World Trade Organization (WTO) dispute settlement process, with the EC’s measure being found inconsistent with the WTO Sanitary and Phytosanitary (SPS) Agreement.2 The workshop programme was not solely focused on that Agreement, but it and the hormones dispute were leitmotifs of the workshop. The programme consisted of papers given alternatively by scholars from each of these fields—a situation that arose because few scholars had expertise in both. It was a curious affair. A paper would be given by an international trade law scholar that most international trade law scholars would nod in agreement at

* An earlier version of this paper was delivered as ‘Expertise and the WTO Agreement’ at the ESIL-ASIL Research Forum, Helsinki, October 2009. 1 Christian Joerges, ‘Law, Science and the Management of Risks to Health at the National, European and International Level—Stories of Baby Dummies, Mad Cows and Hormones in Beef’ (2001) 7 Columbia Journal of European Law 1. 2 Panel Report, European Communities Measures Concerning Meat and Meat Products (Hormones) (WT/DS26/R/USA 13 February 1998) and Appellate Body Report, European Communities—Measures Concerning Meat and Meat Products (Hormones) (WT/DS26/AB 16 January 1998).

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while most regulation/public law scholars would crinkle up their foreheads in puzzlement at. The same would occur when a regulation/public law scholar presented their paper, except this time it was the regulation/public law scholars that were primarily nodding and the international trade law scholars that were furrowing their brows. More significantly, few papers stimulated any form of debate between these groups. The workshop stumbled from awkward silence to awkward silence. My memory may exaggerate the nods, the furrowing and the silences, but the experience of that workshop can easily be understood as yet another example of international trade law and social regulation primarily operating as two distinct sub-disciplines with their own vocabularies, frames and normative visions. It was a cognitive disjunction in operation—these two groups of scholars were imagining the nature, role and interrelationship between the state and market very differently. Such a disjunction can be easily understood in terms of Polanyi’s narrative concerning the dis-embedding of markets. Much has been written about the narrow and confining logic of international trade law, a line of analysis that often ends in characterising the cognitive gap seen above as a purely ideological one—you are either for free trade or you are for national sovereignty. There are three problems with this. The first is that it overlooks the nuance of Polanyi’s own macro arguments about the society/market interface and arguments such as those of Granovetter who focus on the more micro aspects of it.3 Second, as I have shown elsewhere, divergent opinions about the nature of the relationship are co-produced with understandings of administrative constitutionalism.4 Finally, the assumption that the division is ideological diverts attention away from the role that our own legal and scholarly expertise plays in framing the social world. It is the third concern that is the focus of this chapter. My inspiration for this chapter is the work of Michel Callon and Donald Mackenzie on performativity of economic theories.5 My focus here is not on those theories however, but law as a discipline. My argument is that legal scholars are part of the process of dis-embedding. As Butler notes: It is not just that the apparently autonomous sphere of economic markets is produced on the condition that a conceptual distinction has been made between the economic and social. Rather that very distinction is performatively produced through a process of selection, elision and exclusion.6 3 Greta Krippner and Anthony Alvarez, ‘Embeddedness and the Intellectual Projects of Economic Sociology’ (2007) 33 Annual Review of Sociology 219. 4 Elizabeth Fisher, Risk Regulation and Administrative Constitutionalism (Hart Publishing, 2007). 5 Michel Callon, ‘Performativity, Misfires and Politics’ (2010) 3 Journal of Cultural Economy 163 and Donald MacKenzie, Material Markets: How Economic Agents Are Constructed (Oxford University Press, 2009). 6 Judith Butler, ‘Performative Agency’ (2010) 3 Journal of Cultural Economy 147, 149.

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That performative process of ‘selection, elision, and exclusion’ is occurring through the practices of international trade law scholarship which are closely related to how international trade lawyers understand their own expertise. In this chapter I illustrate the limitations of WTO law expertise in relation to the WTO SPS Agreement and provide a starting point for thinking about how to foster WTO law expertise so as to address those limitations. By rethinking legal expertise and thus reframing understandings of international law a more sophisticated discourse can be developed concerning market/society relationships. The structure of this chapter is as follows. First, I ponder the role of WTO law in framing market/society relationships and show that has led to a development of legal expertise primarily focused on trade liberalisation principles. Second, I provide an overview of the WTO SPS Agreement and briefly show how there has been a tendency to perceive it as a regime operationalising those principles by relying on science. In the third section, I show how the limits of this approach are not only obvious from the critiques of the SPS Agreement, but also from the experience of attempting to deal with disputes in relation to it. Fourth, I consider the type of expertise I see lawyers and scholars needing to foster in relation to that Agreement. An understanding of the SPS regime requires not only understanding of the ambiguous market framework created by the WTO regime, but also what the SPS Agreement is regulating and how it legally operates. Three points should be made before starting. First, this chapter should not be seen as just another exercise in ‘WTO bashing’. While my focus is upon the limits of the WTO law discourse, I also have no doubt that regulatory discourses have their limitations when it comes to thinking about markets.7 Second, this piece deliberately takes the form of a personal reflective essay. I appreciate that my analysis touches on some key theoretical questions about the role of law,8 embeddedness,9 and performativity.10 While I am aware of the complexity of these ideas, I am also aware they can seem alien ideas to the legal scholar. This chapter is thus an introduction to those ideas and hopefully will be read as a reason why legal scholars might want to engage with those theoretical debates, particularly those concerning embeddedness and performativity. Finally, I presume my readership has a nodding acquaintance with WTO law. In light of my conclusion, that may be an interesting assumption to reflect upon.

7 As shown by Sanja Bogojevic, Emissions Trading Schemes: Markets, States and Law (Hart Publishing, 2013) 8 Andrew Lang, ‘The Legal Construction of Economic Rationalities?’ (2013) 40 Journal of Law and Society 155. 9 Krippner and Alvarez (n 3). 10 Donald MacKenzie, An Engine Not a Camera: How Finanical Models Shape Markets (MIT Press, 2006) 16–20 and Callon (n 5).

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I am a latecomer to the world of international trade law and the WTO, and a reluctant one at that. My intellectual nursery ground was the polycentric and socio-politically disciplinary realms of national risk regulation.11 In those realms of administrative law,12 regulatory theory13 and science and technology studies14 questions about who should regulate, what they should regulate, and how they should regulate are explicitly recognised as open to interpretation and shaped by normative understandings about the role of the administrative state. As a public law scholar, I cannot pretend I was initially enthusiastic about having to start learning about the WTO regime. That regime, while neither a full blown market nor economy does appear ‘disembedded’ from society and thus outside the realm of my expertise.15 My engagement with it was only after reviewers of my articles placed it on my scholarly agenda, I was invited to workshops on the topic, and because it was increasingly playing a framing role in scholarly discourse, specifically in relation to the European Union’s (EU) use of the precautionary principle.16 The need to engage with the WTO law regime is because in certain circumstances national regulatory practices could come into conflict with basic trade obligations. The most obvious example is a national product ban. One of the first things that the novice scholar learns about the WTO regime is that a conflict between its basic principles and national regulation does not immediately lead to the latter being a breach of international trade obligations. The General Agreement on Tariffs and Trade 1947 (GATT) has always recognised the right of members to justify violations.17 International trade law has thus always had to accommodate national social regulation in its realm. With that said, there are two important things to note about that process of accommodation. The first is that ideas of national regulation are not at the core of international trade law. Rather, a bundle of ideas of international trade liberalism are.18 Implicit in those ideas are ideas about market/state relations, but the focus of the GATT and subsequently the WTO has been on creating a set

11

For that perspective see Fisher (n 4). Carol Harlow and Richard Rawlings, Law and Administration, 3rd edn (Cambridge University Press, 2009). 13 Robert Baldwin and Martin Cave, Understanding Regulation: Theory, Strategy and Practice, 2nd edn (Oxford University Press, 2012). 14 Ulrich Beck, Risk Society: Towards A New Modernity (Sage Publications, 1992). 15 Elizabeth Fisher, ‘The Rise of Transnational Environmental Law and the Expertise of Environmental Lawyers’ (2012) 1 Transnational Environmental Law 43. 16 Elizabeth Fisher, ‘The European Commission’s Communication on the Precautionary Principle’ (2000) 12 Journal of Environmental Law 403. 17 Art XX. 18 Andrew Lang, World Trade Law After Neoliberalism (Oxford University Press, 2011). 12

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of legal obligations by which to ‘frame’ and thus manage trade between states.19 The study of those legal obligations has given rise to its own subdiscipline with its own texts and specialised journals.20 Alongside, and interrelated with this literature, is a rich discourse that critiques, deconstructs and argues for possible different futures for the WTO regime.21 With all that said, there is a presumption that to understand the regime there is a need to start with basic principles of trade liberalisation and underpinning economic ideas.22 As Lang has so deftly shown, those basic principles are not fixed.23 He has argued that in the early years the GATT was shaped by ideas of embedded liberalism that emphasised ideas of stability and diplomacy.24 The GATT principles were perceived to be embedded in political communities and the regime was not understood to encompass significant swathes of national social regulation.25 Ideas of embedded liberalism, gave way however, to neoliberalism and what Lang has described as the ‘formal-technical turn’— an approach to legal reasoning that emphasised the idea that the application of WTO law could be a neutral and objective exercise.26 At the same time, the scope of the legal regime expanded and thus there was the potential for greater swathes of national regulation to be within the province of WTO law. One of the most obvious examples of that expansion was the coming into force of the SPS Agreement in 1994. Second, and implicit in the above, are that aspects of the WTO regime that allow Member States to derogate from these liberalisation obligations are understood as exceptions. This means they are perceived as being secondary in importance to concentrate on. This structural focus can be seen in picking up a textbook on the topic. A discussion of the logics of trade liberalisation is in a first chapter while discussions concerning exceptions are towards the back of the book.27 As all this is the case, from a WTO perspective the study of national regulation is not only framed by international trade law but also seen as marginal to the discipline. By that I don’t mean anything derogatory, but 19 John Jackson, The Jurisprudence of GATT and the WTO (Cambridge University Press, 2000). 20 See for example the World Trade Review and the Journal of International Economic Law. 21 Deborah Cass, The Constitutionalization of the World Trade Organization: Legitimacy, Democracy and Community in the International Trading System (Oxford University Press, 2005) and Christian Joerges and Ernst-Ulrich Petersmann (eds), Constitutionalism, Multilevel Trade Governance and Social Regulation (Hart Publishing, 2006). 22 Jackson (n 19). 23 Lang (n 18). 24 ibid Ch 7. 25 ibid 205–20. 26 ibid Ch 8. 27 Petros Mavroidis, Trade in Goods, 2nd edn (Oxford University Press, 2013) and Peter Van den Bossche and Werner Zdouc, The Law and Policy of the World Trade Organization (Cambridge University Press, 2013).

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rather that while for regulatory scholars the messiness of regulatory regimes is their focus, it is not for WTO scholars. National regulation comes into their frame as a second step and as such is not perceived within the core of their expertise. All of the above is a rough sketch that is stating the obvious. I state it however, because all of the above is not just ideology in action—it is also to do with how legal disciplines chart the market/society relationship.28 Nor are the limits only in relation to international trade law. Bogojevic has shown that regulatory scholars have limited expertise and understanding of markets as regulatory devices.29 The theories encompassed in both those disciplines are ‘performative’ in nature.30 They shape our understanding of the world and help us make sense of it.31 Much of the work on performativity has focused upon the role of economic theory, but the role of law is also important to have regard to,32 particularly in relation to the WTO regime because that is a frame constituted and limited by law and operating on a legal basis. In playing that role, understandings of law are co-produced with understanding of markets and societies.33 That last paragraph raises a number of important theoretical and conceptual questions about co-production and performativity.34 But let me put them to one side as my purpose in this chapter is to get lawyers thinking about how they understand the world, and the advantages and disadvantages of those understandings. Thinking about that is not just thinking about how lawyers view the world, but also about what skills and knowledge they need to foster to understand that world. Or in other words, it is about what we think is the expertise required to understand the international trade law regime. Expertise is not a monolithic idea and has many facets.35 It is useful to distinguish between those bodies of expertise that may be understood as contributing to the further advancement of a particular area of knowledge (contributory expertise) or may be simply the expertise in knowing about another area of knowledge but not actually participating in its creation (interactional expertise).36 This is particularly in relation to law where lawyers

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MacKenzie (n 5). Bogojevic (n 7). 30 Callon (n 5). 31 Michel Callon, ‘An Essay on Framing and Overflowing: Economic Externalities Revisited by Sociology’ in Michel Callon (ed), The Laws of the Markets (Blackwell, 1998). 32 Lang (n 8). 33 Fisher (n 4) and Sheila Jasanoff, ‘The Idiom of Co-Production’ in Sheila Jasanoff (ed), States of Knowledge: The Co-Production of Science and Social Order (Routledge, 2006). 34 Chris Muellerleile, ‘Turning Financial Markets Inside Out: Polanyi, Performativity and Disembeddedness’ (2013) 45 Environmental and Planning A 1626. 35 Arie Rip, ‘Constructing Expertise: In A Third Wave of Science Studies?’ (2003) 33 Social Studies of Science 419. 36 Harry Collins and Robert Evans, Rethinking Expertise (University of Chicago Press, 2007). 29

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must have an understanding of the law and the problems it deals with. Furthermore, expertise has an institutional life and different institutional cultures construct different concepts and ideals of expertise.37 Expertise is developed because of perceived institutional and resource needs and thus will naturally co-exist alongside different types of institutions and understandings of different types of problems. The process of co-production noted above is thus not only about the world ‘out there’ but also encompasses our own intellectual and scholarly world. What we teach, what we write about, and what we think, are the boundaries of our disciplines. Admittedly that relationship is hard to chart. As Morgan notes in regards to the relationship between economics and the economy, ‘there are so many paths of transfer and many meditators on the way between economic ideas, theories, laws and accounts, and the associated actors, actions, and interventions in the economy’.38 The same is true of law, particularly international law when those that practice it and write about it are one and the same. The overall point is however, that what we as lawyers think is required to understand international trade law will be influenced by how we frame the field.

II. THE SPS AGREEMENT FROM A WTO LAW PERSPECTIVE

The significance of this framing can be seen in relation to the common depiction of the SPS Agreement in international trade law discourse. The SPS Agreement was agreed as part of the Uruguay Round and is primarily regulating when a signatory’s national regulatory measure concerning human, plant and animal health is consistent with the WTO regime.39 The general purpose of the SPS Agreement has been described by the WTO Appellate Body (AB) in Continued Suspension of Obligations in the EC-Hormones Dispute (EC-Hormones-II) in the following terms: The SPS Agreement recognizes the right of WTO Members to take measures necessary to protect human, animal or plant life or health. The right to take a protective measure must be exercised consistently with a series of obligations that are set forth in that Agreement, and that seek to ensure that such measures are properly justified [my emphasis].40 37 Andrew Abbott, The System of Professions: An Essay in the Division of Expert Labor (University of Chicago Press, 1988) 323. 38 Mary Morgan, The World in the Model (Cambridge University Press, 2012) 402. 39 For lengthier discussions of that Agreement see Fisher (n 4) and Elizabeth Fisher, ‘Beyond the Science/Democracy Dichotomy: The World Trade Organization Sanitary and Phytosanitary Agreement and Administrative Constitutionalism’ in C Joerges and Ernst-Ulrich Petersmann (eds), Transnational Trade Governance and Social Regulation: Tensions and Interdependencies (Hart Publishing, 2006). 40 Appellate Body Report, United States—Continued Suspension of Obligations in the ECHormones Dispute (WT/DS320/AB/R 16 October 2008) para 522.

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This is a strong statement concerning the rights of Member States but it is still the case that that process of proper justification is happening in a context where the expertise of trade lawyers is largely understood to work outwards from trade liberalisation principles. National regulations that come into conflict with those principles are essentially ‘overflows’ that then need to be managed by the regime.41 The formal-technical turn in WTO law has resulted in this management process largely been understood as a hard edged factual inquiry about whether a particular national measure meets the requirements of the exceptions.42 In part this is a product of how the Agreement has been commonly interpreted. Scott expresses conventional thinking about the SPS Agreement when she notes: [T]he agreement posits scientific principle, scientific evidence, and risk assessment, as benchmarks according to which the lawfulness of Member State regulatory intervention will be assessed.43

This is not surprising. Article 2.2 of the Agreement states that any SPS measure be ‘based on scientific principles’ and that it should be ‘not maintained without sufficient scientific evidence’.44 Moreover, scholars also highlight Article 5.1.45 That Article states: Members shall ensure that their sanitary or phytosanitary measures are based on an assessment, as appropriate to the circumstances, of the risks to human, animal or plant life or health, taking into account risk assessment techniques developed by the relevant international organizations.46

This is even though there is no reference to science in this Article.47 The interpretation of the Agreement is not the only reason for the formaltechnical turn however. It is also to do with the fact that dispute settlement has been largely understood as being concerned with states proving they meet the requirements of the Agreement. Much of this is due to the way that

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Muellerleile (n 34) 1630 and Callon (n 31). Lang (n 18) 265 and Fisher (n 4) 202. 43 Joanne Scott, The WTO Agreement on Sanitary and Phytosanitiary Measures (Oxford University Press, 2007) 3. 44 See also Article 3.3. 45 Sioban Harlow, ‘Science-Based Trade Disputes: A New Challenge in Harmonizing the Evidentiary Systems of Law and Science’ (2004) 24 Risk Analysis 443 and Howard Chang, ‘Risk Regulation, Endogenous Public Concerns, and the Hormones Dispute: Nothing to Fear But Fear Itself’ (2004) 77 Southern California Law Review 743. 46 See also 5.2, 5.3 and Annex A.4. 47 For discussions of the problematic nature of this characterisation see Appellate Body Report, European Communities—Measures Concerning Meat and Meat Products (Hormones) (n 2) para 180 and Appellate Body Report, United States—Continued Suspension of Obligations in the EC-Hormones Dispute (n 40) para 526. Cf Appellate Body Report, Japan—Measures Affecting Agricultural Products (WT/DS76/AB/R 22 February 1999) para 83. 42

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Article 11 of the WTO Dispute Settlement Understanding (DSU) has been interpreted. It states: The function of panels is to assist the DSB [Dispute Settlement Body] in discharging its responsibilities under this Understanding and the covered agreements. Accordingly, a panel should make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements, and make such other findings as will assist the DSB in making the recommendations or in giving the rulings provided for in the covered agreements. Panels should consult regularly with the parties to the dispute and give them adequate opportunity to develop a mutually satisfactory solution.

Article 11 has been understood by the AB as the Panel’s standard of review.48 Such review is described as requiring an ‘objective assessment of the facts’.49 Panels can appoint experts under both the DSU and the SPS Agreement.50 Because the SPS Agreement has been understood to be about science, the expertise of these experts is largely understood as the expertise required in understanding scientific facts. This is even when it becomes obvious that in giving expert advice, experts are often discussing administrative processes and not just science.51 There is little in Article 11 and the rest of the dispute settlement framework to suggest a different view. It is also the case that Panels often heavily rely on the experts they appoint.52 Moreover, Panels tend to understand SPS standard setting as the practice that occurs before them in the process of dispute settlement.53 Thus the SPS Agreement requirements of Members in relation to standard setting are largely understood as a set of evidentiary requirements before a Panel. In some of the early SPS cases the Panel also collapsed the requirements of showing that a Member had complied with the SPS Agreement with the operation of the burden of

48 Appellate Body Report, European Communities—Measures Concerning Meat and Meat Products (Hormones) (n 2) para 116. For an account of this see David Palmeter and Petros Mavroidis, Dispute Settlement in the World Trade Organization, 2nd edn (Cambridge University Press, 2004) 152–55 and Matthias Oesch, Standards of Review in WTO Dispute Resolution (Oxford University Press, 2003). 49 Appellate Body Report, European Communities—Measures Concerning Meat and Meat Products (Hormones) (n 2) para 117. 50 DSU, Article 13 and SPS Agreement, Article 11.2 although note that the wording of these Articles is different. 51 Appellate Body Report, United States—Continued Suspension of Obligations in the ECHormones Dispute (n 40) paras 415–84. 52 Panel Report, Australia—Measures Affecting Importation of Salmon (WT/DS18/R 12 June 1998) paras 8.75, 8.79, and 8.87 and Panel Report, Japan—Measures Affecting Agricultural Products (WT/DS76/R 27 October 1998) para 8.32. 53 Panel Report, Japan—Measures Affecting Agricultural Products ibid at para 8.42 and Panel Report, Japan—Measures Affecting the Importation of Apples (WT/DS245/R 15 July 2003) at para 8.105.

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proof in dispute settlement, although the AB ultimately ruled this was an incorrect approach.54 This depiction of both the SPS Agreement and dispute settlement as simple exercises in applying law to the scientific facts can be seen in the treatment of many (but not all) SPS disputes.55 It can also be seen as the starting point for much of the scholarship in regards to the Agreement. Take for example, the ‘simulation case’ that was put to a group of over 30 international law trade professionals at the fourth annual World Trade Forum in 2000 so as to stimulate debate about the role of judges in WTO dispute settlement.56 The case was explicitly designed to serve as a ‘benchmark’57 and in doing so captured how international trade law at that time characterised the market/society interface. The ‘moot’ case concerned a fictional county’s ban on ducks treated with growth hormones due to the risks from ‘Dumb Duck Disease’.58 The reasons for the ban, as described in the problem, are presented as socio-cultural and while the scientific evidence is seen as somewhat conflicting there is also the identification of quite definitive evidence from what is described as a ‘neutral institution’.59 The description of the problem is followed by 21 questions and here the frame of international trade law can be seen most obviously. The first set of questions are concerned with whether the measure would be discriminatory in terms of international trade law and then move outwards to questions concerning the legitimacy of the regulation. Scientific evidence is treated as a definite and determinate thing that can be distinguished from politics and law. The language is the language of externalities, of efficiency, of proof. They are highly legalistic questions—to answer them requires an understanding of international trade law. The questions start with ‘Does the fact that we deal here with a de facto and not de jure discrimination issue already make you adopt a more pro-deference stance?’ and carry through to ‘What in case [sic] where the regulating authority deviates from an international standard? What evidence is necessary for the judge to decide that the deviating authority has met its standard of proof?’60

54 Appellate Body Report, European Communities—Measures Concerning Meat and Meat Products (Hormones) (n 2) paras 97–108. 55 See Fisher (n 4) Ch 5. 56 Thomas Cottier and Petros Mavroidis (eds), The Role of the Judge in International Trade Regulation: Experience and Lessons for the WTO (University of Michigan Press, 2003) Appendix. 57 ibid xii. 58 ibid 359. 59 ibid 360. 60 ibid 360, 362.

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III. THE LIMITS OF THE WTO LAW FRAME

I appreciate the above depiction has a certain straw man quality to it. Let me stress again, that in putting it forward I am not attempting to tear it down but rather I want to identify what is commonly understood as the required expertise in regards to the WTO SPS Agreement. As can be seen above, that expertise is understood to be primarily in the application of formal law to scientific issues. As one WTO lawyer once put it to me, he knew about the SPS Agreement because he had read a toxicology textbook. The well documented problem with this characterisation of the SPS Agreement is that it is at odds with the very rich discourse about the complexity of national risk regulatory regimes.61 The depiction, the critique goes, ignores the complexity of scientific uncertainty, the role of values in risk assessment, and the power of national regulatory frames.62 Only focusing on that critique can be counter-productive however, emphasising as it does the cognitive disjunction seen in the workshop.63 Rather what I find more interesting is that WTO lawyers themselves have been acutely aware of the limits of the common depiction of the SPS Agreement. They have struggled with the Agreement on their own terms. The legal operation of the SPS Agreement has not been straightforward and it has given rise to some intractable legal disputes.64 Some of these questions have involved how it should be interpreted65 and others how disputes in regards to it should operate.66 The SPS Agreement may be at the margins but it is an ambiguous agreement that gives rise to a set of tricky legal questions that requires expertise and skill to answer. The 21 questions about Dumb Duck Disease were giving expression to this.67

61 David Winickoff and others, ‘Adjudicating the GM Food Wars: Science, Risk and Democracy in World Trade Law’ (2005) 30 Yale Journal of International Law 81. 62 Eg Vern Walker, ‘Keeping the WTO From Becoming a World Trans-scientific Organisation’ (1998) 31 Cornell International Law Journal 251 and Winickoff and others (n 61) and Jacqueline Peel, ‘Of Apples and Oranges (and Hormones in Beef): Science and the Standard of Review in WTO disputes Under the SPS Agreement’ (2012) 61 International and Comparative Law Quarterly 427. 63 That of course is my point in Fisher (n 39). 64 Catherine Button, The Power to Protect: Trade, Health and Uncertainty in the WTO (Hart Publishing, 2004) and Jacqueline Peel, Science and Risk Regulation in International Law (Cambridge University Press, 2010). 65 Joost Paulwelyn, ‘The WTO Agreement on Sanitary and PhytoSanitary (SPS) Measures As Applied in the First Three Disputes: EC—Hormones, Australia—Salmon and Japan— Varietals’ (1999) 2 Journal Of International Economic Law 641. 66 Michelle Grando, Evidence, Proof, and Fact-Finding in WTO Dispute Settlement (Oxford University Press, 2009) and Caroline Forster, Science and the Precautionary Principle in International Courts and Tribunals (Cambridge University Press, 2011). Note the overlap with other areas of WTO law and other areas of international law in these publications. 67 It can also be seen as a fictionalised account of the ongoing beef hormones dispute. Panel Report, European Communities—Measures Concerning Meat and Meat Products (Hormones); Appellate Body Report, European Communities—Measures Concerning Meat and Meat Products (Hormones) (n 2).

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The fact that those questions were asked also reflects a desire on the part of trade lawyers to develop their expertise. I have written about the difficulties in relation to the SPS Agreement elsewhere,68 but here it is useful to provide a simple example of the type of conundrums the operation of the SPS Agreement has created in the dispute settlement context. The example comes from the AB’s report in ECHormones II.69 That dispute was a continuation of the dispute in the 1990s between the US and the EU concerning hormone-treated beef. The EC argued that the US had continued with retaliatory measures even after the EC had ensured that its measures were WTO compliant. The US held that they were not compliant. The very continuation of this dispute highlights that the ‘scientific’ questions were not easily resolvable. My concern however is with the legal question embedded in the dispute settlement process—whether the Panel had correctly engaged in the proper standard of review when it considered whether the EC had complied with the legal obligation set out in Article 5.1. The AB’s starting point was to define the task of a Panel in such circumstances. The AB stated: A panel reviewing the consistency of an SPS measure with Article 5.1 must determine whether that SPS measure is ‘based on’ a risk assessment. It is the WTO Member’s task to perform the risk assessment. The panel’s task is to review that risk assessment. Where a panel goes beyond this limited mandate and acts as a risk assessor, it would be substituting its own scientific judgement for that of the risk assessor and making a de novo review and, consequently, would exceed its functions under Article 11 of the DSU.70

The first part of this statement reflects the fact that the Panel’s task is a distinct form of review to ensure that a Member has complied with its ‘legal’ obligations. It is a statement that has been made before by the AB71 and in EC-Hormones II the AB found that the Panel had: correctly identified Article 11 of the DSU as setting out the standard of review applicable to its examination of the consistency of the European Communities’ risk assessment with Article 5.1 of the SPS Agreement. The Panel also referred to the guidance provided by the Appellate Body in EC—Hormones concerning the standard of review. Moreover, the Panel made reference to the interpretation of Article 5.1 of the SPS Agreement developed by the Appellate Body in EC— Hormones and acknowledged that a risk assessment may be based on divergent or minority views [footnotes omitted].72 68

Fisher (n 4) Ch 5. Appellate Body Report, United States—Continued Suspension of Obligations in the EC-Hormones Dispute (n 40). 70 ibid para 590. 71 Appellate Body Report, European Communities—Measures Concerning Meat and Meat Products (Hormones) (n 2) para 97–108. 72 Appellate Body Report, United States—Continued Suspension of Obligations in the EC-Hormones Dispute (n 40) para 593. 69

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In other words, the AB found that the Panel had correctly identified its legal function and obligations in dispute settlement. Despite this fact, however, the AB found that the Panel had not conducted its review properly for a number of reasons but particularly because: the Panel seems to have conducted a survey of the advice presented by the scientific experts and based its decisions on whether the majority of the experts, or the opinion that was most thoroughly reasoned or specific to the question at issue, agreed with the conclusion drawn in the European Communities’ risk assessment.73

At first sight this state of affairs is odd. The Panel correctly identified its functions and competences, but yet failed to adhere to them and carried out a very different type of review. If one returns to the AB’s discussion of the standard of review then one can begin to see that this disjunction is not so much a product of any idiosyncrasy on the part of the Panel but more a product of the standard of review itself. The AB, after stating that a Panel must not exceed the ‘limited mandate’ under Article 11 of the DSU, went on to state that: Therefore, the review power of a panel is not to determine whether the risk assessment undertaken by a WTO Member is correct, but rather to determine whether that risk assessment is supported by coherent reasoning and respectable scientific evidence and is, in this sense, objectively justifiable.74

This statement does make sense in light of Article 11 of the DSU and Article 2.2 of the SPS Agreement. It also makes sense if the SPS Agreement is largely understood as regulating science. Yet it suffers from two problems. The first is that, for most lawyers, the distinction between whether something is ‘correct’ and something is ‘objectively justifiable’ is almost non-existent. The second is that both tasks would seem to be essentially the Panel ‘substituting its own scientific judgement for that of the risk assessor and making a de novo review’.75 What the above briefly highlights is the limit of the conventional international trade law frame for thinking about the SPS Agreement. The important point is that it is a problem that is within WTO legal practice and has been identified by WTO law scholars themselves.76 The limits of the way in which the SPS Agreement is framed are not just apparent to those outside international trade law but to those inside it as well.77 The lengthy dispute

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ibid para 598. ibid para 590. 75 ibid para 590. 76 Peel (n 62) and Michael Du, ‘Standard of Review Under the SPS Agreement after EC-Hormones II’ (2010) 59 International and Comparative Law Quarterly 441. 77 Eric Gillman, ‘Making WTO Dispute Settlement Work: Challenges and Practical Solutions’ (2011) 31 Northwestern Journal of International Law and Business 439. 74

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concerning GMOs between the US and the EC is another example of the problems in this area.78

IV. FOSTERING SPS EXPERTISE

As Callon has noted, markets ‘are complex realities that can be configured differently’.79 This is particularly the case in relation to international trade law which is a legal construction that is evolving.80 The issue is not whether our understanding of the world is constructed but about the integrity and quality of that construction.81 That of course has a normative and ideological dimension, but it also is about how useful and workable the constructions are. What the above points to is the need to foster a different type of expertise in relation to the SPS Agreement—one that is not just about the neutral application of the Agreement to scientific questions. In this last section I want to begin to sketch what that expertise might look like. The starting point for thinking about such expertise is that the WTO is not just a set of rules but a ‘thick legal culture’.82 As Weiler notes in discussing the WTO: Law—legal cultures, legal rules, and legal discourse—does not simply act as a neutral medium or transmission belt for policies determined by economic, political, and even moral considerations. Law is, additionally, both reflective and constitutive of political culture, indeed of culture in its broadest sense.83

The reflective and constitutive nature of legal culture can be seen in three different dimensions of the SPS Agreement and how it operates. In all cases, what can be seen is that the operation of the Agreement requires choices to be made. The expertise of lawyers requires the fostering of skills and knowledge about the nature and consequences of those choices. The first dimension relates to how the SPS Agreement is understood as an aspect of international trade law. The Agreement can be seen to have two not always mutually consistent objectives—both objectives flowing from understandings of the type of ‘trade liberalisation’ the WTO is creating. First, SPS measures can be seen as needing special regulation under the 78 Robert Howse and Henrik Horn, ‘European Communities—Measures Affecting the Approval and Marketing of Biotech Products’ (2009) 8 World Trade Review 49 and Panel Report, European Communities—Measures Affecting the Approval and Marketing of Biotech Products (WT/DS291-3/R 29 September 2006). 79 Callon (n 5) 163. 80 Lang (n 18). 81 Bruno Latour, ‘An Attempt at a “Compositionist Manifesto”’ (2010) 41 New Literary History 471. 82 On the concept of legal ‘thickness’ see Fisher (n 4) 36 and Clifford Geertz, Local Knowledge (Fontana Press, 1993) 214. 83 Joseph Weiler, ‘Law, Culture and Values in the WTO—Gazing into the Crystal Ball’ in Daniel Bethlehem and others (eds), The Oxford Handbook of International Trade Law (Oxford University Press, 2009) 752–53.

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WTO regime because historically Members had used SPS measures as covert vehicles for trade protectionism.84 From this perspective, regulating SPS measures is an extension of the discrimination principles and the Agreement is a fleshing out of the Article XX(b) exception included in the GATT.85 The second purpose of the Agreement can be seen as reducing regulatory heterogeneity which can act as a form of trade barrier, due to the fact that different regulatory standards in different states cause extra costs to importers.86 The abandonment of tariffs has made such non-tariff trade barriers more obvious and SPS standards have had a particularly high political profile in this regard.87 From this perspective the Agreement is a form of ‘policed decentralisation’ in that it addresses the regulatory heterogeneity problem by creating common rules for national SPS standard setting.88 On this interpretation, Article 3.1 of the Agreement which states that ‘Members shall base their sanitary or phytosanitary measures on international standards’, is particularly important because Members adopting international standards is the best way to reduce regulatory heterogeneity. Due to the ambiguous nature of the Agreement’s obligations and the unclear relationship between those obligations, the Agreement is open to interpretations informed by either purpose. It is also the case that these two different interpretations stem from different understandings of the trade objectives of the WTO—or in other words—two different understandings of international trade. The former is a model in which states have a right to restrain their trade, and the latter a model in which the level playing field is paramount.89 Interpretation of the Agreement thus requires an awareness that a choice is to be made about the nature of the Agreement and the contribution it makes to the WTO regime.90

84 W Maruyama, ‘A New Pillar of the WTO: Sound Science’ (1998) 32 International Lawyer 651; Donna Roberts, ‘Sanitary and Phytosanitary Risk Management in the Post-Uruguay Round Era: An Economic Perspective’ in National Research Council (ed), Incorporating Science, Economics, and Sociology in Developing Sanitary and Phytosanitary Standards in International Trade: Proceedings of a Conference (National Academies Press, 2000) 35; and Todd Weiler, ‘International Regulatory Reform Obligations’ (2000) 34 Journal of World Trade Law 71. 85 Preamble SPS Agreement. See Joel Trachtman, ‘International Trade as a Vector in Domestic Regulatory Reform: Discrimination, Cost-Benefit Analysis, and Negotiations’ (2000) 24 Fordham International Law Journal 726 for a discussion on how the national treatment principle can be extended into a discussion of the rationality of national regulation. 86 Alan Sykes, ‘The (Limited) Role of Regulatory Harmonisation in International Goods and Services Markets’ (1999) 2 Journal Of International Economic Law 49. 87 Michael Trebilcock and Robert Howse, ‘Trade Liberalization and Regulatory Diversity: Reconciling Competitive Markets with Competitive Politics’ (1998) 6 European Journal of Law & Economics 5, 6. 88 Sykes (n 86) 61–65. 89 One might argue these are akin to Bogojevic’s private property rights and economic efficiency models respectively. See Sanja Bogojevic, ‘Ending the Honeymoon: Deconstructing Emissions Trading Discourses’ (2009) 21 Journal of Environmental Law 443. 90 Fisher (n 4) 178–89, discussing whether the Agreement is an extension of the Article XX GATT non-discrimination principles or whether it is directly concerned with reducing regulatory heterogeneity.

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The second dimension concerning the expertise of WTO lawyers relates to what the Agreement is regulating—SPS standard setting. SPS and other forms of technological risk standard setting do have a scientific dimension but are primarily administrative activities that encompass a rich mixture of normative prescription, information, expertise, and communication processes.91 The administrative nature of SPS standard setting is significant because the legitimacy of public administration is constantly contested in liberal democracy.92 In such circumstances, SPS standard setting is shaped by discourses of administrative constitutionalism.93 That is, it is shaped by discourses about the role of law in constituting, limiting and holding public administration to account to ensure it is legitimate. These discourses are embedded in legal cultures and frame not only the role of public administration but also the role of law and how SPS issues are understood.94 The SPS Agreement is no exception to this, and looking at the Agreement as a whole it can be seen that it regulates all aspects of SPS standard setting. Thus, there are provisions concerned with the role of normative prescriptions95 and ensuring they are ‘appropriate’ in any particular circumstance.96 There are a considerable number of provisions regulating the type of information on which standards can be set.97 Implicit in these provisions is the utilisation of a range of expertise98 including the expertise of international bodies99 and national regulatory bodies.100 The Agreement also includes a number of provisions regulating communication and transparency,101 particularly concerning consultations between Members.102 The Agreement is thus requiring far more than measures based on science. Rather, the Agreement is a statement of administrative constitutionalism, a

91

ibid 19–22. Gerald Frug, ‘The Ideology of Bureaucracy in American Law’ (1984) 97 Harvard Law Review 1276 and Brian Cook, Bureaucracy and Self Government: Reconsidering the Role of Public Administration in American Government (Johns Hopkins University Press, 1996). 93 Fisher (n 4). 94 ibid Ch 1. 95 Art 2.1 and the Preamble. Although note that the concept of ‘level’ of protection (see Arts 3.3 and 5.6) suggests that the issue of normative prescription is linear when, as seen in the rest of this book, it is multidimensional. Also note other provisions of the Agreement will limit the discretion of a Member in relation to how a normative prescription applies. See Art 2.2 (extent necessary), Art 5.4 (need to take into account minimising negative trade effects in determining the ‘appropriate level of protection’) and Annex A.5. 96 Arts 5.4 and 5.6. 97 Art 3.1 (information for international bodies); Art 2.2 and Art 3.3 (scientific principles and scientific justification); Art 5.1–5.3 and Annex A.4 (a range of information). 98 See in particular the provisions of Art 5.2 and 5.3. 99 Art 3.1 and Annex A.3. 100 Art 9. 101 Art 7 and Annex B. 102 Arts 3.4, 9 and 12. 92

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fact most obviously seen in Article 5.1. Article 5.1 is usually understood as an extension of the requirement for scientific justification103 but an assessment of risks, and particularly a ‘risk assessment’, are not purely scientific constructs.104 Rather, in the regulatory context they are analytical processes developed to justify administrative decision-making. An assessment of risks will nearly always mobilise science but is not a purely scientific process per se. Rather it is an administrative process, and the primary catalyst for ‘risk assessment’ in the national SPS context, has been debates over administrative constitutionalism.105 The implication of this analysis is not to argue that there is no role of science under the SPS Agreement. Rather, it is that that role must be seen in context—there are many different forms of expertise that must be drawn upon in the interpretation and operation of the Agreement. What Articles 5.1 and 2.2 reflect is that information and specialist experience and skills are a necessary aspect of SPS standard setting. Indeed, states have only been able to evaluate and manage technological risks because of advances in specialised knowledge.106 The Agreement and the AB have both pointed to the relevance of other forms of knowledge, skills and experience for assessing risk and applying the Agreement.107 The final dimension of expertise that needs to be fostered in relation to the SPS Agreement is that in regards to dispute settlement. It is this expertise that the AB was describing when discussing the standard of review in EC-Hormones II and it is distinct and interrelated to that concerning how the SPS Agreement is interpreted. The AB in EC-Hormones emphasised the legal expertise of this review by noting that it reflected ‘the balance established in the Agreement between the jurisdictional competences conceded by the Members for themselves’.108 In other words, this type of expertise is about more than just applying the law to the facts.

103

Scott (n 43) 3. Elizabeth Fisher, ‘Framing Risk Regulation: A Critical Reflection’ (2013) 4 European Journal of Risk Regulation 125. 105 Elizabeth Fisher, ‘Risk and Environmental Law: A Beginner‘s Guide’ in Benjamin Richardson and S Wood (eds), Environmental Law for Sustainability (Hart Publishing, 2006); National Research Council, Science and Judgment in Risk Assessment (National Academy Press, 1994); and Sheila Jasanoff, Risk Management and Political Culture: A Comparative Study of Science in the Policy Context (Sage Publications, 1986). For an analysis of the many different forms of risk assessment in the EPA see L Rhomberg, A Survey of Methods for Chemical Risk Assessment Among Federal Regulatory Agencies (National Commission for Risk Assessment and Management, 1997). 106 Paul Harremoës and others (eds), The Precautionary Principle in the Twentieth Century: Late Lessons From Early Warnings (Earthscan Publications, 2002). 107 Article 5.2 and see Appellate Body Report, United States—Continued Suspension of Obligations in the EC-Hormones Dispute (n 40) para 545. 108 Appellate Body Report, European Communities—Measures Concerning Meat and Meat Products (Hormones) (n 2) para 115. 104

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In most courts, and in particular specialist courts, a range of procedures and doctrines govern this expertise.109 The resulting legal complexity is significant, particularly in those institutions that can exercise de novo review. Thus, for example, a merits review in Australian environmental law courts can be understood to vary along four different dimensions: scope of review; relevant considerations; procedure; and evidentiary requirements.110 If one turns to WTO dispute settlement, one can see an emerging framework that does indeed govern this form of expertise. That framework includes Article 11 of the DSU, procedural rules, emerging AB doctrine, and the procedures concerning the role of experts.111 It was that framework which the AB identified when it discussed the appropriate standard of review in relation to Article 5.1 in EC-Hormones II. Yet, as that decision highlights, there are some real problems at present with how WTO dispute settlement expertise is understood. In part that is due to a failure to understand the complexity of the SPS Agreement. In part however, it is to do with the fact that the distinct range of expertise required in dispute settlement is not as well established in WTO law as it should be. In stating the above I recognise that these different forms of expertise require much to be fostered and that fostering requires institutional changes and thinking through different ideas of contributory and interactional expertise. The above is thus not offered as a definitive blueprint but more as a starting point for discussion. It is related to the 21 questions concerned with Dumb Duck disease—the difference is I am highlighting the importance of focusing on our own scholarly expertise. That expertise will define the analytical ‘horizons’ of what is possible.112 The key thing is that the process of dis-embedding international trade law comes from within the discipline, not outside it. I should also stress that there are many trade lawyers already engaged in fostering the different types of expertise seen above.113 The real significance of that should be more widely recognised.

109 Elizabeth Fisher, The Capacity of Courts to Handle Complex Cases: Lessons from Technological Risk Regulation (Foundation of Law, Justice and Society Policy Brief, 2009). 110 Elizabeth Fisher, ‘Administrative Law, Pluralism and the Legal Construction of Merits Review in Australian Environmental Courts and Tribunals’ in Linda Pearson and Carol Harlow (eds), Administrative Law in a Changing State: Essays in Honour of Mark Aronson (Hart Publishing, 2008). 111 Andrew Guzman, ‘Determining the Appropriate Standard of Review in WTO Disputes’ (2009) 42 Cornell International Law Journal 45 and Joost Paulwelyn, ‘The Use of Experts in WTO Dispute Settlement’ (2002) International And Comparative Law Quarterly 325. 112 Sheila Jasanoff, ‘Objectivity in Regulatory Science: Sites and Practices’ in C Camic, N Gross and M Lamont (eds), Social Knowledge in the Making (University of Chicago Press, 2011) and Expert Group on Science and Governance, Taking European Knowledge Society Seriously (European Commission, 2007). 113 Lang (n 18) and R Howse, ‘Democracy, Science, and Free Trade: Risk Regulation on Trial at the WTO’ (2000) 98 Michigan Law Review 2329.

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V. CONCLUSION

In stating all of the above, I am acutely aware that re-imagining our own legal and scholarly expertise is easier said than done. My own reluctance with engaging with WTO law is evidence of that fact and the lesson from that workshop many years ago was that it was too easy for discussions between regulatory scholars and international trade lawyers to descend into counterproductive silence very quickly. By the end of the workshop the realm of international trade law looked even more disembedded than it did at the beginning and I am sure that national regulation looked more ‘political’ to the international trade lawyers. Yet with all that said, the point remains that in thinking about market/society relationships we need to start with our own expertise. As Lang has noted, this is not ‘a rejection of specialist bodies of knowledge, but a more active, and critical informed process of engagement with them’.114 Such a process of engagement requires making more ‘visible’ the way in which knowledge and skills construct our understanding of trade law and of the problems it regulates.115 That relationship becomes particularly visible by pondering ideas of embeddedness and performativity.

114 115

Lang (n 18). ibid 351–52.

7 Regulating Economic Activity Through Performative Discourses: A Case Study of the EU Carbon Market BETTINA LANGE

I. INTRODUCTION

T

HIS CHAPTER ARGUES that Polanyi’s embeddedness metaphor matters for developing analytical insights into interactions between economy and society that underpin regulatory practice. In building on previous work,1 the chapter suggests that Polanyi’s metaphor can be developed further with reference to Laclau’s and Mouffe’s ideas about discourse. This linguistic turn enables to transcend a clear demarcation between an economic and a social sphere, a key limitation of Polanyi’s approach. It thereby opens up the regulatory imagination to a range of interconnections between ‘economy’ and ‘society’ as informing regulatory practice. The chapter examines and develops this argument in the context of a case study about the European Union (EU) carbon market. The chapter develops its argument in five sections. The second reviews contributions to contemporary economic sociology that seek to develop Polanyi’s ideas about embedding economic into social relationships. It suggests that these contributions do not fully address three key points of critique of Polanyi’s embeddedness metaphor. Section three sets out key elements of Laclau’s and Mouffe’s discourse concept. Section four provides an introduction to the EU carbon market. The main section five explores how this market is performed through various internally contradictory, ‘open’ economic discourses. These valorize ‘competition’ and are constructed also

1 Bettina Lange, ‘From Polanyi to Discourse Theory’ in Bettina Lange and Dania Thomas (eds), From Economy to Society: Perspectives on Transnational Risk Regulation, Special Issue of Studies in Law, Politics and Society (Bingley, Emerald Insight, 2013) 73–101.

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with reference to a discourse of ‘society’ that turns talk about power in the EU carbon market into a key theme. Section six concludes.

II. HOW TO OVERCOME A DICHOTOMY BETWEEN AN ECONOMIC AND SOCIAL SPHERE IN POLANYI’S EMBEDDEDNESS METAPHOR?

Polanyian ideas about the embedding of economic in social relationships provide a distinct perspective for thinking about the regulation of economic activity, including transnational risks that merit further exploration. Polanyi’s theory has experienced a revival in the wake of the 2007–08 subprime mortgage lending crisis in the US, and the later unfolding and on-going sovereign debt crisis in Europe.2 The political responses to these economic crises seem to be a paradigmatic case of a Polanyian regulatory ‘double movement’, that is the reassertion of a degree of societal control over economic activity in order to stabilize that activity and thus to maintain the fabric of society.3 Significant state intervention, such as the nationalization of Lloyds TSB bank and the Royal Bank of Scotland in the UK, and the provision of funds for undercapitalized banks through the Troubled Assets Relief Program in the US may be understood as a countermove of ‘society’, though on inegalitarian terms given that tax payers’ money helped to deal with the fall-out of private economic risk taking.4 Polanyi’s embeddedness metaphor is, however, not just timely. More importantly it enables us to inquire into how ‘society’ contributes to control over economic activity, a question at the heart of regulation scholarship.5 But what did Polanyi actually mean by ‘embedding’ economic in social relationships? To begin with, he marshalled anthropological and historical evidence for showing that social and legal norms, and their institutional

2 Amanda Perry-Kessaris, Diamond Ashiagbor and Prabha Kotiswaran, Towards an Economic Sociology of Law (London, Wiley-Blackwell, 2013); Lange and Thomas (n 1); Christian Joerges and Josef Falke, Karl Polanyi, Globalisation and the Potential of Law in Transnational Markets (Oxford, Hart Publishing, 2011); Bettina Lange and Dania Thomas, Socializing Economic Relationships: A Critique of Business Regulation (2011) 62. Northern Ireland Legal Quarterly 4; Fred Block, ‘Introduction’ in K Polanyi (ed), The Great Transformation: The Political and Economic Origins of Our Time (Boston, Beacon Press, 2001). 3 Sometimes also referred to as ‘spontaneous social protection’, and including state economic and social regulation to deal with the worst side effects of the commodification of labour, land and money (Gareth Dale, Karl Polanyi: The Limits of the Market (Cambridge, Polity Press, 2010) 4, 60–61. 4 Martijn Konings, ‘Neoliberalism and the American State’ (2010) 36 Critical Sociology 741, 742. 5 See eg Bridget M Hutter and Joan O’Mahony, ‘The Role of Civil Society Organisations in Regulating Business’, CARR ESRC Centre for Analysis of Risk and Regulation, Discussion Paper No 26, September 2004, at: www.lse.ac.uk/researchAndExpertise/units/CARR/pdf/DPs/ Disspaper26.pdf (last accessed 10 October 2014).

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expression,6 inform and shape economic activity in various cultures. ‘Society’ thus exerts an important influence on the economy.7 He argued that the degree to which economic relationships are embedded in social ones was particularly high in pre-industrialist and pre-capitalist societies:8 Custom and law, magic and religion cooperated in inducing the individual to comply with rules of behaviour which eventually, ensured his functioning in the economic system.9

Relationships between a town and its rural hinterland, family ties in the household economy, indentured labour, as well as wider cultural belief systems, for instance about property and its inheritance, are key examples of social relationships that can embed economic activity.10 To understand economic relationships as embedded in social ones also entails qualifying the idea that economic actors are utilitarian interest maximisers who observe economic and social affairs, and respond to economic incentives, in particular price signals. It also entails questioning whether interactions between market actors are largely impersonal, premised on honesty and mediated by contracts.11 Instead economic activity is the outcome of pro-active social interactions between economic actors, which go beyond ‘barter, truck and exchange’.12 Social context thus matters for defining ‘rational’ behaviour in economic exchange co-ordinated, for example, by markets.13 Polanyi’s embeddedness metaphor has itself undergone various ‘great transformations’ in contemporary economic sociology,14 but a key criticism remains. It is ambiguous and potentially internally contradictory.15 On the 6 Jens Beckert, ‘The Great Transformation of Embeddedness: Karl Polanyi and the New Economic Sociology’, (2007) MPIfG Discussion Paper 07/1, 8, at: www.mpifg.de/pu/dp_ abstracts/dp07-1.asp (last accessed 6 October 2014). 7 This account of Polanyi’s ‘embeddedness’ metaphor suggests that the economy does not dominate society. Some contributions to the new economic sociology, however, interpret Polanyi’s embeddedness metaphor in a functionalist way, by suggesting that embedding economic in social relations is a ‘necessity’ in order to ensure the functioning of economic activity (Beckert (n 6) 7, 19). 8 But Polanyi did not suggest that ‘embeddedness’ was the key feature that distinguished pre-modern from modern economies (Beckert (n 6) 19). 9 Karl Polanyi, The Great Transformation: The Political and Economic Origins of our Time (Boston MA, Beacon Press, 2001) 57. 10 Karl Polanyi, Conrad M Arensberg, Harry W Pearson (eds), Trade and Market in the Early Empires (Chicago, Macmillan, 1957). 11 Bernard Barber, ‘All Economies are “Embedded”: The Career of a Concept and Beyond’ (1995) 62 Social Research 2, 398. 12 ‘The propensity to truck, barter and exchange one thing for another is common to all men, and to be found in no other race of animals’, Adam Smith, An Inquiry into the Nature and Causes of The Wealth of Nations (London, Methuen & Co Ltd, 1776) 16. 13 Gareth Dale, ‘Karl Polanyi in Budapest: On his Political and Intellectual Formation’ (2009) I Archives Européennes de Sociologie 1, 97, 112. 14 Beckert (n 6) 1. 15 Fred Block in Greta Krippner, Mark Granovetter, Fred Block, Nicole Biggart, Tom Beamish, Youtien Hsing, Gillian Hart, Giovanni Arrighi, Margie Mendell, John Hall, Michael Burawoy, Steve Vogel and Sean O’Riain, ‘Polanyi Symposium: A Conversation on Embeddedness’ (2004) Socio-Economic Review 2, 109, 118.

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one hand, the terminology of embedding, disembedding and re-embedding economic in social relationships seems to imply that economic and social relationships can be clearly differentiated. How else can one make sense of the idea of embedding a distinct set of economic relationships into a different types of relationships, social ones? On the other hand, Polanyi argued that markets should be thought of as a particular type of institution and thus are always embedded in social relationships.16 One way to resolve this tension is to interpret Polanyi’s work as suggesting that a ‘dis-embedding’ of markets occurs only temporarily. Society’s nearly automatic17 regulatory counter-movement will always re-embed markets in social relationships in the end.18 But the regulatory counter-movement is precarious and conditional upon a range of factors that enable successful political intervention in the economy, so re-embedding cannot be simply assumed to occur.19 Hence, at the heart of the ambiguity of Polanyi’s embeddedness metaphor seems to be a too clear-cut distinction between an economic and a social sphere. Contributions to contemporary economic sociology have sought to address this but there is scope for further developing this work. In particular three related criticisms remain. First, contrary to its original intention the embeddedness metaphor may actually reify economic activity. Second, the nature of ‘the social’ in which economic relationships can become embedded is broad and potentially underspecified. Third, the embeddedness metaphor needs to be fleshed out further so that it can be operationalized better for empirical research. With reference to the first criticism it has been suggested that Polanyi may not have gone far enough in abandoning an ‘economistic’ understanding of the economy. Despite the fact that Polanyi sought to show the ‘primacy of society’, also in the realm of economic action,20 he may not have succeeded in doing so.21 Contemporary economic sociologists have therefore sought to develop perspectives that further transcend ‘economistic’ thinking. Fred

16 Fred Block (n 2) xxiv. Barber also follows this idea in order to reduce the contradiction at the heart of Polanyi’s embeddedness metaphor. He argues that we should not attribute analytical or empirical independence to the social phenomenon of markets. Instead the task is to analyse how reciprocal and redistributive forms of economic relations co-exist with market co-ordination of economic activity (Barber (n 11) 400. 17 Arne L Kalleberg, ‘Precarious Work, Insecure Workers: Employment Relations in Transition’ (2009) 74 American Sociological Review 1, 14. 18 Konings (n 4) 744. 19 Beckert (n 6) 17. 20 Barber (n 11) 388. 21 Konings (n 4) 745, also referring to similar critiques by Jens Beckert, ‘Economic Action and Embeddedness: How Shall We Conceptualize Economic Action?’ (2003) 37 Journal of Economic Issues 3, 769–87; Andrew Jones, ‘Beyond Embeddedness: Economic Practices and the Invisible Dimensions of Transnational Business Activity’ (2008) 32 Progress in Human Geography 1, 71–88; Greta Krippner, ‘The Elusive Market: Embeddedness and the Paradigm of Economic Sociology’ (2002) 30 Theory and Society 6, 775–810.

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Block, for example, suggests that we should think of economic and social relationships as related and situated on a continuum through which we can distinguish different degrees of ‘marketness’ of economic behaviour. Limited influence of social relationships is associated with ‘high marketness’, as illustrated by the competitive, price based markets described in neo-classical economic theory. ‘Low marketness’ involves eg reliance on organizational hierarchies for the co-ordination of economic transactions.22 Clear distinctions between an economic and a social sphere are also abandoned by those who argue that economic activity is performed through social networks. Ghezzi’s and Mingione’s re-interpretation of ‘embeddedness’ locates economic actors in various social networks that change according to specific historical and institutional contexts.23 They are interested in understanding the configuration of these networks, and thus how various actors are inserted in them. The ground-breaking idea that economic activity is performed through social networks was first developed by Granovetter. He suggested that networks not only enable a descriptive mapping of economic activity, but also point to ‘proximate causes’ that explain economic relationships.24 Granovetter sought to avoid the pitfall of either an ‘under- or oversocialized’ understanding of economic behaviour, with the former neglecting the influence of internal social norms on economic choice, while the latter exaggerated it. He argued instead that economic behaviour is embedded in continuous networks of social relations,25 with network structures, rather than social action being a key determinant.26 Other contributions to contemporary economic sociology have gone even further in abandoning a questionable dichotomy between an economic and a social sphere. Konings, for instance, challenges reified understandings of a market in his critical analysis of neo-liberal governance practices.27 He argues that such practices are not a technique for subordinating governments and citizens to the workings of distinct impersonal markets. Instead they involve the ‘creation, legitimation and consolidation of simply new relations of control’.28 Hence, while neo-liberal governance could be understood as the disembedding of economic relationships out of institutional, including regulatory contexts, Konings argues that such practices create new institutional contexts that help to buttress market logics. Konings works with a broad conception of institutions, which includes ‘relations

22

Krippner et al (n 15) 111. Simone Ghezzi and Enzo Mingione, ‘Embeddedness, Path Dependency and Social Institutions: An Economic Sociology Approach’ (2007) 55 Current Sociology 1, 11. 24 Krippner et al (n 15) 116. 25 Mark Granovetter, ‘Economic Action and Social Structure: The Problem of Embeddedness’ 91 American Journal of Sociology (1985) 481–510; Krippner et al (n 15) 110. 26 Beckert (n 6) 9. 27 Konings (n 4) 742. 28 Emphasis added. Ibid. 23

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of power’ that come to shape citizens’ everyday practices.29 In Polanyian terminology Konings argues that neo-liberalism generates a new form of embeddedness. His perspective thus avoids a re-enactment of clear divisions between a social and an economic sphere by highlighting that de-regulation usually involves re-regulation.30 But these accounts which seek to lessen clear-cut distinctions between an economic and a social sphere of action in Polanyi’s embeddedness metaphor may not go far enough. They do not completely abandon ‘economistic’ thinking. For instance, Block’s ideas can also be interpreted as superimposing a socialized understanding of economic transactions on top of a ‘pre-social and untheorized’ understanding of the market.31 In addition, Granovetter’s approach to the embeddedness metaphor has been considered as too narrow, with a focus on network structures limiting rich accounts of political and cultural features of economic action, and obscuring an understanding of the relationship between economic activity and ‘the larger social systems’ in which economic activity is located.32 Barber also seems to retain a clear distinction by considering market exchange as ‘one type’ of ‘social exchange more generally’.33 Moreover, in some accounts of ‘economy’ and ‘society’ interactions, reference to ‘nature’ seems to further buttress a conceptual distinction between ‘economic’ and ‘social’ activity. For instance, in Malthus’ social naturalism, the spectre of over-population is used to emphasize that economic activity is embedded in competitive Darwinian struggles for scarce natural resources.34 This backgrounds the social organization of economic activity as a major influence on economic development. Similarly, a burgeoning contemporary literature on ‘ethnoeconomics’ has emphasized the value of harnessing traditional and local forms of knowledge for organizing economic activity in order to promote more sustainable forms of production and consumption. Where this implies natural limits to economic growth, this challenges neoclassical, abstract understandings of economic activity that claim universal applicability regardless of the specific cultural context in which economic activity is carried out.35 While Malthusian and contemporary sustainability accounts of the importance of ‘nature’ start to qualify a dichotomy between ‘social’ and ‘economic relations’, mainly by broadening an understanding 29

ibid. Konings (n 4) 748. 31 Krippner et al (n 15) 112. 32 Beckert (n 6) 16, 21; Barber (n 11) 406. 33 ibid 395. 34 Margaret R Somers and Fred Block, ‘From Poverty to Perversity: Ideas, Markets, and Institutions Over 200 Years of Welfare Debate’ (2005) American Sociological Review 70, 269–70. 35 See eg Clóvis Cavalcanti, ‘Economic Thinking, Traditional Ecological Knowledge and Ethnoeconomics’ (2002) 50 Current Sociology 1, 39, 42; Herman Daly, Beyond Growth: The Economics of Sustainable Development (Boston, Beacon Press, 1996). 30

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of economic activity through reference to its natural foundations they do not overcome this dichotomy. They arguably even further reinforce it, when ‘nature’, such as in Malthus’ perspective, is contrasted with ‘society’ and ‘social organization’, and thus is turned into an independent explanatory variable of a distinct set of economic relations. But Polanyi’s embeddedness metaphor has not just been criticized for reinforcing distinctions between the ‘social’ and ‘the economic’. A second criticism of Polanyi’s embeddedness metaphor suggests that the meaning of the ‘social’ often remains opaque in debates about ‘embedding’ economic in social relationships.36 The terminology employed in order to capture ‘the social’ is rather wide-ranging. It includes reference to ‘social systems’,37 ‘political’ embeddedness38 at national and global levels, ‘cultural embeddedness’39 and embedding in ‘moral’ orders that rely on trust, even if these moral orders are not very transparent or explicit,40 as well as embeddedness in legal institutions. Moreover, various indicators are referred to for identifying ‘the social’, ranging from visions of a particular political economy, to characteristics of the social interactions which inform economic activity as well as particular social incentives that drive demand, and thus eg ‘sustainable’ economic growth. Embedding economic in social relationships is here understood as developing new regimes of capital accumulation.41 Realizing this vision is associated with labour market regulation that limits the growth of low wage work in order to sustain demand. Similarly, Cavalcanti suggests that the very idea of ‘resources’ in an economic system should be changed. Human, natural, and heritage, including spiritual and aesthetic resources should be included in the analysis of economic activity that takes into account how in local and indigenous peoples’ economies economic relations are constituted.42 Other commentators identify ‘the social’ on a smaller scale through reference to the characteristics of the relationships

36 Economic relations are often more clearly defined. For instance, Barber focuses on ‘economic institutions’ that produce ‘material and immaterial goods’ that members of a society want to use in their lives (Barber (n 11) 395. 37 Beckert (n 6) 9; Barber (n 11) 388, 405. 38 Fred Block, ‘Crisis and Renewal: The Outlines of a Twenty-First Century New Deal’ (2010) Socio-Economic Review 1, 13; Block, in Krippner, et al (n 15) 118, 127; John Holmwood, Three Pillars of Welfare State Theory (2000) 3 European Journal of Social Theory 23, 31, 33. 39 Sharon Zukin and Paul DiMaggio, ‘Introduction’ in Paul DiMaggio and Sharon Zukin (eds), Structures of Capital: The Social Organization of the Economy (Cambridge, Cambridge University Press, 1990) 1–36. 40 Block (n 38) 13; Block, in Krippner et al (n 15) 118, 127. 41 Block (n 38) 23. Harvey’s notion of ‘embedded liberalism’ is a further, earlier variant of a vision of political economy. Reliance on Keynesianism coupled with stable economic growth in Western liberal democracies in the 1950 and 1960s led to markets embedded in social democratic governance (David Harvey, A Brief History of Neoliberalism (Oxford, Oxford University Press, 2005) 11–12. 42 Cavalcanti (n 35) 52.

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in which economic activity can become embedded. For instance, the concept of ‘social capital’ has been invoked in order to explain co-operation in economic exchange in the absence of economic incentives. Social capital captures the social ties, such as kinship relations or systems of social stratification, which can help to explain how co-operation is also achieved in an economic sphere.43 The longer such relationships, for instance, in markets endure, the more likely they are to take on the characteristics of a ‘social’ relationship.44 Even though such social ties may not be very visible, and markets may appear to be impersonal, a social capital perspective suggests that markets are embedded in institutional frameworks and this is the foundation of their ‘sociality’. While these accounts provide some indication of what can be meant by ‘the social’, they also show that these meanings are rather wide-ranging. Hence, a third criticism is that also in contemporary interpretations Polanyi’s embeddedness metaphor remains vague. Is it perhaps even too broad to explain specific empirical scenarios? Through what criteria can we identify particular empirical instances of ‘embedding’ and ‘disembedding’? Konings’ work as discussed above seems to suggest that quite different empirical scenarios are considered as instances of ‘embedding’. Konings, for instance, considers neo-liberal governance of financial services as a form of embedding, rather than disembedding of economic out of social relationships. He argues that neo-liberal governance of financial services in the US was accompanied by an increase in the governance capacity of the state. It involved, for instance, attempts to extend home ownership to low income groups through wider home loan sales, underwritten by mortgage companies Freddie Mac and Fanny Mae. This is an interesting and innovative take on Polanyi’s embeddedness metaphor, but also raises the question whether we need a more specific definition of ‘embedding’. Does it matter whether it is the state or civil society that embeds economic in social relationships? If the state implements market imperatives is this still a form of ‘embedding’ in Polanyi’s sense? Does ‘embedding’ of economic in social relationships require that social structures or actors actually constrain what economic actors do? Or does ‘embedding’ imply something more ephemeral, such as merely ‘to frame’ specific economic activities, eg the selling of financial products, in a particular belief system, such as the aspiration to spread wealth through private home ownership? What does ‘embeddedness’ look like if we abandon an institutionalist perspective that thinks of economic transactions as embedded in social structures, such as kinship systems, company hierarchies and welfare states?45 43

Granovetter, in Krippner et al (n 15) 133. Krippner et al (n 15) 111. 45 Beckert sidesteps the issue by arguing that ‘embeddedness’ is a general concept that should be reinterpreted as referring to three key co-ordination problems in markets. These are how to determine the value of goods and services, how to achieve protection from pure price competition 44

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Some contributions to contemporary economic sociology debates have gone beyond modernist, institutionalist perspectives by drawing on ideas about discourse in order to understand the nature of economic activity. For instance, Finlayson et al have traced the significance of a neoclassical economic narrative to constituting the space occupied by capitalist economic relations.46 Such a neoclassical economic narrative transforms a range of phenomena into private property. Even goods and services not for sale or personal in nature become thought of as potential objects of an economic transaction, usually co-ordinated by a market. Examples are common pool resources, public goods, such as the climate, and social relations, such as marriage.47 To think of economic activity as facilitated by narratives can also help to explain that contemporary economic activity increasingly ‘crosses temporal, geographic and political boundaries’, a point that matters also because globalization of economic action has further advanced since Polanyi wrote The Great Transformation.48 The deterritorialization of economies has also made it much more difficult to draw boundaries around a distinct field of economic action, for instance through reference to the boundaries of a nation state. Similar to this discourse perspective some contributions to contemporary economic sociology consider economic relations as ‘cognitively’ embedded.49 A key example of this is Margaret Somers’ and Fred Block’s work on ‘ideational embeddedness’. This qualifies an institutionalist interpretation of Polanyi’s embeddedness idea by highlighting the power of ‘ideas to shape, structure and change market regimes’.50 Somers’ and Block’s work shows that some ideas such as Malthus’ ‘social naturalism’ became central to questioning the social welfare regimes of the Poor Laws in England, and of contemporary social security in western liberal democracies. Not dissimilar to ideas voiced in contemporary debates about welfare states, Malthus argued that the Poor Laws actually further entrenched poverty, by creating psychological and material dependency of the poor on welfare payments. Specific payments, such as child allowances did not end poverty but perversely promoted it by providing incentives

and how to achieve co-operation in markets. But this analysis focuses on markets which are simply one way of organizing economic relations. This analysis also re-affirms a dichotomy between social and economic relations, by tracing how distinct social relations shape the determination of value in a market, for instance when the value attributed to goods reflects the contribution that the good makes to the formation of the owner’s ‘social identity’ (Beckert (n 6) 12. 46 Alan Christopher Finlayson, Thomas A Lyson, Andrew Pleasant, Kai A Schafft and Robert J Torres, ‘The “Invisible Hand”: Neoclassical Economics and the Ordering of Society’ (2005) Critical Sociology 31 (4), 515. 47 ibid 530. 48 ibid 516. 49 Biggart in Krippner et al (n 15) 120. Somers and Block (n 34) 260; John Holmwood, ‘Three Pillars of Welfare State Theory: T.H. Marshall, Karl Polanyi and Alva Myrdal in Defence of the National Welfare State’ (2000) 3 European Journal of Social Theory 23, 26. 50 Somers and Block (n 34) 260.

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for larger families, and thus overpopulation.51 Malthus’ social naturalism advocated that the endless struggle for scarce resources did not need any adjustments in the form of welfare state intervention. By itself nature would lead to a perfect balance of supply and demand of material goods for the population.52 Desert, merit and self-sufficiency became the moral categories associated with justifying limited assistance to the poor. These demonstrate a change in the way market regimes were embedded in social relations. Somers and Block show that Malthus’ ideas thus supported a dominant discourse of ‘market fundamentalism’, with this dominance relying on the claim that this presented the only defensible account of reality.53 But Somers and Block stop short of fully utilizing a discourse perspective. A discourse perspective enables us to explore questions about why and how specific discourses—defined as historically specific knowledge regimes constituted by a range of sources and practices—become dominant, without seeking to locate the power of discourse in the power of ideas of specific social actors, such as Malthus in Somers’ and Block’s work. Moreover, Somers and Block refer briefly to a narrow definition of discourse that focuses on ideas, and does not seem to include social practices54 in order to show that ‘embedding’ occurs not just through institutions, but also through ideas that shape the boundaries of political discourse about the welfare state. This is a specific, but also limited application of discourse ideas that neglects how the very notions of ‘society’ and ‘economy’ are discursively performed. While discourse as a lens through which to understand social action may appear to be ephemeral and vague, the next section argues that it can actually further specify the embeddedness metaphor by pinning social and economic action down to specific articulatory practices, without implying a sharp institutionalized demarcation between an ‘economic’ and a ‘social’ sphere of action.

III. GOING BEYOND A CLEAR-CUT DICHOTOMY BETWEEN ECONOMY AND SOCIETY: ECONOMY AND SOCIETY AS DISCURSIVELY PERFORMED

A key theoretical resource for questioning a clear-cut distinction between ‘economy’ and ‘society’ is Laclau’s and Mouffe’s political philosophy. It develops a vision of radical pluralist democracy which draws on neomarxism and to some extent on the work of Michel Foucault. Laclau and Mouffe are particularly interested in understanding how political forces

51 52 53 54

ibid 273. ibid 270. ibid 275. ibid 279, 281.

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become hegemonic.55 A hegemonic relation exists if a particularity assumes the representation of a universality, though the particularity is not commensurate with the universality. For instance, the interests of a particular socio-economic class are taken to be the interests of the state. Practices of representation are key to rendering these connections between a particularity and a universality plausible. Laclau and Mouffe explore practices of representation through a close analysis of texts, and—what they call—‘articulation’. Articulation is any practice which establishes a relation among elements, so that their identity is changed.56 Articulatory practices constitute discourses.57 Hence, for Laclau and Mouffe discourses are not merely ‘cognitive’ or ‘contemplative’ but they involve social practices which organize social relations.58 Discourses contain ‘moments’, which are differential positions clearly spelt out in a discourse,59 and ‘elements’ which are differences that are not articulated. Elements are thus ‘floating signifiers’, which cannot be anchored completely to a discursive chain.60 Laclau and Mouffe suggest that elements of a discourse can transform into moments, but this transformation is never complete.61 Understanding ‘society’ and ‘economy’ as discursively performed means to think of them as less unified and homogenous than Polanyi thought them to be. For Laclau and Mouffe there is no logical coherence to the elements of a discourse. There is no transcendental subject that can provide unity to a discourse, and there is no unity of experience.62 Again in contrast to Polanyi, for Laclau and Mouffe limits to ‘the social’ do not arise from an external environment, such as disembedded markets. Instead the limits of ‘the social’ arise from positions of difference within the social itself: Society never manages fully to be society because everything in it is penetrated by its limits, which prevent it from constituting itself as an objective reality.63

Also differently from Polanyi, Laclau and Mouffe argue that there is no social order that has the status of a key principle that organizes society. ‘The social’ therefore has no essence.64 It is characterized by inevitable antagonisms which are, however, perceived as positive because they actually provide the trigger for pluralist democratic politics.65 For Laclau and Mouffe

55 Laclau and Mouffe, Hegemony and Socialist Strategy: Towards a Radical Democratic Politics, 2nd edn (London, Verso, 2001). 56 ibid 105. 57 ibid 105. 58 ibid 96. 59 ibid 111. 60 ibid 105. 61 ibid 107. 62 ibid 105. 63 ibid 127. 64 ibid 96. 65 ibid xvii.

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‘the social’ should be thought of as a ‘plural’ and ‘open’ space,66 constituted by diverse social orders.67 It is characterized by a ‘surplus of meaning’ which manifests itself in a proliferation of differences which cannot be fixed through the constitution of ‘a stable articulatory structure’.68 Similarly, and in contrast to Marxism, Laclau and Mouffe suggest that there is no abstract universal object called ‘the economy’ which generates specific effects.69 But Laclau and Mouffe recognize that specific discourses often seek to dominate the field of discursivity, to stop ‘the flow of differences’ and ‘to construct a centre’.70 This can occur through ‘nodal points’71 or master-signifiers that temporarily fix discourses. A nodal point is a ‘particular element that assumes a “universal” structuring function within a certain discursive field’.72 Nodal points are indicators of ‘partial concentrations of power’ that ‘exist in every concrete social formation’,73 and can become hegemonic.74 These characterisations of discourse by Laclau and Mouffe amount to an understanding of discourses that conceives of them as relatively open and thus more likely to be constructed in relation to each other. Where ‘economy’ and ‘society’ are thus understood as discursively performed with reference to these ideas about discourse, it is then possible to transcend a clear-cut distinction between ‘economy’ and ‘society’ as distinct fields of social action. This chapter contends that such an understanding of ‘economy’ and ‘society’ can develop Polanyi’s embeddedness metaphor, and render it valuable for analysis of regulation. In particular, such an embeddedness metaphor can advance understanding of how business behaviour becomes regulated by social norms and interactions. Moreover, attention to discourse enables to understand more about the characteristics of contemporary regulatory counter-movements that rely on hegemonic control derived from compliance and consent, rather than physical and economic coercion.75 The following section further explores these points through a case study of the transnational risk regulation regime established by the EU carbon market.

IV. INTRODUCING THE EU CARBON MARKET

Why focus on the EU carbon market? This market appears to be a paradigmatic example of the embedding of economic in social relationships, but in 66 67 68 69 70 71 72 73 74 75

ibid 95. ibid 5. ibid 96. ibid 99. ibid 112. ibid 112. ibid xi. ibid 142. ibid 139. Kalleberg (n 17) 12.

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a field of regulation that has assumed prominence only after Polanyi wrote The Great Transformation. In the EU carbon market trading in emission allowances is embedded in environmental objectives that reflect a wider societal goal of combating climate change. This, in turn, addresses fundamental questions about ‘green lifestyles’ that are of relevance not just to an economic sphere. Moreover, the EU carbon market is a critical case76 through which to reflect on Polanyi’s embeddedness metaphor because it complements academic research that focuses on disembedded markets.77 The EU carbon market is significantly governed by institutions.78 It only exists because it has been created through law by supranational institutions, in particular the European Commission, Parliament and Council. Its economic transactions are subject to legal restraints. For instance, Member States have to establish effective, dissuasive and proportionate penalties in order to ensure compliance with the requirement that industrial installations have to submit each year a sufficient amount of emission allowances that match the amount of greenhouse gases they emit.79 Last but not least the EU carbon market is also significant because it is the largest, multi-country, multi-sector trading regime. It covers about 11,500 installations, and regulates about 45 per cent of total greenhouse gases in the EU.80 It also has a wide reach because it links with international emissions trading, established under the Kyoto Protocol. Emission credits from schemes such as the Clean Development Mechanism (CDM) and Joint Implementation (JI) can be traded in the EU carbon market. Through CDM, operators in developed countries can gain emission credits by setting up pollution reduction projects in developing countries such as reforestation schemes or solar energy plants. JI enables two developed countries,81 such as EU Member States, to set up a scheme for the reduction of greenhouse gas emissions. Emission credits accrue to the operator who has set up the emission reduction project.

76 Robert K Yin, Case Study Research: Design and Methods, 5th edn (Los Angeles, Sage, 2014) 51. 77 See eg Noëlle Burgi, ‘Societies without Citizens, the Anomic Impacts of Labour Market Restructuring and the Emergence of Social Rights in Europe (2014) European Journal of Social Theory 6, 1–17. Konings (n 4) 746. 78 Mitchel Abolafia, ‘Separate Spheres? The Cultural Contradictions of Markets: A Discussion’ in Lange and Thomas (n 1) 270. 79 Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC [2003] OJ L275/32, Art 16. 80 European Commission, The EU Emissions Trading System (EU ETS), at http://ec.europa. eu/clima/publications/docs/factsheet_ets_en.pdf (last accessed 22 August 2014) 1. 81 That must be included in Annex I to the Kyoto Protocol.

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How does the EU carbon market work? The EU carbon market was established in 2005 by the EU Emissions Trading Directive (2003/87/EC) as amended.82 The EU Emissions Trading System (ETS) is a compulsory regime for buying and selling emission allowances for the six key greenhouse gases83 in all 28 EU Member States, and in Iceland, Liechtenstein, and Norway. The Directive establishes the core economic actors in this market. These are installations that are significant emitters of greenhouse gases, operating in sectors, such as energy, the production and processing of ferrous metals, the production of iron and steel as well as pulp and paper, cement, glass and ceramics.84 The carbon market has developed in three phases, with phase I lasting from 2005–07, and phase II from 2008–12. For the current phase III (2013 to 2020), aviation—a significant greenhouse gas emitter—was included in the scheme.85 Further market actors are intermediaries, such as specialist banks and brokers. Entry to the market is dependent upon state authorisation, usually granted in the form of a permit.86 Each installation has to annually submit a sufficient number of emission allowances that match the amount of greenhouse gases that it is emitting.87 Installations have to obtain these emission allowances by buying them in the EU carbon market. They can limit the number of emission allowances they need by reducing the amount of greenhouse gases they emit, for instance through pollution reduction technologies. During the current phase III the European Commission sets the overall limit (‘cap’) on allowances which are allocated to emitters mainly through auction. The EU carbon market thereby seeks to reduce the amount of greenhouse gases that installations emit by limiting the amount of greenhouse gas allowances that are available to match installations’ emissions. The Directive requires that each year the number of allowances available will be reduced by 1.74 per cent.88 But in practice the EU carbon market’s actual contribution to the reduction of greenhouse gas emissions has also been limited due to the way it is regulated by law and due to the economic context in which it operates.

82 By Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 2003/87/EC (n 79) so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community [2009] OJ L140/63. 83 Carbon dioxide, nitrous oxide, perfluorocarbons, methane, hydrofluorocarbons, sulphurhexafluoride. 84 Annex I of the EU ETS Directive (n 79). 85 Directive 2008/101/EC of the European Parliament and Council of the 19th of November 2008. Emissions from shipping were included during phase II. 86 Arts 4–6 EU ETS Directive (n 79). A key requirement for obtaining such a permit is that the operator of the installation has to show that he is capable of monitoring and reporting emissions from the installation. 87 ibid Art 6 (1)(e). 88 ibid Art 9.

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According to the initial legal regulation of the EU carbon market during phases I and II, emission allowances were given away for free to installations by Member State regulatory authorities. Only during phase III has the European Commission priced emission allowances by auctioning them for the power sector.89 Right from the beginning of the EU ETS, prices for emission allowances were thus too low to significantly incentivize installations to install emission reduction equipment or to change production techniques.90 It has been cheaper for installations to buy allowances on the EU carbon market to match their emissions than to reduce their emissions. Prices for emission allowances were then falling further in response to the 2007–08 economic crisis, and the still on-going Eurozone sovereign debt crisis. These crises led to the closure of a number of installations which no longer needed emission allowances, and these surplus allowances flooded the market. About five to eight per cent of unused allowances from phase II (2008–12) can be carried over to phase III of EU ETS (2013–20).91

V. NEW CONNECTIONS: LACLAU’S AND MOUFFE’S IDEAS ABOUT DISCOURSE AND THE EU CARBON MARKET

This section applies Laclau’s and Mouffe’s ideas about open and relationally performed discourses to the case study of the EU carbon market by addressing three questions. First, what are discourses of ‘economy’ and ‘society’ in the context of the EU carbon market? Second, how do they perform this market? Third, how does this analysis advance our understanding of what is entailed in embedding economic in social relationships? This analysis reflects a key premise of economic sociology, that is not to assume the existence of markets, but to analyse how economic relationships become instituted or, in this case, discursively performed, as markets.92 This section focuses on the

89 A system for a transitional move to auctioning which initially involves free allocation, based on benchmarks, has been put in place for other sectors. For instance, the manufacturing industry will receive 80% of its allowances free of charge in 2013 but this will decrease annually to 30% in 2020. Allowances not allocated for free will be auctioned. In the aviation sector, however, only 15% of aviation allowances will be auctioned over the whole 2013–2020 period. Commission Decision 2011/278/EU, Commission Decision of 27 April 2011 determining transitional Union-wide rules for harmonised free allocation of emission allowances pursuant to Art. 10 a of Directive 2003/87/EC of the European Parliament and the Council [2003] OJ L130/1. 90 Daniel Wilsher, ‘Reducing Carbon Emissions in the Electricity Sector: A Challenge for Competition Policy, Too? An Analysis of Experience to Date and Some Suggestions for the Future’ (2009) 6 The Competition Law Review 1, 35. 91 Communication from the Commission to the European Parliament, The Council, The European Economic and Social Committee and the Committee of the Regions, ‘Analysis of Options to Move beyond 20% Greenhouse Gas Emission Reductions and Assessing the Risk of Carbon Leakage’, SEC (2010) 650, Brussels, 26.5.2010, COM (2010) 265 final, 3. 92 Biggart, in Krippner et al (n 15) 119.

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articulatory practices in particular of a legal discourse as expressed in the text of the EU ETS Directive,93 cases decided by the Court of Justice of the EU, as well as academic commentary from a legal and economic perspective. Discourses of economy in relation to the EU carbon market are complex because they are not unified, but contain contradictory articulatory practices. In Laclau’s and Mouffe’s terminology they include moments that indicate ‘positions of difference’. Discourses of ‘economy’ that perform the EU carbon market are also a moving target. They have changed over the three phases of the EU ETS, and are still evolving in the post-Kyoto Protocol phase. The European Commission is ‘learning by doing’94 in developing this regime of transnational climate change risk regulation.95 But even though these discourses are open-textured, and developing, we can still identify master signifiers, ie ‘nodal points’ that structure the discourses.

A. Cost-Effectiveness and Competition as Key Features of Discourses of ‘Economy’ in EU ETS There is a clear focus on the idea that the EU carbon market should reduce emissions in a cost-effective manner:96 This Directive aims to contribute to fulfilling the commitments of the European Community and its Member States more effectively, through an efficient European market in greenhouse gas emission allowances, with the least possible diminution of economic development and employment (emphasis added).97

93 Due to the word limit, the analysis here focuses on the EU ETS Directive, but other EU Directives also influence the operation of the EU carbon market. The Directive on the geological storage of carbon dioxide (2009/31/EC) regulates and thereby facilitates the storage of carbon dioxide in geological formations. It can therefore influence the price of emission allowances by reducing demand for allowances by large thermal power stations (Carrie Bradshaw, ‘The New Directive on the Geological Storage of Carbon Dioxide: Legislation and Policy (2009) 11 Environmental Law Review 3, 196–203; 196). Directive 2009/31/EC of the European Parliament and of the Council of 23 April 2009 on the geological storage of carbon dioxide and amending Council Directive 85/337/EEC, European Parliament and Council Directives 2000/60/EC; 2001/80/EC; 2004/35/EC, 2006, 12/EEC, 2008/1/EC and Regulation (EC) No 1013/2006 [2009] OJ L140/114. 94 Marjan Peeters and Stefan Weishaar, ‘Exploring Uncertainties in the EU ETS: “Learning by Doing” Continues Beyond 2012’ (2009) Carbon and Climate Law Review 1, 88, 100. 95 Also specific rules eg for the oversight of the EU carbon market by financial services regulatory authorities may change in the future. 96 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, ‘A Roadmap for Moving to a Competitive Low Carbon Economy in 2050’, SEC (2011) 287 final, Brussels, 8.3.2011, COM (2011) 112 final, 4. In some cases the General Court has required that the EU ETS should achieve the reduction of greenhouse gas emissions ‘at the lowest cost’ (Case T-370/11 Republic of Poland v European Commission (Judgment of the General Court, Seventh Chamber, 7 March 2013) para 72). 97 Preamble 5 to EU ETS.

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Hence, EU ETS relies on the ‘least cost abater principle’. This means that in a ‘cap and trade’ regime, such as the EU carbon market, those installations that find it cheapest to install emission reduction equipment will do so, selling on their surplus emission allowances to other installations for whom it is more expensive to reduce their emissions.98 If installations do not reduce their emissions they will incur additional costs because they will have to purchase emission allowances to match their existing emissions. These purchases limit the amount of emission allowances available on the market and thus should increase their price, which, in turn, should generate further reductions in emissions by other installations.99 But this ‘marketness’ of the EU ETS is precarious. Key features of a market that, from a neo-classical economic perspective, one would expect to be present are missing. For instance, the supply of goods and services through a market is responsive to demand for these.100 But in the EU carbon market, the supply of allowances is increasing, despite declining demand for them, to such an extent that there is a large surplus of emission allowances.101 Moreover, whether marketization of greenhouse gas emissions yields economic benefits and for whom has been questioned. A French steel company—though unsuccessfully—challenged the implementation of the EU ETS in France on the grounds that it interfered with its fundamental rights to property, and the pursuit of economic activity, because the EU ETS required its installations to absorb additional costs, and thus to operate under unsustainable economic conditions.102 Given this precarious ‘marketness’ of EU emissions trading, further discursive work is necessary to perform this ‘market’. This discursive work relies in particular on the neo-classical economic master signifier of ‘competition’103 in order to buttress the idea that EU emissions trading is co-ordinated by a ‘market’. Various meanings of competition are invoked in relation to the EU carbon market. First, competition is understood as the ‘competitiveness of the EU’ in comparison to its major regional trading rivals, such as 98 Sanja Bogojeviċ, ‘EU Climate Change Litigation, the Role of the European Courts, and the Importance of Legal Culture’ (2013) 35 Law & Policy 3, 184, 185.Case C-203/12 Billerud Karlsborg AB, Billerud Skärblacka AB v Naturvårdsverket, 17 October 2013, para 26. 99 James Maurici, ‘Litigation and the EU Emissions Trading Scheme’ at www.landmarkchambers.co.uk/userfiles/documents/resources/Litigation_and_the_EU_Emissions_Trading_ Scheme_-_JPM.pdf (last accessed 21 August 2014) 4. 100 Angus Deaton and John Muellbauer, Economics and Consumer Behaviour (Cambridge, Cambridge University Press, 1980) 149. 101 By early 2012, a surplus of 955 million allowances had accumulated. Report from the Commission to the EP and the Council, ‘The State of the European Carbon Market in 2012’ Brussels, 14.11.2012 COM (2012) 652 final, 4. 102 Maurici (n 99) 17. 103 Beckert (n 6) 13; Hans Vedder, ‘Competition in the EU Energy Sector—An Overview of Developments in 2009 and 2010’, at: www.researchgate.net/publication/228218938_ Competition_in_the_EU_Energy_Sector_-_An_Overview_of_Developments_in_2009_and_ 2010 (last accessed 12 March 2015) 1, 2.

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North-America and South-East Asia.104 In policy documents the Commission seeks to affirm that the EU ETS does not undermine the competitiveness of the EU in this sense. The ‘marketness’ of the EU carbon market is affirmed here because its contribution to the overall competitiveness of the EU as a regional trading bloc is highlighted. Second, competition is also referred to through the notion of the ‘level playing field’, which means that national legal implementation of EU ETS should be harmonized to such an extent that there is no distortion of competition between national economies and individual installations emitting greenhouse gases.105 This conception of competition is further buttressed by Member States’ sanctions that seek to maintain equal competition between installations. The EU ETS Directive requires Member States to apply penalties to installations that fail to submit the required number of emission allowances in a financial year in order to match their actual emissions of greenhouse gases.106 Article 16 (3) of the EU ETS Directive provides for a harmonized penalty, ie 100 Euros for each tonne of CO2 equivalent emitted that is not covered by an emission allowance, with that penalty increasing in accordance with the European index of consumer prices.107 This detailed specification of a harmonized penalty in EU law seeks to avoid distortions to competition that could arise if each Member States could choose a different level of penalty for installations.108 Third, the importance of competition is further highlighted by Articles 101–106 of the Treaty on the Functioning of the EU (TFEU) which prohibit prevention, restriction or distortion of competition between companies or the abuse of a dominant position by them. Hence, Member States were required not to discriminate between companies or industrial sectors, and thus not to unduly favour certain installations in the national plans through which they allocated emission allowances to installations during phases I and II of EU ETS.109 To summarize, the master signifier of ‘competition’ is crucial to affirming the ‘marketness’ of the EU ETS. But this master signifier involves various articulatory practices. In Laclau’s and Mouffe’s terminology the discourse 104 Communication from the Commission to the European Parliament, The Council, The European Economic and Social Committee and the Committee of the Regions, ‘Analysis of Options to Move beyond 20% Greenhouse Gas Emission Reductions and Assessing the Risk of Carbon Leakage’, SEC (2010) 650, Brussels, 26.5.2010, COM (2010) 265 final, 10. Carbon leakage refers to high carbon intensity businesses leaving the EU to avoid the potentially additional costs of EU emissions trading. 105 ibid 11. 106 Art 12 (3) EU ETS Directive. See also Case C-148/14 Germany v Nordzucker AG (Judgment of the Court (Second Chamber) of 29 April 2015). 107 ibid Art 16 (4). 108 Case C-203/12 Billerud Karlsborg AB, Billerud Skärblacka AB v Naturvårdsverket (Judgement of the Court, Second Chamber, 17 October 2013) para 27. 109 Case C 505/09 P European Commission v Republic of Estonia, Judgement of the Court (Second Chamber) 29 March 2012, para 5.

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contains ‘moments’ that establish ‘positions of difference’. As the next section suggests, the marketness of EU ETS is also under constant threat.110

B. Threats to Competition within the EU Carbon Market Competition in the EU carbon market is under threat because the nature of this market makes anti-competitive practices more likely. The largest seven per cent of installations operating in this market account for about 60 per cent of greenhouse gas emissions, while the 1400 smallest plants emit 0.14 per cent of emissions.111 Hence, there is a potential for large emitters to dominate the market, and thus limit competition. Large emitters may recognize their economic interdependence, and thus signal low demand for emission allowances during auctions in order to keep the price of emission allowances down.112 Such strategies by large emitters may not be caught by Art 101 TFEU, which prohibits concerted practices that limit competition.113 Also, variation in Member States’ national legal rules for allocating emission allowances during phases I and II of EU ETS made distortion of competition more likely.114 A further threat to perfect competition in the EU carbon market is ‘grandfathering’.115 This means that established installations obtain a comparative financial advantage in relation to new installations entering the market, because established installations are allocated through EU or national rules free emission allowances based on their past emissions. This was a threat to competition in particular during phases I and II of EU ETS.116 Auctioning of emission allowances was introduced during phase III of EU ETS explicitly in order to enhance competition between established and new installations.117 But there is still a threat to competition 110 In traditional legal analysis the EU carbon market is considered as characterized by market failure which requires further public intervention. See eg Vedder (n 103) 13. 111 Peeters and Weishaar (n 94) 93. 112 ibid 93. 113 ibid. 114 Sanja Bogojevic, ‘The EU ETS Directive Revised: Yet Another Stepping Stone’ (2009) 11 Environmental Law Review 275, 279. 115 Wilsher (n 90) 35. 116 ‘Grandfathering’, enshrined in national rules, was unsuccessfully challenged by an economic competitor in the case of Case T-387/04 EnBW v Commission & Germany. EnBW, the third largest energy producer in Germany, challenged the Commission decision to approve Germany’s phase I National Allocation Plan, including its ‘transfer rule’. According to this rule, in case of closure an energy generating plant could transfer its emission allowances to a new plant, as long as the new plant was located in Germany and would start operations within three months of the closure of the old plant. EnBW argued that this conferred an unfair advantage upon electricity-generating installations it was competing with because these competitor plants had significant numbers of old plants. The then Court of First Instance rejected the claim on the grounds that EnBW lacked standing to bring the action. 117 Joined Cases C-566/11, C-567/11, C-580/11, C-591/11, C-620/11 and C-640/11 Iberdrola SA, Gas Natural SDG SA v Administración del Estado and Others, Bahía de Bizcaia Electricidad SL, Judgment of the Court (Fifth Chamber) 17 October 2013, para 10.

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looming if the price of emission allowances achieved during auctions is too high and thereby creates a barrier for new installations to enter the EU carbon market. Competition may also be limited if Member States use the provision that enables opt-out from the EU-wide auctioning platform, and set up their own national auctioning schemes.118 Another threat to competition in the EU carbon market arises from the fact that this market allocates ‘rents’ to some installations. This means that some installations trading in the EU carbon market have obtained financial benefits from the selling of emission allowances that they would not have obtained but for the legal rules establishing the EU carbon market. Across the EU, electricity generators have reaped windfall profits from EU ETS.119 As emitters of large amounts of greenhouse gases they were allocated a lot of emission allowances for free during phases I and II of EU ETS which they then could sell on in the EU carbon market. Moreover, limited competition in EU energy markets meant that electricity producers could pass on the costs of participating in EU ETS to their customers,120 or, depending on price, switched between different, more or less carbon-intensive fuels.121 The Court of Justice, however, confirmed in a recent judgment that Member States, in the particular case of Spain, had powers to impose national legislation that reduced those windfall profits for electricity operators, as long as this did not interfere with the main objectives of the EU ETS Directive.122 But too much competition within the EU carbon market is also considered as problematic. This highlights an internal contradiction in discourses of ‘economy’ that perform the EU carbon market. In Laclau’s and Mouffe’s words these are ‘moments’ in discourses of economy which show ‘positions of difference’. Competition within the EU carbon market is limited through the legal regulatory framework in which this market is ‘embedded’. This framework provides financial support for various industrial sectors in order to maintain their competitiveness and thus economic viability both within the EU and internationally. For instance, free allocation of emission allowances during phase III for sectors whose production costs are significantly influenced by energy costs should maintain the competitiveness of the EU economy as a whole. This sits somehow uneasily with the new ambitious target of reducing greenhouse gas emissions by 30 per cent in comparison to 1990 levels by 2020, a further reduction of 10 per cent in relation to the previous target of a 20 per cent reduction. Moreover, the Court of Justice has justified limitations to competition within the EU carbon market on the grounds that it is necessary to focus EU

118 119 120 121 122

Vedder (n 103) 13. Wilsher (n 90) 31. Peeters and Weishaar (n 94) 88. Joined Cases Iberdrola SA, Gas Natural SDG (n 117) paras 9, 40. Wilsher (n 90) 31. Joined Cases Iberdrola SA, Gas Natural SDG (n 117) paras 42, 60.

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emissions trading on the most polluting installations and on the grounds of administrative feasibility. For instance, the then European Court of Justice (ECJ) rejected an action by a French steel company which had argued that the European chemicals and non-ferrous metal industry should also be included during phase I of EU ETS. The French steel company argued that the non-inclusion of these sectors was in breach of the EU administrative law ‘equal treatment principle’, because it was competing with these other sectors. It suggested that since chemicals and non-ferrous metal plants did not have to bear the financial cost of EU emissions trading, these sectors had gained an unfair competitive advantage in relation to the iron and steel sector in the EU.123 From the perspective of the French steel company this restricted competition, because industrial sectors not included in EU ETS were in effect obtaining a subsidy by not having to incur the costs of participating in EU emissions trading. The Court rejected the claim by the French steel company on the grounds that there were objective justifications for the different treatment of comparable industrial sectors. The then ECJ referred to the approximately 10 times lower greenhouse gas emissions from nonferrous metal producers and—during phase I—the need to keep EU ETS limited on the grounds of administrative feasibility.124 Finally, there are further threats to competition within the EU carbon market. Where installations covered by EU ETS leave EU Member States for cheaper production opportunities in countries outside the EU, this may limit the marketness of the EU ETS, since there may not be enough installations left for EU ETS to function as a ‘market’. Moreover, the very objective for the existence of this market in emission allowances may be undermined by global competition between countries for inward investment. ‘Carbon leakage’—a nodal point in discourses of ‘economy’125 about EU ETS—means that installations migrate out of the EU to third countries which impose no or less stringent and thus less costly measures for cutting greenhouse gases. The risk of carbon leakage occurring is recognized. EU ETS allocates 100 per cent of free emission allowances to relevant sectors, such as those in which electricity use constitutes a significant element of production costs.126 123 Case C-127/07 Société Arcelor Atlantique et Lorraine and others v Premier Ministre and Others Judgment of the Court (Grand Chamber) 16 December 2008. 124 ibid para 70–72. 125 Communication from the Commission to the European Parliament, The Council, The European Economic and Social Committee and the Committee of the Regions, ‘Analysis of Options to Move beyond 20% Greenhouse Gas Emission Reductions and Assessing the Risk of Carbon Leakage’, SEC (2010) 650, Brussels, 26.5.2010, COM (2010) 265 final, 2. 126 Art 10 a (12) provides that installations in sectors that face a significant risk of ‘carbon leakage’ can be allocated up to 100% free emission allowances, in accordance with Art 10 a (1). Various criteria have to be fulfilled before sectors can benefit from free allocation, such that they must show potential for emission reduction and that they have limited ability to pass on costs to customers. Art 10 a (14)—(17) EU ETS. Peeters and Weishaar (n 94) 96.

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Given this precarious ‘marketness’ of emissions trading, further discursive work is being invested in performing the EU carbon market. For instance, the European Commission also seeks to maintain a clear discursive distinction between trading and taxing greenhouse gases.127 It distinguishes trading a ‘market’ tool of environmental regulation from taxing a state regulatory, economic incentive regulatory tool.128 Taxation involves a fixed levy determined by a public body to be paid by industrial installations, for eg each ton of greenhouse gas emissions. In a trading regime, in contrast, the price for eg a ton of greenhouse gas emissions is determined by demand-supply equilibria in the market, and can thus float freely. But this discursive distinction is precarious, because the fixing of a minimum price for a ton of greenhouse gas emissions in a trading regime, which is advocated as a necessary reform of the EU carbon market by some academic commentators, would integrate an element of taxation into trading. Each installation holding allowances would at least have to pay the minimum price.129 Further discursive work that also seeks to affirm the ‘marketness’ of the EU carbon market relies on another ‘nodal point’ in discourses of economy, the ‘low carbon economy’. This nodal point partially fixes the meaning of discourses of ‘economy’. More importantly it bolsters the idea that EU ETS is ‘a market’ because it pins down the purpose of this market, which is to establish a ‘low carbon economy’,130 especially in the energy sector.131 This is expected to reduce energy costs for economic operators in comparison to reliance on gas and oil.132 This ambitious though elusive vision of the low carbon economy is discursively further affirmed through reference to a range of regulatory measures. These include the Eco-Design Directive 133 and its product standards, limitation of CO2 emissions from vehicles,134 and the EU Regional Policy for steering investments in Member States, regions and cities towards low-carbon projects, such as renewable energy production and the promotion of public transport.135 Hence, discourses of ‘economy’ that perform the EU carbon market are open-textured. Continuous discursive work is required to stabilize these discourses, for instance around key nodal points. But these discourses of ‘economy’ are also open in the sense

127 Dieter Helm, ‘Chapter 11: EU Climate-Change Policy: A Critique’ in Helm, Dieter and Hepburn, Cameron (eds), The Economics and Politics of Climate Change (Oxford, Oxford University Press, 2009) 222–46. 128 Ibid 240. 129 Ibid 232. 130 Communication from the Commission (n 125) 15. 131 ibid 6. 132 ibid 12. 133 Directive 2009/125/EC of the European Parliament and of the Council of 21 October 2009 establishing a framework for the setting of ecodesign requirements for energy-related products (recast) [2009] OJ L285/10. 134 ibid 6. 135 ibid 7.

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that they are constructed with reference to open discourses of ‘society’, a point further explored in the next section.

C. Key Features of Discourses of ‘Society’ and How They Contribute to the Performance of the EU Carbon Market A discourse of ‘society’ captures that the EU carbon market also seeks to achieve objectives that go beyond an efficient allocation of resources. For example, in a legal case before the General Court, Poland suggested that the EU ETS was also concerned with ‘social, humanitarian and environmental aspects as well as intangible benefits’.136 We can see these aspects of EU ETS expressed in a range of discourses that perform aspects of ‘society’ in relation to the EU carbon market. First, a discourse of ‘society’ is performed through reference to citizens in this market, though their role is limited. Citizens are fairly invisible in the EU carbon market which focuses on corporate economic actors, such as installations emitting greenhouse gases, as well as specialist banks and brokers. The EU ETS Directive required public participation in the production of the draft National Allocation Plans (NAPs). Through these plans Member States allocated emission allowances to installations during phases I and II of EU ETS.137 Member State regulatory authorities had to take ‘due account of citizens’ comments when drafting their NAPs during phases I and II.138 During phase III the EU ETS Directive requires the European Commission to consult with ‘relevant stakeholders, including the sectors and sub-sectors concerned’, in order to establish the greenhouse gas emission benchmarks for products for those installations that receive free emission allowances.139 But the scope of these consultation rights is limited because it is difficult for citizens, trade associations or individual installations to legally challenge the content of European Commission decisions that they consider not to be in their interests. Non-privileged applicants, that is any applicants that are not an EU supranational institution or a Member State, usually do not fulfil the narrow standing criteria of Art 263 (4) TFEU.140 Moreover, the involvement of environmental non-governmental organizations in trading in the EU carbon market has been limited, though the EU ETS Directive enables

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Republic of Poland v European Commission (n 96) para 10. In accordance with the criteria set out in Annex III to EU ETS Directive. Art 9 (1) EU ETS. 139 ibid Art 10 a (1). 140 Case T-381/11 Europäischer Wirtschaftsverband der Eisen- und Stahlindustrie (Eurofer) ASBL v European Commission (Order of the General Court, 4 June 2012). 137 138

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‘persons’ to hold emission allowances, and to request for such allowances to be cancelled by submitting them to a Member State regulatory authority.141 Involvement of environmental NGOs in trading may also be hampered by limited knowledge about how the EU carbon market works. In a recent case the Court of Justice decided that the French city of Lyon could not access trading data from the French national registry that recorded emission allowances held by installations and submitted to public authorities in France.142 Such trading data included information about the volume of greenhouse gas emission allowances sold and acquired by specific operators in 2005, but not information on the price paid for allowances.143 The Court held provisions of the EU Directive on Access to Environmental Information144 inapplicable. It ruled that the EU ETS Directive and a Regulation on carbon data registries passed in relation to it145 were lex specialis provisions on access to trading data that were applicable to the case.146 The Court further held that the trading information requested by the City of Lyon was protected by provisions about commercial confidentiality as these were interpreted by the administrator of the central EU data registry for the carbon market, unless the holders of the emission allowances consented to the disclosure of the trading information.147 Second, ‘society’ in relation to the EU carbon market is performed through discourses that refer to the ‘fairness’ of the economic transactions in this market. The EU ETS Directive modifies Pareto and Kaldor-Hicks’ criteria of efficiency by considering the distribution of costs and benefits of emissions trading between different Member States and installations. For instance, the Commission took into account the affordability of emission reductions for various Member State economies. It required Member States to make different contributions to the then overall EU target of an eight per cent reduction in greenhouse gas emissions by 2012 with reference to 1990

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EU ETS Directive (n 79) Art 14 (4). Case C-524/09 Ville de Lyon v Caisse de dépôts et consignations (Judgment of the Court, Fourth Chamber, 22 December 2010). 143 Art 9, para 5 of Commission Regulation (EC) No 2216/2004, of 21 December for a standardized and secured system of registries pursuant to Directive 2003/87/EC of the European Parliament and of the Council and Decision No 280/2004/EC of the European Parliament and Council [2004] OJ L 386/1. 144 Directive 2003/4/EC of the European Parliament and of the Council of 28 January 2003 on public access to environmental information and repealing Council Directive 90/313/EEC [2003] OJ L41/26. 145 Regulation 2216/2004 and Decision No 280/2004 (n 143). This Regulation provides detailed rules about the administration of registries that record economic transactions in the EU carbon market and also deals with access to such information. 146 Case C-524/09 Ville de Lyon v Caisse de dépôts et consignations (Judgment of the Court, Fourth Chamber, 22 December 2010) para 40. 147 ibid para 59. 142

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levels.148 Each Member State had a national cap on emissions imposed. Richer, northern European countries, such as Denmark and Germany had to reduce their emissions by 21 per cent, while poorer, southern economies, such as Greece and Ireland could actually increase their emissions by 25 and 13 per cent respectively. Now, during phase III, ten per cent of all emission allowances auctioned are given to the less economically developed Member States of Central and Eastern Europe,149 such as Poland, for the purposes of ‘solidarity and growth within the EU, to reduce emissions and to adapt to the consequences of climate change’.150 Moreover, those Member States which generated in 2006 more than 30 per cent of electricity from a single fossil fuel, and in which the GDP per capita at market price did not exceed 50 per cent of the average GDP per capita in the EU, can issue free allowances to their electricity-generating installations during a transitional period.151 In addition, a proportion of profits generated through trade in the EU carbon market have to be invested for ‘social’ purposes that benefit a wider public, rather than just market actors. For instance, at least 50 per cent of revenues generated from the auctioning of allowances has to finance research and adaptation measures, eg through an Adaptation Fund and a Global Energy Efficiency and Renewable Energy Fund.152 Revenues generated from auctioning should also be used to promote a shift to low-emission and public forms of transport,153 as well as support financially ‘lower and middle income households’ in order to address ‘social aspects’, for instance by lowering the costs of home energy efficiency and insulation.154 But this reference to ‘fairness’ in discourses of society in relation to the EU carbon market also involves positions of difference. Some of the provisions of financial support for particular sectors in the EU ETS may conflict with the ‘polluter pays’ principle. EU ETS may thus be ‘fair’ in terms of the inclusion of some redistributive measures. But it may not be ‘fair’ in terms of a wider interpretation of the polluter pays principle. The polluter pays principle as set out in Art 191 (2) TFEU suggests that harm caused to the environment should trigger a financial obligation to remedy that harm by those who can be identified as having caused it, rather than by society as

148 Council Decision 2002/358/EC of 25 April 2002 concerning the approval on behalf of the European Community of the Kyoto Protocol to the UN Framework Convention on Climate Change and the joint fulfilment of commitments thereunder [2002] OJ L 130/1. 149 Bogojevic (n 114) 284. 150 Art 10 (2) (b) EU ETS Directive (n 79). 151 ibid Art 10 c (1) (c). A further example of a redistribution in the EU carbon market is the fact that small emitters of greenhouse gases are exempt from the regime (ibid Art 27 (1); Bogojevic (n 114) 8). 152 These funds were established under the Climate Change Convention. Art 10 (3) (a) EU ETS Directive (n 79). 153 Art 10 (3) (f) EU ETS Directive (n 79). 154 ibid Art 10 (3) (h).

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a whole,155 in particular if the harm resulted from behaviour in breach of environmental legal rules. The principle has therefore also been referred to as a non-subsidisation principle.156 According to the Commission’s view, however, some aspects of EU ETS, such as the ‘grandfathering’ of emission allowances, should not be considered as in breach of the principle given the importance of abating climate change.157 Third, ‘society’ in relation to the EU carbon market is performed through discourses that focus on political relationships between the EU supranational institutions and EU Member States. This is one of the most visible ways in which the EU carbon market is ‘embedded’ in ‘social relationships’. Trading in emission allowances occurs within the framework of a finely calibrated, but also contested multi-level governance regime. This regime allocates specific powers to both EU supranational institutions and Member State public authorities for the regulation of the EU carbon market. But Member States have sought to challenge the scope of powers allocated to the Commission through the text of the EU ETS Directive, and these relationships of power are evolving during the operation of the EU ETS. One example of these multi-level politics of emissions trading is reference to national sovereignty. Some Member States are concerned that EU ETS poses threats to their national energy security, a point that matters also in light of rising energy consumption in a number of Member States.158 For the Baltic EU Member States159 a lack of energy security increases the risk of becoming dependent on gas imports, and potentially significant political influence, from the Russian Federation.160 In its review of NAPs, the European Commission therefore had to ensure that its approval or rejection of a national plan would not require a Member State to change its national energy policies, nor should it jeopardize a national climate change program.161 But the protection of national sovereignty in EU emissions trading is waning. While the Court of Justice initially interpreted Commission powers in EU ETS narrowly,162 during the current phase III it has interpreted Commission powers more extensively, also with reference to the text of the EU ETS Directive. For instance, the Court ruled that during phases I and II of EU ETS, the ETS Directive did not authorize the Commission to substitute 155 Case C-203/12 Billerud Karlsborg AB, Billerud Skärblacka AB v Naturvårdsverket (Judgment of the Court, Second Chamber, 17 October 2013) para 23. 156 Marcin Stoczkiewicz, ‘The Polluter Pays Principle and State Aid for Environmental Protection’ (2009) 6 Journal for European Environmental & Planning Law 2, 171, 176. 157 ibid 192. 158 Communication from the Commission (n 125) 5. 159 eg by the Republic of Poland in Case C-504/09 P European Commission v Republic of Poland (Judgment of the General Court, Seventh Chamber, 7 March 2013) para 10. 160 Communication from the Commission (n 125) 11. 161 Annex III, para 1 of EU ETS Directive (n 79); Communication from the Commission (n 125) 5. 162 Bogojeviċ (n 98) 3, 184, 196, 197.

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its judgment about the allocation of emission allowances for that of Member State authorities.163 The Court thus rejected the idea that the Commission could harmonize the allocation of allowances, and hence there was no power for the Commission to fix a maximum quantity of allowances that a Member State could allocate to installations in its territory.164 The Court relied on EU constitutional law principles, such as the rule of law, subsidiarity and legal certainty,165 as well as respect for competences as they are attributed through EU primary Treaty law and secondary legislation in order to reach this conclusion.166 But in the recent case of Poland v Commission167 the General Court rejected Poland’s challenge to the European Commission transitional rules on the free allocation of emission allowances during phase III of the EU ETS. Poland had argued that these rules—contrary to Arts 192 (2) and 194 (2) TFEU—interfered with the choice of its national energy sources. Since Poland relies heavily on coal for its energy production, it felt disadvantaged by the EU emission benchmarks, contained in the transitional rules. These benchmarks relied on emissions data for the cleaner energy source of gas, not coal. Most importantly for the discussion here, the General Court also came to this conclusion by affirming a discourse of ‘society’ in relation to the EU carbon market. It held Art 194 (2) TFEU inapplicable. Art 194 TFEU deals with the energy policy of the EU, and Art 194 (2) provides an important qualification of the idea of a harmonized energy policy applicable across the EU. Art 194 (2) maintains a Member State’s rights to determine the conditions for exploiting its energy sources, its choices between different energy sources and the general structure of its energy supply. If the EU seeks to adopt measures which have a ‘significant effect’ upon a Member State’s choice between different energy sources and the general structure of its energy supply, such measures have to be adopted by unanimity. A Member State could thus veto such measures.168 The General Court rejected Poland’s challenge by holding that Art 194 (2) TFEU was not applicable, because the Commission decision laying down transitional rules for the free allocation

163 For instance, in the case of Estonia the Commission called for a reduction of emission allowances by 47.8% (Case C-505/09 P European Commission v Republic of Estonia (Judgment of the Court, Second Chamber, 29 March 2012) para 8). 164 Case C-267/11 Commission v Latvia (Judgment of the Court, First Chamber, 3 October 2013) para 54; European Commission v Republic of Estonia (n 163) para 86. 165 With legal certainty here referring for instance to non-retroactivity of legislation as well as the protection of acquired rights and legitimate expectations. 166 Bogojeviċ (n 98) 201. 167 Republic of Poland v European Commission (n 96). 168 Art 192 (2) (c) TFEU. For a further discussion of the scope of Member States’ energy rights see: Angus Johnston and Eva van der Marel, ‘Ad Lucem? Interpreting the New EU Energy Provision’, and in particular the Meaning of Art. 194 (2) TFEU’ (2013) 22 European Energy and Environmental Law Review 5, 181.

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of emission allowances was not so much concerned with Poland’s national ‘energy market’, but raised issues of ‘environmental policy’.169 To summarize, this section has mapped three open-textured key discourses that perform ‘society’ in relation to the EU carbon market. These are, firstly, discourses about the involvement of citizens in EU emissions trading. Secondly, discourses about the ‘fairness’ of economic transactions in the EU carbon market, and linked to this, thirdly, political discussions about the question whether the regulation of economic transactions in the EU carbon market strikes the right balance between the power of the EU supranational institutions and the power of the EU Member States. The next section will further show how discourses of ‘economy’ and ‘society’ are constructed in relation to each other in the EU carbon market.

D. The Relational Construction of Discourses of ‘Economy’ and ‘Society’ in the EU Carbon Market Laclau’s and Mouffe’s critical discourse analysis enables us to trace the relational construction of discourses, here how discourses of ‘economy’ and ‘society’ are constructed in relation to each other in the EU carbon market. The analysis above has already indicated how in the legal provisions establishing the EU carbon market ‘economy’ and ‘society’ are also related. This section further reinforces the idea of the relational construction of discourses of ‘economy’ and ‘society’ by arguing that the meaning of some key concepts, such as ‘efficiency’, is established through reference to both discourses of ‘economy’ and ‘society’. In Laclau’s and Mouffe’s terminology such key concepts are ‘floating signifiers’; that is broad concepts whose meaning fluctuates. But the meaning of such concepts can be partially and temporarily fixed with reference to both discourses of ‘society’ and ‘economy’. For instance, ‘efficiency’ and ‘economy’ are terms that have been used both to talk about the most efficient allocation of resources by pricing greenhouse gas emissions, but also to refer to wider societal objectives, such as ‘good administration’ to be achieved by the EU ETS. Member States and the Court of Justice have used the language of ‘economy’ in order to argue that the Commission should make speedy decisions about the approval or rejection of NAPs. Latvia, for instance, argued that the ‘effective and rapid’ adoption of its NAP by the European Commission was required by Art 1 of the EU ETS Directive which states that the purpose of the Directive is to promote ‘reductions of greenhouse gas emissions in a cost-effective and economically efficient manner’ (emphasis added).170 Moreover, Latvia argued 169

Republic of Poland v European Commission (n 96) para 17. Point made by the Republic of Latvia, in European Commission v Latvia (n 164) paras 32, 39. 170

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that legal certainty about the status of a NAP—whether it was approved or still under consideration by the Commission—was important. Businesses had to know where they stood. Delays in Commission decisions could jeopardize economic development. Quick decisions from the Commission were also needed because subsequent amendments to the NAP by Member States could only be adopted once the Commission had approved the NAP in the first place. The Court endorsed these claims. 171

VI. CONCLUSION: FROM LACLAU AND MOUFFE BACK TO POLANYI

This chapter has sought to critically probe and develop Polanyi’s ideas about regulating economic activity by ‘embedding’ it in social relationships. It has argued that Laclau’s and Mouffe’s ideas about ‘open’ and ‘relationally constructed’ discourses are an important resource for overcoming a key shortcoming of Polanyi’s embeddedness metaphor, that is an unresolved tension between, on the one hand, a perception of economic activity as distinct from ‘social’ action, and, on the other hand, a view that, economic activity is always embedded in social norms and interactions. By understanding ‘economy’ and ‘society’ as discursively performed in relation to each other, sharp demarcations between social and economic action disappear. Economic activity is always performed with reference to a wider horizon of ‘society’ and a range of social actions involve economizing. Methodologically, Laclau’s and Mouffe’s perspective provides new tools for analysing interactions between ‘economy’ and ‘society’ in risk regulation. Their perspective allows us to move from a macro to a meso-level of analysis by focusing on specific articulatory practices. By identifying ‘positions of difference’ within a discourse, and by understanding a discourse of ‘economy’ as constructed in relation to a discourse of ‘society’, a nuanced picture of economy-society interactions can be developed. This is one further step towards abandoning reified images of economic activity. Various sources generate discourses of ‘economy’ and ‘society’. This chapter has focused on how legal provisions that constitute the EU carbon market give rise to discourses of ‘economy’ and ‘society’. Hence, Laclau’s and Mouffe’s critical discourse perspective has also been used here in order to analyse in more specific terms what ‘the social’ is in which economic activity can be embedded. In the context of EU emissions trading social norms do not appear as very distinct from the values that inform economic action. For instance, what is considered as ‘fair’ seems to modify rather than subvert the rationality of market behaviour. Social norms do not explicitly refer to eco-centric values, such as the interests of 171

ibid para 57.

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fauna and flora threatened with extinction by climate change. Instead, social norms seem more closely informed by the interests of politically powerful human economic actors, such as Member States and the European Commission. Moreover, the discourse perspective sketched here points to the normative ambiguity of the social norms in which economic activity can become embedded. While for Polanyi social norms exert a humanizing effect on utility maximising market actors, the case of the EU carbon market suggests that also a heavily ‘embedded’ market can be associated with normative consequences which are welcomed by some, but resisted by other market actors. Examples of such normative consequences in the context of the EU carbon market are rent seeking, national protectionism and destabilization of national energy security. This questions Polanyi’s vision of social norms that embed economic activity as reflecting the normative orientation of society as a collective. Understanding more about the discursive performance of key elements of transnational risk regulation also matters because difficulties of achieving political consensus among a wide range of regulatory actors often lead to key aspects of such regimes remaining open-textured and indeterminate. In the context of emissions trading a rich and important literature has therefore pointed out that foundational concepts of such regimes are often underspecified. For example, should permits under which greenhouse gases can be emitted be considered as a type of private property right or merely as an administrative authorisation?172 What concept of risk regulation informs emissions trading?173 This chapter has argued that a re-interpretation of Polanyi’s embeddedness metaphor with reference to contemporary discourse ideas can provide a rich seam of social-theoretical ideas and methodological tools for understanding how such concepts become fleshed out and thus how transnational risk regulation is discursively performed.

172 Sanja Bogojevic, Emissions Trading Schemes: Markets, States and Law (Oxford, Hart Publishing, 2013) 102. 173 Veerle Heyvaert, Europe in a Climate of Risk: Three Paradigms at Play, LSE Law, Society and Economy Working Papers 06/2010, at: http://eprints.lse.ac.uk/32904/1/WPS2010-06_ Heyvaert.pdf (last accessed 10 October 2014).

8 (Dis)embeddedness and the Management of Transnational Risk: The Case of Blood Regulation ANNE-MAREE FARRELL*

I. INTRODUCTION

T

HIS CHAPTER EXAMINES how regulation mediates the relationship between the economic and social spheres in the context of managing transnational risk. It does so through the use of a case study examining blood regulation in the post HIV blood contamination era, with a predominant focus on developments at supranational level. The chapter seeks to explore two aspects of Polanyi’s notion of embeddedness: first, how a social sphere becomes embedded in regulation; and second, what the disembedding of the economic from the social sphere in regulatory design might mean for the management of transnational risk. In exploring these issues it is argued that we need to pay close attention to how social spheres are framed for regulatory purposes. What constitutes the social may only be a partial representation, reflective of particular historical and institutional trajectories, as well as professional ideologies. This may be particularly acute at global level, where institutional decision-making processes are dominated by experts, regulators and industry representatives, and largely insulated from stakeholder activism, democratic politics and accountability mechanisms. In addition, where disembedding of the economic from the social sphere occurs in regulatory design as a result of this partial framing, a ‘double movement’ re-embedding the economic in the social sphere may not be automatic or inevitable. Instead, any countermovement may be politically and institutionally contingent, if it occurs at all.

* This chapter draws on research undertaken while in receipt of the Australian Research Council (ARC) Future Fellowship Regulating Human Body Parts: Principles Institutions and Politics (FT130101768) and the Wellcome Strategic Programme The Human Body: Its Scope Limits and Future (WT087439MF). The support of both the ARC and the Wellcome Trust is gratefully acknowledged.

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This may have adverse consequences for the effective management of transnational risk, which may prove problematic in politically sensitive policy sectors. In order to examine these arguments in more detail, the chapter first proceeds with an examination of Polanyi’s notion of embeddedness and how it might inform an analysis of regulation of transnational risk. For present purposes, regulation is broadly defined as a ‘sustained and focused attempt to alter the behaviour of others according to standards and goals with the intention of producing a broadly defined outcome or outcomes, which may involve mechanisms of standard setting, information gathering and behaviour modification’.1 Thereafter, the case study on blood regulation is presented, with a focus on the constituting of the social and economic spheres in the field and their relationship to regulating risk at supranational level. The final section concludes with a commentary on the broader insights to be drawn on the notion of embeddedness for understanding the role of regulation in managing transnational risk.

II. (DIS)EMBEDDEDNESS AND THE REGULATION OF RISK

Polanyi argued that all economic systems, with the exception of the market system, embeds the economy in social relationships which are framed by non-economic institutions. As such, production and distribution do not follow economic interests shaped by acquisitive motives but instead resemble social interests based upon collectively shared norms and conventions.2 He suggested that one of the more perverse consequences of the rise of capitalism was the disembedding of the economy from social relationships, which in turn allowed markets to operate according to their ‘own internal, autonomous logic’, underpinned by the ‘self-interested behaviour of atomized individuals’.3 The adoption of suitable institutional and regulatory arrangements was necessary to facilitate this embedding process, as they reinforced the importance of political, religious or other moral values as part of the broader social contract, over and above market-driven priorities.4

1 J Black, ‘What is Regulatory Innovation?’ in J Black, M Lodge and M Thatcher (eds), Regulatory Innovation: A Comparative Analysis (Cheltenham, Edward Elgar, 2005) 1, 11. 2 A Ebner, ‘Transnational Markets and the Polanyi Problem’ in C Joerges and J Falke (eds), Karl Polanyi, Globalisation and the Potential of Law in Transnational Markets (Oxford, Hart Publishing, 2010) 19, 21. 3 See C Holmes, ‘Problems and Opportunities in Polanyian Analysis Today’ (2012) 41 Economy and Society 468, 472. 4 G Grippner, M Granovetter, F Block et al, ‘Polanyi Symposium: A Conversation on Embeddedness’ (2007) 2 Socio-Economic Review 109; F Block, ‘Understanding the Diverging Trajectories of the United States and Western Europe: A Neo-Polanyian Analysis’ (2007) 35 Politics and Society 3.

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Polanyi also sought to make a distinction between real and fictitious commodities in terms of understanding the degree to which his notion of embeddedness was relevant in the context of market relations. He interpreted a commodity as something that had been created for sale on a market. Things such as land, money or labour were fictitious commodities in the sense that they had not been created purely as commodities within this definition. Therefore, it was not appropriate to conceive of, or regulate, them in the same way one would real commodities.5 As a result, fictitious commodities needed direct state intervention which involved political decision-making, steering and responsibility. Any attempt to disembed the management of fictitious commodities with a view to permitting greater market self-regulation would inevitably result in citizens having to bear the brunt of any asymmetries in the functioning of the market. This disembedding would inevitably lead to the ‘double movement’: a countermovement involving the re-embedding of the economy in social relationships as the burden upon citizens became too great.6 Polanyi’s notion of embeddedness has been the subject of cross-disciplinary critique on both methodological and substantive grounds. Commentators have pointed to a number of tensions at play in the way in which he used the term to grapple with the pathologies of capitalism and their consequences. For Dale, these tensions contributed to a lack of analytical precision,7 whereas for Lacher such imprecision highlighted the fact that for Polanyi such pathologies could ultimately only be resolved through the replacement of capitalism with socialism.8 For Lie, one of the key problems in Polanyi’s analysis was his failure to recognise distinct social organisations within the conceptual rubric of the ‘market’.9 Yet others working in the field of economic anthropology criticised Polanyi for what they saw as an incorrect assumption made about markets as being socially embedded in pre-industrial societies, which undermined his claims about embeddedness in industrial societies.10 In contrast, those working in the field of economics, as well as economic sociology in particular, argued that Polanyi had failed to appreciate markets had always

5

Ebner, ‘Transnational Markets and the Polanyi Problem’, 23–24. See F Block, ‘Introduction’ in K Polanyi, The Great Transformation: The Political and Economic Origins of Our Time, 2nd edn (Boston, MA, Beacon Press, 2001) 1. 7 G Dale, ‘Social Democracy, Embeddedness and Decommodification: On the Conceptual Innovations and Intellectual Affiliations of Karl Polanyi’ (2010) 15 New Political Economy 369, 382, 390. 8 H Lacher, ‘The Politics of the Market: Re-Reading Karl Polanyi’ (1999) 13 Global Society 313, 322. 9 J Lie, ‘Embedding Polanyi’s Market Society’ (1991) 34 Sociological Perspectives 219, 230. 10 For methodological critiques, see for example, C Hann and K Hart (eds), Market and Society: The Great Transformation Today (Cambridge, Cambridge University Press, 2009); C Hann and K Hart, Economic Anthropology: History, Ethnography, Critique (Cambridge, Polity Press, 2010). 6

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been socially embedded in both pre-industrial and industrial societies.11 In the circumstances, it was suggested that a more useful way forward in analytical terms would be to examine how this embedding process differed across national settings, cultural practices and industrial activity.12 For other commentators, Polanyi’s concept of embeddedness provided a springboard for exploring the tensions between neoliberalism and social protection in the current era of globalisation,13 as well as the role played by regulation in contributing to such tensions.14 Polanyi emphasised the importance of using regulation as a mechanism for mediating the pathologies of capitalism, rather than just enabling the (better) functioning of markets.15 However, the role of regulation in this regard has been questioned by a number of academic commentators who have suggested that it contributes to disembedding in the service of the ‘neoliberal paradigm’.16 What is clear is that the relationship between regulation and (dis)embeddedness remains under-developed in Polanyi’s work, no doubt informed by the times in which he lived where state-sponsored regulation predominated, where it existed at all.17 Nevertheless, it provides a springboard for thinking about how regulation structures, and is itself structured by, the relationship between economy and society, particularly beyond the nation-state. Viewed in this way, it also provides an opportunity to explore whether the double movement, which is a key aspect of Polanyi’s notion of embeddedness, is inevitable or contingent.18 As mentioned in the Introduction, it is argued that political and institutional dynamics are likely to loom large in determining whether a countermovement takes place, particularly given the dynamics of regulatory processes at supranational level. This will be explored in more detail in the case study on blood regulation examined in the following section of the chapter. Historically, trade and economic concerns have predominated at supranational level,19 with regulation often limited to furthering such ends.

11 V Zelizer, ‘Beyond the Polemics of the Market: Establishing a Theoretical and Empirical Agenda’ (1988) 3 Sociological Forum 614. 12 F Block, ‘Contradictions of Self-Regulating Markets’ in M Mendell and D Sallee (eds), The Legacy of Karl Polanyi: Market, State and Society at the End of the Twentieth Century (Basingstoke, Macmillan, 1991) 86. 13 M Granovetter, ‘Economic Action and Social Structure: The Problem of Embeddedness’ (1985) 91 American Journal of Sociology 481; J Stiglitz, ‘Foreward’ in Polanyi (n 6) vii. 14 JA Caporaso and S Tarrow, ‘Polanyi in Brussels: Supranational Institutions and the Transnational Embedding of Markets’ (2009) 63 International Organization 593. 15 See Grippner et al, ‘Polanyi Symposium’ 118–9; Ebner (n 2) 29. 16 Ebner (n 2) 22; G Dale, ‘Double Movements and Pendular Forces: Polanyian Perspectives on the Neoliberal Age’ (2012) 60 Current Sociology 3, 17. 17 Dale, ‘Double Movements and Pendular Forces’ 18–19. 18 Note that Hann and Hart have criticised as too simplistic the binary opposition approach to interpreting the double movement as one of marketisation as bad, and countermovement as good, see Hann and Hart, Economic Anthropology 8. 19 For a historical overview, see J Braithwaite and P Drahos, Global Business Regulation (Cambridge, Cambridge University Press, 2000).

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In recent decades, however, there has been an upsurge in the scope and breadth of regulatory governance across a diverse range of policy sectors, particularly at supranational level.20 Notwithstanding this upsurge, regulatory developments beyond the nation-state have not followed a clear or consistent trajectory. Given limited legal competence, regulation beyond the nation-state has historically been driven by the use of ‘soft’ (non-legally binding) law,21 such as norms, principles, guidelines, recommendations and standards, often underpinned by a drive towards technical harmonisation and co-operation.22 It has been described as ‘decentred’, characterised by fragmentation, complexity and heterarchy,23 populated by a diverse range of state and non-state actors, stakeholders and organisations.24 It is a fluid transnational regulatory space, with interests, institutions and jurisdictions blurred and interconnected between national and supranational orders,25 largely insulated from the demands of democratic politics and accountability mechanisms.26 As a regional polity, the European Union (EU) stands as an exception to such insularity, given the potential for regulatory challenge and review through its democratically accountable Parliament, as well as its reliance on regulatory ‘outputs’ as a way of promoting its legitimacy.27 Having said that, much of the day-to-day regulatory decision-making and evaluation at EU level takes place in non-majoritarian institutions, in circumstances where the emphasis has traditionally been on achieving efficiency. To this end, much of the traditional impetus for the EU acting as a ‘regulatory state’ has been on either promoting market integration or addressing market failure

20 J Jordana and D Levi-Faur, ‘The Politics of Regulation in the Age of Governance’ in J Jordana and D Levi-Faur (eds), The Politics of Regulation: Institutions and Regulatory Reforms for the Age of Governance (Cheltenham, Edward Elgar, 2004) 1, 1; ML Djelic and K Sahlin-Andersson, ‘A World of Governance: The Rise of Transnational Regulation’ in ML Djelic and K Sahlin-Andersson (eds), Transnational Governance: Institutional Dynamics of Regulation (Cambridge, Cambridge University Press, 2006) 1, 1. 21 W Mattli and N Woods, ‘In Whose Benefit? Explaining Regulatory Change in Global Politics’ in W Mattli and N Woods (eds), The Politics of Global Regulation (Princeton, Princeton University Press, 2009) 1, 3. 22 On the use of standard-setting to facilitate co-operation and co-ordination at supranational level, see N Brunsson and B Jacobsson, ‘The Contemporary Expansion of Standardization’ in N Brunsson, B Jacobsson and Associates (eds), A World of Standards (Oxford, Oxford University Press, 2000) 1. 23 J Black, ‘Decentring Regulation: Understanding the Role of Regulation and Self-Regulation in a “Post-Regulatory” World’ (2001) 54 Current Legal Problems 103, 104. 24 D Levi-Faur, ‘The Global Diffusion of Regulatory Capitalism’ (2005) 598 Annals of the American Academy of Political and Social Science 12; J Braithwaite, Regulatory Capitalism: How it Works, Ideas for Making it Work Better (Cheltenham, Edward Elgar, 2009). 25 It has been argued that it is for these reasons that the term ‘transnational’ should be preferred to ‘global’, see Djelic and Sahlin-Andersson, ‘A World of Governance’ 3–4. 26 Black, ‘Decentring Regulation’ 337–39. 27 FW Scharpf, Governing in Europe: Effective and Democratic? (Oxford, Oxford University Press, 1999).

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as primary legitimating purposes underpinning regulatory initiatives.28 In more recent times, however, social aims and objectives have formed part of an expanded regulatory remit at EU level,29 albeit tensions remain about where to strike the balance between the social and the economic in specific policy sectors.30 Risk has become an important signifier for managing this tension, with regulation operating as a key legitimating mechanism. The way in which risk is defined, and indeed itself defines particular regulatory cultures, can offer insights into how this relationship is managed at supranational level. Within the relevant socio-legal literature, risk has been defined in varying ways and there has been extensive academic debate on its interpretation and application. Risk is often used as a term to describe situations where behaviour is known and where a probabilistic value or calculation can be assigned to outcomes. This needs to be distinguished from uncertainty, where important parameters of circumstances are known, but not the probability of outcomes.31 In contrast to those who view risk as an objective and knowable phenomenon, it has been argued that risk is socially-constructed and shaped by cultural, institutional and political contexts. Taking this view, risk should be seen as subjective and reflexive, reflecting broader social changes in line with the emergence of what has been described as the ‘risk society’ in advanced post-industrial democracies.32 Applying a Polanyian critique to understanding the relationship between the economic and the social requires a socially constructed and contextual approach to risk. It permits a more fine grained analysis of how risk is constructed in individual polities or fora, as well as in and across particular regulatory regimes. In the EU, for example, it has been suggested that a specific approach is taken to how risk is defined, as well as to how it is incorporated into regulatory design. The origins of such an approach are said to reflect a longstanding commitment to promoting the Single Market.33 It is particularly applicable in cases involving the manufacture, supply and movement of goods within the EU market where there may be issues regarding

28

G Majone, ‘The Rise of the Regulatory State in Europe’ (1994) 17 West European Politics 77. Caporaso and Tarrow, ‘Polanyi in Brussels’ 601. 30 It has been argued that ‘undue regard’ has been given to efficiency over equity, see D Mabbett, ‘Polanyi in Brussels or Luxembourg? Social Rights and Market Regulation in European Insurance’ (2014) 8 Regulation and Governance 186–202. 31 B Wynne, ‘Uncertainty and Environmental Learning: Reconceiving Science and Policy in the Preventative Paradigm’ (1992) 2 Global Environmental Change 111, 114. 32 U Beck, Risk Society: Towards A New Modernity (trans Mark Ritter) (London, Sage, 1992). 33 M Lee, EU Regulation of GMOs: Law and Decision-Making for a New Technology (Cheltenham, Edward Elgar, 2008) 6; V Heyvaert, ‘Governing Climate Change: Towards a New Paradigm for Risk Regulation’ (2011) 74 Modern Law Review 817, 822–25. 29

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health, environmental or technological risks associated with their use.34 The political fallout from the BSE crisis in the late 1990s brought about a more expansive approach to the use of risk regulation in economic and social policy sectors at EU level, with the successful management of risk becoming important to enhancing public trust and promoting legitimacy.35 However, whether to adopt a broad or narrow approach to risk in specific EU policy sectors, and how to separate out science and politics in managing risk, has been problematic in practice. This has been apparent in politically sensitive policy sectors, such as those affecting human health and the environment.36 At supranational level, the EU is not alone in experiencing difficulties in defining and interpreting risk in such contexts, as is evidenced in the rulings on the Sanitary and Phytosanitary (SPS) Agreement within the World Trade Organization.37 We now turn to the next section of the chapter to examine the relationship between the Polanyian notion of embeddedness and the management of transnational risk through a case study on blood regulation.

III. CASE STUDY: BLOOD REGULATION

A. Historical Overview Human blood has longstanding socio-cultural and religious resonance.38 Many diseases afflicting human beings were considered to result from an imbalance of key ‘humours’ which included phlegm, choler, bile and blood. Blood was considered to be the key humour and was seen as representing the spiritual essence of human beings. Bloodletting, which involved cutting the vein of a human being to drain blood, was practised for hundreds of years as a curative approach to disease.39 It was not until the early part of the twentieth century, however, that medical and scientific research advanced to the point that discoveries were made regarding different blood types, and techniques were developed to collect, store and transfuse blood. Further research revealed that blood was in fact composed of plasma and 34 V Heyvaert, ‘Europe in a Climate of Risk: Three Paradigms at Play’, LSE Law, Society and Economy Working Papers 06/2010, 1, 12, 16. 35 E Vos, ‘EU Food Safety Regulation in the Aftermath of the BSE Crisis’ (2000) 23 Journal of Consumer Policy 227. 36 AM Farrell, ‘Risk, Legitimacy and the Regulation of Health Technologies’ in ML Flear, AM Farrell, TK Hervey and T Murphy (eds), European Law and New Health Technologies (Oxford, Oxford University Press, 2013) 203, 209. 37 J Peel, ‘Of Apples and Oranges (and Hormones in Beef): Science and the Standard of Review in WTO Disputes under the SPS Agreement’ (2012) 61 International and Comparative Law Quarterly 427. 38 P Camporesi, The Juice of Life: The Symbolic and Magical Significance of Blood (trans (RR Barr) (New York, Continuum Publications, 1996) 14–32. 39 D Starr, Blood: An Epic History of Medicine and Commerce (New York, Alfred A Knopf, 1997) 17.

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several cellular elements, which included red cells, five kinds of white cells and platelets. By 1940, the Rhesus system had been identified, which meant that eight different blood groups could now be distinguished.40 Following the end of the Second World War, many Western governments formalised the arrangements for the collection, organisation and supply of blood and plasma products. In some countries, the Red Cross undertook this task, while in other countries governments created state executive agencies to manage the national blood supply. Co-existing with such arrangements, independent and hospital blood banks were also established in a range of countries as well. The decision as to how a national blood supply was organised often turned on the peculiarities of historical and social developments, rather than on any specific economic considerations.41 Developments in scientific research, advances in technology and growing consumer demand for a range of plasma products led to the emergence of a global market in such products by the 1970s.42 Over time, a bifurcated approach to blood regulation developed at both national and supranational levels, with separate institutional and regulatory trajectories in relation to the collection and supply of blood on the one hand and plasma products on the other hand.43 The former was managed by not-for-profit national blood services, a select few of which also engaged in the manufacture of plasma products. For the most part, however, the manufacture and supply of plasma products was controlled by the for-profit plasma products industry, which formed a niche within the broader global pharmaceutical industry.44

B. The Social Sphere One of the key principles underpinning blood sourcing and supply in Western countries is that it should be donated on a voluntary, unpaid basis. The well-known British academic, Richard Titmuss, encapsulated the principle in what he described as the ‘gift relationship’: the donation of blood by altruistic individuals to anonymous recipients with no expectation of financial or other reward.45 Although referencing the work of Mauss who argued for the

40 P Hagen, Blood: Gift or Merchandise? Towards an International Blood Policy (New York, Alan R Liss, 1982) 12–13. 41 ibid 74. 42 ibid. 43 AM Farrell, ‘The Politics of Risk and EU Governance of Human Material’ (2009) 16 Maastricht Journal of European and Comparative Law 41, 43. 44 For an overview, see Farrell, The Politics of Blood: Ethics Innovation and the Regulation of Risk (Cambridge, Cambridge University Press, 2012) Chapters 2 and 5. 45 RM Titmuss, The Gift Relationship: From Human Blood to Social Policy (London, George Allen & Unwin, 1970) 210–35.

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importance of reciprocity in gift exchange for promoting social relations,46 Titmuss chose not to view the idea of reciprocity in gift exchange as central. Instead, he placed emphasis on the promotion of disinterested and unreciprocated gifting through altruism, exemplified through voluntary, unpaid blood donation as having an important role in mediating social relationships in modern democratic states. He went on to argue that any tensions between such relationships and the marketplace in blood sourcing and supply should be resolved through excluding markets in favour of promoting important social values, as exemplified in the gift relationship.47 In support of his arguments, Titmuss relied upon empirical research undertaken in relation to the United States (US) blood supply in the late 1960s, which he suggested showed a laissez-faire, minimally regulated approach to the collection and supply of blood, sourced predominantly from individuals who were paid to provide their blood. He argued that this had resulted in the exploitation of the socio-economically disadvantaged, high rates of viral contamination of blood units, and large-scale economic inefficiencies and waste.48 Titmuss’s analysis of the interplay between the social and the economic in the context of blood donation and supply provoked a lively and enduring academic debate. Economists argued that contrary to Titmuss’s denigration of market dynamics, the promotion of blood markets would in fact enhance an individual’s freedom of choice about whether they wished to sell their blood or not, and would not undermine the altruistic impulse.49 Other commentators criticised Titmuss as having misrepresented the level of institutional and community support for individuals to engage in voluntary, unpaid blood donation in the US context.50 In any case, it was suggested that such arguments were no longer relevant, given the significant regulatory and institutional reforms that had since taken place in relation to the management and safety of the American blood supply from the 1970s onwards.51 Notwithstanding such criticisms, Titmuss’s arguments proved highly influential in political and professional circles, with voluntary, unpaid blood donation becoming an important guiding principle in both national and supranational blood policy by the end of the 1970s. Support for this method of donation was in large part promoted by those in charge of national blood services, traditionally described as blood bankers although more commonly known today as transfusionists, and it became part of their professional

46 M Mauss, The Gift: The Form and Reason for Exchange in Archaic Societies (London, Routledge, 1990), translated by WD Halls from M Mauss, ‘Essai sur le don’ Sociologie et Anthropologie (Paris, Presses Universitaires de France, 1950). 47 Titmuss, The Gift Relationship 158, 198–99, 210–42. 48 ibid 143–54. 49 K Arrow, ‘Gifts and Exchanges’ (1972) 4 Philosophy and Public Affairs 343. 50 AW Drake, SN Finkelstein and HM Sapolsky, The American Blood Supply (Cambridge, MA, MIT Press, 1982). 51 Farrell, The Politics of Blood Chapter 2.

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ideology.52 They supported voluntary, unpaid blood donation primarily on ethical and safety grounds. It allowed the altruistic impulse to flourish and avoided the ethically objectionable practice of seeking commercial gain from the human body. It encouraged long term loyalty on the part of donors, leading to repeated donations over time. In turn, this enabled regular tests to be conducted on donors and their blood, contributing to higher levels of blood safety and continuity in supply. Transfusionists’ opposition to paid donation also had its origins in the exploitative practices engaged in by the plasma products industry in developing countries in the 1970s, as well as from socially and economically disadvantaged groups in developed countries. Over time, such opposition had become entrenched and transfusionists were of the view that it was much more likely that new infectious agents would appear first and in much greater number in donors who had been paid to make their donations, as opposed to the volunteer population.53 Ethical and safety concerns over paying individuals to provide their blood, as well as the circumstances in which donors were paid to provide their plasma, crystallised over time around what has colloquially become known as the ‘gift v commodity’ debate in blood circles. The main protagonists in this debate are transfusionists, not-for-profit plasma product manufacturers and donor organisations on the one hand; and those involved in the for-profit plasma products industry, on the other hand. Sitting uneasily between the two are consumer organisations whose primary concerns are plasma product safety and availability. Such oppositional positions are held against a background of continuing public, political and institutional support for voluntary, unpaid donation as a guiding principle in national and supranational blood policy. The social sphere which is embedded in risk regulation in the field is constituted by actors, institutions and states that support voluntary, unpaid donation on ethical and safety grounds. This is the case notwithstanding the fact that it remains largely aspirational in many parts of the world in the face of longstanding demand for plasma products which is largely unmet by many national blood services. This led to the development of a global market for such products, the origins and dynamics of which are examined in the next section of the chapter.

C. The Economic Sphere From the mid to late 1960s onwards, scientific and technological developments made the large-scale industrial manufacture of plasma products possible. One particular product for which there was increasing demand 52 Bayer and Feldman have noted that the gift relationship had achieved the status of ‘international orthodoxy’ by the 1980s, see R Bayer and E Feldman, ‘Understanding the Blood Feuds’ in E Feldman and R Bayer (eds), Blood Feuds: AIDS, Blood and the Politics of Medical Disaster (New York, Oxford University Press, 1999) 2, 7, 9; Farrell (n 44) Chapter 4. 53 R Beal and W van Aken, ‘Gift or Good? A Contemporary Examination of the Voluntary and Commercial Aspects of Blood Donation’ (1992) 63 Vox Sanguinis 1.

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was factor concentrates, which had brought about a revolution in the treatment of haemophilia.54 Manufacturing facilities for the production of such products were established, predominantly in the US. As thousands of units of plasma were required for product manufacture, the plasma products industry sourced much of the raw material required through offering financial payments to donors. As mentioned previously, this had led the industry to establish plasma collection facilities in developing countries in the 1970s, leading to claims of donor exploitation.55 It was during this same period that an international black market emerged in relation to the buying and selling of plasma, with plasma ‘brokers’ operating out of Zurich and Montreal. Public condemnation of such practices by international organisations, such as the World Health Organization (WHO), brought international pressure to bear on the industry. By the end of the 1970s, the industry had closed its facilities in the developing world, largely confining plasma collection activities to the US.56 This was made possible by the fact that the US permitted financial payments for plasma donation, unlike many other Western countries.57 For many years, regulatory oversight of the predominantly US-based plasma products industry was largely dysfunctional, particularly in relation to the management of risk. This was despite the fact that the US regulator, the Food and Drug Administration (FDA), possessed strong regulatory powers in the field. There was little, if any, focus on the operations of the industry beyond the US, and what evidence is available from this time, showed that national regulators in other Western countries essentially relied on what the industry told them as to the quality and safety of their products. Other national regulators also assumed that the industry’s collection, manufacture and supply operations were being effectively monitored and regulated by the FDA, which in retrospect turned out to be mistaken.58 In effect, the global plasma products market, which was predominantly US based, essentially operated in a transnational regulatory vacuum. It was a situation which proved to be highly problematic with the emergence of the transnational risk posed by HIV in the 1980s, in circumstances where plasma products

54 Haemophilia is a genetic disorder, which is carried by females, but affects—with rare exceptions—male offspring. The disorder results in a (severe, moderate or mild) deficiency of clotting Factors VIII or IX. ‘Factor concentrates’ are plasma products that have been sourced from thousands of donors in order to extract a concentrated form of the clotting factors which are lacking in people with haemophilia, see The Honourable Justice H Krever, Commission of Inquiry on the Blood System in Canada, 3 vols, (Ottawa, Canadian Government Publishing, 1997) 26–27. 55 Hagen, Blood: Gift or Merchandise?. 56 Starr, Blood. 57 L Leveton, HC Sox and MA Stoto (eds), HIV and the Blood Supply: An Analysis of Crisis Decisionmaking. Committee to Study HIV Transmission through Blood and Blood Products, Division of Health Promotion and Disease Prevention (Washington, DC, National Academy Press, 1995) 30. 58 ibid.

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were increasing being sourced and supplied across national borders.59 When the risk of HIV transmission through blood became apparent in Western countries in the early 1980s, the industry announced that it would identify and screen out high risk donors. Some members of the industry also introduced laboratory testing to identify potential high risk donors, although others were resistant. By the mid-1980s HIV testing had been introduced and the industry had instituted steps in the plasma product manufacturing process to eliminate the virus.60 However, the results of HIV testing revealed that the industry’s management of the risk posed by HIV had been inadequate. There were high rates of infection with the virus amongst national haemophilia populations which had relied upon the use of the industry’s products.61 People with haemophilia who were infected with HIV mounted political campaigns and took legal action in a number of Western countries demanding financial compensation, as well as political and corporate accountability for the circumstances that had led to their HIV infection. Such patient activism triggered political scandals in a number of Western countries.62 It resulted in the establishment of several state-sponsored inquiries into the circumstances that had led to the contamination episode and how this could be prevented in the future.63 A number of common themes can be discerned from the findings of such inquiries. It was found that those with institutional, regulatory and political responsibility for blood and plasma products had failed to act decisively in taking all necessary steps to minimise the risk of HIV transmission. In the circumstances, it was recommended that a precautionary approach should now be taken to managing risks to the blood supply, notwithstanding scientific uncertainty about the nature and scope of such risks. There was also a view that national regulators, such as the FDA, had suffered regulatory capture by the industry which had led to a failure to act in a decisive or independent manner in the interests of public health protection. It was also recognised that the inter-connected nature of cross-border exchange of blood and the growth in the global market for plasma products required strengthened regulatory oversight at both national and supranational levels.

59

Farrell (n 44) Chapters 2 and 6. For an overview, see Leveton et al, HIV and the Blood Supply. 61 BK Kroner, PS Rosenberg, LM Aledort et al, ‘HIV-1 Infection Incidence among Persons with Hemophilia in the United States and Europe’ (1994) 7 Journal of the Acquired Immune Deficiencies Syndrome 279. 62 Farrell (n 44) Chapter 6. 63 M Lucas, Transfusion sanguine et SIDA en 1985: chronologie des faits et de decisions pour ce qui concern les hémophiles (Paris, Inspections Générales des Affaires Sociales, 1991); Leveton et al (n 57); Krever, Commission of Inquiry on the Blood System in Canada; The Honourable Justice A Lindsay, Report of the Tribunal of Inquiry into the Infection with HIV and Hepatitis C of Persons with Haemophilia and Related Matters (Dublin, Government Publications, 2002); and the Right Honourable Lord Archer of Sandwell QC, N Jones and J Willetts, Independent Public Inquiry Report on NHS Supplied Contaminated Blood and Blood Products (2009). 60

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The fallout from HIV blood contamination scandals and state-sponsored inquiries led to reform of the industry’s sourcing and manufacturing processes in the interests of enhanced quality and safety.64 The industry argued that such reform had led to high levels of product safety as a result of significant financial and technical investment in the development of improved testing technology, donor screening and protocols, as well as improved adherence to good manufacturing practice (GMP) principles and procedures.65 Transfusionists remained largely unconvinced by the industry’s claim, although some acknowledged that safety practices had dramatically improved.66 Consumers remained most concerned about the prospects of shortfalls in supply, as well as the safety and availability of plasma products. This was regardless of whether the products were sourced from paid or unpaid donors.67 In the post HIV blood contamination era, the industry recognised that strengthened quality control over the plasma sourcing was required, whilst also ensuring access to the plasma required for manufacture. It led to the industry becoming highly integrated in terms of plasma collection, manufacture and supply, with the emergence of a small number of major players controlling the global marketplace.68 Together, the US and the EU now comprise the largest and most financially lucrative markets for the industry. Ensuring regulatory compliance is therefore a necessary adjunct to doing business in these markets. The main industry criticisms associated with compliance between the two markets include significant additional costs due to a lack of regulatory harmonisation, as well as the fact that regulators on both sides of the Atlantic have become overly precautionary in their demands for enhanced product safety.69 Access to national markets remains a complex issue for the industry. This is predominantly because national governments determine the terms of such access and levels of reimbursement. In determining access, governments must balance a number of competing demands, as well as ensuring value for money and efficiencies against a background of limited financial 64 J Penrod and M Gustafson, ‘The Evolution of Safety in Source Plasma Collection’ (2009) The Source 16, 18; A Farrugia, M Gustafson and I von Hoegen, ‘Decades of Safety Measures’ (2009) The Source 8. 65 E Tabor, ‘The Epidemiology of Virus Transmission by Plasma Derivatives: Clinical Studies Verifying the Lack of Transmission of Hepatitis B and C Viruses and HIV Type 1’ (1999) 39 Transfusion 1160. 66 R Beal, ‘Titmuss Revisited’ (1999) 9 Transfusion Medicine 352. 67 B O’Mahony and A Turner, ‘The Dublin Consensus Statement on Vital Issues Relating to the Collection of Blood and Plasma and the Manufacture of Plasma Products’ (2010) 98 Vox Sanguinis 447. 68 E Nauenberg and SD Sullivan, ‘Firm Behavior in the U.S. Market for Factor VIII: A Need for Policy?’ (1994) 39 Social Science and Medicine 1591, 1602; J Penrod, ‘PPTA Leadership Interview: Gordon Naylor’ (2009) The Source 6, 7. 69 A Farrugia, ‘The Regulatory Pendulum in Transfusion Medicine’ (2002) 16 Transfusion Medicine Reviews 273.

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resources. The failure to strike the right balance could result in adverse political consequences, as was highlighted in the HIV blood contamination scandals. While showing due deference to public and political support for the gift relationship as exemplified in voluntary, unpaid donation, governments must also address professional and consumer demands for plasma products where such demand cannot be met by national blood services. In short, this is what constitutes the economic sphere in the field. It is informed by a potent mix of ethics, politics, safety, availability and finance, which in turn determines market access, product innovation and supply in and across national boundaries. The next section of the chapter examines how supranational blood regulation mediates the relationship between the economic and social spheres, with a particular focus on how it manages transnational risk.

IV. REGULATING BLOOD AND PLASMA PRODUCTS

A. European Union The political fallout from national HIV blood contamination episodes provided the catalyst for regulatory initiatives at supranational level, particularly in the EU context.70 The EU has legal competence to adopt minimum harmonisation measures setting standards for blood quality and safety.71 Such standards are now set out in what has become known as the Blood Directive, which came into force on an EU-wide basis in 2005.72 Although problems have been experienced in relation to various aspects of its implementation,73 it represents the first and only attempt at creating a legally-binding transnational risk regulation regime for blood quality and safety.74 Controversy dominated the passage of the Blood Directive through the legislative process, with conflict centred predominantly on what should be recognised as the preferred method of blood donation—paid or unpaid— within the EU.75 During the passage of the Blood Directive in the European Parliament, the protagonists involved in the longstanding ‘gift v commodity’ stakeholder

70 AM Farrell, ‘Is the Gift Still Good? Examining the Politics and Regulation of Blood Safety in the European Union’ (2006) 14 Medical Law Review 155, 169. 71 Article 168(4) TFEU. 72 Directive 2002/98/EC of the European Parliament and of the Council of 27 January 2003 setting standards of quality and safety for the collection, testing, processing, storage and distribution of human blood and blood components and amending Directive 2001/83/EC [2003] OJ L33/30 (Blood Directive). 73 For an overview, see Farrell, ‘Risk, Legitimacy and the Regulation of Health Technologies’ 212–14. 74 Farrell, ‘Is the Gift Still Good?’ 178. 75 F Sauer, F Delaney and E Fernandez-Zincke, ‘The Regulation of Blood and Tissues in the European Union’ (2005) 6 Pharmaceuticals Policy and Law 47.

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debate (previously referred to) lined up to present their opposing arguments on the issue. Although a dichotomous framing of blood as either gift or commodity has been described as an inadequate descriptor for the complex, interconnected arrangements for blood sourcing and supply in and across national borders that currently exist,76 the fraught negotiations over the Blood Directive made it clear that oppositional positions on what should be recognised as the preferred method of donation, as well as the role of blood markets in the EU, continued to generate significant political and stakeholder conflict. Such conflict was also set against a high level of public support for voluntary, unpaid blood donation.77 In the circumstances, EU decision-makers were forced to find a way forward which would accommodate oppositional stakeholder (and Member State) positions on the issue, so as to ensure that an acceptable political compromise was achieved that would allow for the adoption of the new risk regulation regime. After two years of debate and negotiations, the nature of the political compromise reached can be gleaned from the carefully-crafted wording used in the Blood Directive, where Member States are encouraged rather than legally-mandated to take ‘all necessary measures’ to promote voluntary, non-remunerated blood donation.78 It is also noted in the non-legallybinding Recital to the Directive that this source of donation ‘can contribute to high safety standards for blood and … therefore to the protection of human health’.79 There is neither any reference to the realities of the EU blood market which includes mixed sourcing arrangements, nor the implications for managing risks to the EU blood supply as a result. References to the commitment to voluntary, unpaid blood donation and its putative link with enhanced blood safety are couched in aspirational, non-legally binding, terms. It is simply referred to as a factor which has the potential to contribute to high safety standards, therefore facilitating a high level of human health protection.80 This is to be contrasted with the approach taken to this method of donation in the legally binding part of the Directive, where Member States are simply encouraged rather than required to take all necessary measures to ensure that blood is provided through this method of donation.81 In the pursuit of the objective of a national blood supply sourced solely through voluntary, unpaid donation, Member States are permitted to restrict or

76 C Waldby and R Mitchell, Tissue Economies: Blood, Organs and Cell Lines in Late Capitalism (Durham NC, Duke University Press, 2006) 49. 77 INRA Europe, Europeans and Blood, Eurobarometer 41.0 (Brussels, European Commission, 1995); European Opinion Research Group (EEIG), Le don de sang, Eurobaromètre spécial, 1883–4/Vague 58.2 (Brussels, European Commission, 2003). 78 Blood Directive, Art 20(1). 79 Blood Directive, para 23, Recital. 80 ibid. 81 Blood Directive, Art 20(1).

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otherwise prohibit the importation of blood, provided it is line with treaty obligations.82 Voluntary, unpaid donation is not defined in the Directive itself, although it is stated that the definition provided by the Council of Europe may be taken into account.83 No doubt the absence of any binding definition of voluntary, unpaid donation was designed to provide for flexibility in interpretation by Member States, especially in relation to the reimbursement of expenses associated with blood donation.84 There is separate EU regulation of plasma products, or what are more formally described as ‘medicinal products derived from human blood or plasma’, which is situated within the broader EU pharmaceutical regulatory regime.85 There is some crossover with the Blood Directive in that source plasma used in such products required to meet its quality and safety standards.86 Risk management of plasma products at an institutional level is carried out by the European Medicines Agency. Framed in both policy and regulatory terms as related to biotechnology, innovation and industrial processes of manufacture, risk management of plasma products is overseen by scientific experts in this technocratic environment, far removed from the political contestation that ensued during and after the passage of the Blood Directive. Given that the vast majority of plasma products are sourced from paid donation, this bifurcated approach to blood regulation also provides a useful way of avoiding ongoing political conflict generated by the longstanding ‘gift v commodity’ debate, as well as promoting technical harmonisation that facilitates market access and product innovation.87 B. Council of Europe and World Health Organization This bifurcated approach to blood regulation is also mirrored in the approach taken by other international organisations, such as the Council of Europe (Council) and the World Health Organization (WHO). Both have longstanding interests in facilitating supranational technical harmonisation of content, manufacture and supply standards for pharmaceutical products, of which plasma products constitute a distinct niche. The origins of the Council’s regulatory oversight of plasma products is to be found in 82

Blood Directive, Art 4(2). Blood Directive, para 23, Recital. 84 This has certainly been highlighted in post-implementation evaluation reports published by the Commission, see European Commission Directorate-General for Health and Consumers, http://ec.europa.eu/health/blood_tissues_organs/blood/index_en.htm. The problems encountered with such diversity in approach to voluntary, unpaid donation within the EU were highlighted in the European Court of Justice (ECJ) judgment in Humanplasma GmbH v Republik Österreich (C-421/09) [2010] ECR I–12869. 85 Directive 2001/83/EC of the European Parliament and of the Council of 6 November 2001 on the Community code relating to medicinal products for human use [2001] OJ L311/67. 86 Blood Directive, Art 31. 87 Farrell, ‘The Politics of Risk’ 52. This may be changing, see Creative-Ceutical and EU Commission, An EU-wide overview of the market of blood, blood components and plasma derivatives focusing on their availability for patients (8 April 2015). 83

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the much earlier development of national and regional pharmacopoeias, which were designed to set standards for the development, manufacture and use of pharmaceutical products. The work of the Council in relation to both blood and plasma products is managed by one of its internal Directorates, the European Directorate for the Quality of Medicines & Health Care (EDQM). As part of its work programme, the EDQM is responsible for the European Pharmacopoeia, managing standardisation, testing and compliance activities. It liaises with WHO, national regulatory agencies, experts, and the International Conference on Harmonisation (ICH) which promotes global technical harmonisation of pharmaceutical products.88 WHO is specifically empowered by its Constitution ‘to develop, establish and promote international standards with respect to … biological, pharmaceutical and similar products’.89 This provides the basis for its involvement in technical harmonisation activities in relation to plasma products. This has led to its sponsorship of the Expert Committee on Biological Standardization (ECBS), which develops international reference preparation materials identifying best practice in the manufacture of plasma products.90 It is important to underline that the focus by these two international organisations is firmly on promoting technical harmonisation of plasma products. Framed in this way, there has been little in the way of open political conflict or scrutiny over the use of paid donors as the predominant method of sourcing the raw material for the manufacture of plasma products. This is in contrast to the work they undertake in the case of blood sourcing and supply by national blood services. In line with the influence of transfusionists on their expert advisory committees in this area, both organisations advocate the use of voluntary, unpaid donation (from low risk donor populations) on ethical and safety grounds for national blood services.91 Recommendations and guidelines issued by both organisations have been influential in the development of social and economic norms in supranational, as well as national, blood policy and regulation.92 At an institutional level, a bifurcated approach to the regulation of blood and plasma products is well entrenched, largely driven by a closed ‘epistemic community’ of manufacturers, experts and regulators,93 which operates outside majoritarian democratic controls and accountability mechanisms.94 88

For an overview, see Farrell (n 44) 45–49. Constitution of the WHO, Art 2(u). 90 WHO, Expert Committee on Biological Standardization, www.who.int/biologicals/ expert_committee/en. 91 Council of Europe, European Directorate for the Quality of Medicines & Health Care, Blood Transfusion, www.edqm.eu/en/blood-transfusion-mission-65.html; WHO, Essential Health Technologies, Blood Safety, www.who.int/bloodsafety/en. 92 See for example, Council of Europe, Recommendations of the Committee of Ministers, www.edqm.eu/en/blood-transfusion-recommendations-resolutions-71.html. 93 See P Haas, ‘Introduction: Epistemic Communities and International Policy Coordination’ (1992) 46 International Organization 1. 94 Braithwaite and Drahos, Global Business Regulation 369–98; Farrell (n 44) 54–55. 89

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In this section of the chapter, the fact that the Council of Europe, WHO and the EU have separate regulatory regimes for blood and plasma products raises a number of interesting questions from a Polanyian perspective. Although particular historical and institutional trajectories may account at least in part for their separate development, particularly the situating of plasma products within broader global pharmaceutical regulation, it is clear that tensions in managing the relationship between the constituted social and economic spheres in the field have also made a significant contribution. Informed by the Titmussian conception of the gift relationship as exemplified in voluntary, unpaid donation, the social sphere has become embedded in supranational risk regulation involving blood to the extent of marginalising the reality of transnational blood markets which constitute the economic sphere. The institutional management of this disembedding has involved removing the economic sphere to a separate regulatory regime which has technical harmonisation as its primary focus. One of the consequences of this bifurcated approach is that risk to blood and plasma products are framed in different ways and this may have adverse implications for managing new risks to the blood supply on a transnational basis. In the case of plasma products, risk is framed in terms of the need to promote technical harmonisation, with incremental adjustments to be made as and when new risks present themselves by a politically unaccountable group of experts in a closed technocratic environment. In the case of blood, risk continues to be primarily framed in terms of ensuring that blood sourcing and supply is based on voluntary, unpaid donation in line with the gift relationship. It has meant that opportunities have been lost to acknowledge in an open, transparent and accountable manner how innovation and technological change in the field of blood sourcing and supply creates complexity in transnational markets and regulation in the twenty-first century.

V. CONCLUSION

This chapter examined how regulation mediates the relationship between the economic and social spheres in managing transnational risk. Drawing on a case study involving blood regulation at supranational level, it explored a number of aspects of the Polanyian notion of embeddedness. This included how a social sphere was constituted and became embedded in this regulatory regime, as well as what happens when the economic sphere becomes disembedded from the social sphere and the difficulties this presents in terms of managing risk. In tracking the development of the social sphere in this policy sector, it was clear that the sphere had been constituted by certain professional and political preferences, which operated to marginalise the reality of transnational blood markets. The constituted social sphere was therefore only a partial representation of the socio-economic dimensions of blood sourcing and supply.

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Notwithstanding path dependencies created by particular historical and institutional trajectories, it is clear that the disembedding of the economic from the social sphere has contributed to the development of separate regulatory regimes for blood and plasma products at supranational level. Although such spheres are interconnected and overlapping, the tensions in the relationship are unlikely to be resolved through a re-embedding of the economic into the social sphere in a Polanyian double movement. Even if there was potential for a countermovement, the extent to which a re-embedding process would take place would be necessarily political contingent and subject to institutional inertia. This is because there is a lack of political will to acknowledge the reality of transnational blood markets which are sourced from mixed donation methods and the fact that separate regulatory institutional cultures involving blood and plasma products are now entrenched at supranational level. So what might this mean for managing transnational risk in blood regulation? The political fallout from HIV blood contamination scandals revealed that the disembedding of the economic from the social spheres proved to be problematic in terms of effectively addressing the risk posed by the virus to the blood supply. In not acknowledging the realities of global supply and demand for plasma products, as well as the interconnected nature of blood collection, manufacture and supply, regulators failed to fully grasp the extent of the risk, with adverse consequences for consumers. Ideally, what is needed is for a more holistic approach to be taken to blood regulation at both national and supranational levels which embeds both social and economic spheres more fully in regulatory design and evaluation.95 In reality, disembeddedness in the field remains institutionally entrenched at the supranational level contributing to a lack of coherence in framing and managing transnational risk, a situation that is unlikely to change in the foreseeable future.

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I have argued for this reform elsewhere, see Farrell (n 44) 55.

9 Double Movements in the Regulation of New Technologies: The Case of Nanotechnology ELEN STOKES

I. INTRODUCTION

A. New Technologies and The Great Transformation

N

EW TECHNOLOGIES CAN produce striking differences in political response.1 Especially during the early stages of development, new technologies may be characterised by uncertainty and there is unlikely to be a demonstrably ‘right’ way of dealing with the range of complex issues involved. Debate about how best to manage them often boils down to arguments ‘for’ or ‘against’ certain technological developments, and the policy discourse around the evolution of these techniques can have a tendency towards polarisation: good/bad, progress/stagnation, expert/lay, safety/danger, known/unknown, for example.2 Such contrasts also infuse discussions about the appropriate regulation of new technologies, where the debate is framed in terms of the choice to be made between a greater and a lesser degree of state intervention.3

1 Sheila Jasanoff, ‘Citizens at Risk: Cultures of Modernity in the US and EU’ (2002) 11(3) Science and Culture 363. 2 eg on the ‘natural/unnatural’ boundary in debate on genetically modified crops, see Nuffield Council on Bioethics, Genetically Modified Crops: The Ethical and Social Issues (Nuffield Council on Bioethics, 1999) 13–15, especially para 1.40; for insights into the divergence of response to genetic technology, see Julia Black, ‘Regulation as Facilitation: Negotiating the Genetic Revolution’ (1998) 61(5) Modern Law Review 621. 3 On the ‘binarity’ of traditional debates about the regulation of the Internet, see Viktor Mayer-Schönberger, ‘The Shape of Governance: Analyzing the World of Internet Regulation’ (2003) 43(3) Virginia Journal of International Law 605, 631; Thomas B Nachbar, ‘Paradox and Structure: Relying on Government Regulation to Preserve the Internet’s Unregulated Character’ (2000) 85 Minnesota Law Review 215.

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Typically, calls for more regulation of new technologies are made in the belief that a higher level of social protection is needed than that available under current legislative arrangements. Technological advance can of course bring about significant societal benefits but it can also be associated with new forms and magnitudes of health/environmental risk, which pre-existing legislation may find difficult to manage. Moreover, new technologies, precisely because of their novelty, can bring about previously unknown and unpredicted effects. Where problems of risk and uncertainty persist, additional state control is often seen as a desirable way of mitigating the potential harm. However, a different view is taken by those who consider that increased state regulation will produce overly restrictive rules and prevent an otherwise promising market from flourishing. From this perspective, extra state measures are thought to inhibit market growth, having potentially disastrous consequences for technological innovation and economic competitiveness. The perceived trade-off between social protection and freely operating markets is a familiar tension in areas of public policy,4 and it bears a certain resemblance to Polanyi’s notion of the ‘double movement’. In The Great Transformation,5 Karl Polanyi gave an historical account of the rise (and subsequent fall) of the market economy, beginning with the Industrial Revolution which brought with it significant institutional, political and social change. For Polanyi, such development resulted not only in unprecedented economic growth but also in damaging strains on social and environmental protection.6 These two ends or ‘organizing principles’7—(i) economic liberalism and (ii) social/environmental protection—and the differences between them, lie at the heart of his thesis. Polanyi explained that each of the two principles is driven by ‘specific institutional aims, having the support of definite social forces and using its own distinctive methods’.8 Whereas economic liberalism (or ‘neo-liberalism’, in today’s language) works towards establishing the self-regulating market ‘using largely laissez-faire and free trade as its methods’,9 the focus of social/environmental protection is on ‘the conservation of man and nature … using protective legislation, restrictive associations, and other instruments of intervention as its methods’.10

4 The literature on sustainable development offers such examples, eg Michael Redclift, ‘Sustainable Development (1987–2005): An Oxymoron Comes of Age’ (2005) 13 Sustainable Development 212; Herman E Daly, ‘Sustainable Growth: An Impossibility Theorem’ in Herman E Daly and Kenneth N Townsend (eds), Valuing the Earth: Economics, Ecology, Ethics (MIT Press, 1993) ch 14. 5 Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Beacon Press, 1957), hereafter ‘TGT’. 6 ibid. See generally ch 18 on ‘Disruptive Strains’, and also page 131 where Polanyi comments that ‘leaving the fate of soil and people to the market would be tantamount to annihilating them’. 7 TGT, 132. 8 ibid. 9 ibid. 10 ibid.

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Of particular importance is the fact that measures to achieve social protection were viewed by Polanyi as ‘powerful protective reactions’11 to the market economy, giving the process a distinct direction and temporality. For Polanyi there was both movement towards greater market autonomy and countermovement ‘against a dislocation which attacked the fabric of society’.12 In the first instance, Polanyi described the drive to achieve ‘separateness’13 between the economy and other domains of society (often referred to as a condition of ‘disembeddedness’).14 In the second, efforts are made to ensure that economic activity once again becomes a ‘social affair’15 by being ‘re-embedded’ into social relationships (so the ‘economic system ceases to lay down the law to society and the primacy of society over that system is secured’).16 While both movements can occur simultaneously,17 the normative element of these concepts derives, at least in part, from some sort of sequential progression, the countermovement developing in response to the disembedded market economy which ‘if left to evolve according to its own laws would create great and permanent evils’.18 As such, countermovements have a certain reactive quality because their prime purpose is to intervene in further market expansion. They seek to push back against the destructive forces of the market system, hence the term ‘double movement’.

II. THIS CHAPTER

This chapter explores whether and to what extent Polanyi’s ‘double movement’ can be observed in the context of nanotechnology regulation, a field renowned for policy drives to both develop markets and increase levels of social (health/environmental) protection. Although The Great Transformation was also about restoring post-war order and finding explanations for the rise of fascism in Continental Europe in the 1930s, it (and in particular its ‘double movement’) may have analytical traction for understanding crises today, especially those identified as sources of tension between market-oriented and protective policy strategies. New technology—and nanotechnology in particular—offers one such example where the appropriate course of regulatory action comes down to a seeming conflict between commitments to market expansion and social protection. The aim here is to show that the 11

TGT, 216. TGT, 130. TGT, 71. 14 Gareth Dale, Karl Polanyi: The Limits of the Market (Polity Press, 2010), particularly ch 5. 15 TGT, 272, where Polanyi references the work of Thurnwald which describes primitive economy as ‘a social affair dealing with a number of persons as parts of an interlocking whole’, Richard Thurnwald, Economics in Primitive Communities (Oxford University Press, 1932) xii. 16 TGT, 251. 17 TGT, 130. 18 ibid. 12 13

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contrast is apparent in different regulatory actors’ policy positions on nanotechnology, but is diminished in the actual regulatory measures adopted. Regulatory provisions enacted in the name of social protection may also carry out functions more closely aligned with the promotion of the market economy. The argument is presented in three sections. Section III introduces nanotechnology and examines its current regulation in the European Union (EU). Section IV discusses recent reforms in the area, focusing in the first instance on ‘light touch’ regulatory responses to nanotechnology, such as non-coercive forms of procedural guidance and codes of practice, introduced by means other than state legislation. A commonly cited reason for preferring minimal intervention is that the alternative, which is presumed to involve the adoption of additional legislative safeguards, could end up stifling market growth and making the EU industry less competitive globally. Relating this to Polanyi’s thesis, these light touch initiatives may be understood as developments in the direction of disembedding, in the sense that they place considerable emphasis on improving the functioning of the market. More recently, however, there has also been regulatory activity at state level leading to the enactment of nanotechnology-specific information disclosure and assessment requirements in EU product safety legislation. Since these legislative measures are primarily aimed at achieving a higher level of health and environmental protection, they can be construed as attempts to re-embed the nanotechnology market by mitigating its potential effects. Section V goes on to argue that, although EU legislative measures on nanotechnology seek to improve the level of social protection, such measures may also promote (not just protect against) the sorts of market-driven practices associated with disembeddedness. Two particular features of the legislation are discussed. First, the particular requirements adopted in the legislation can have a market-opening effect in that they rely on classic approaches (risk assessment, and product labelling) to facilitate trade. Secondly, looking specifically to nanotechnology labelling requirements, the legislation is premised on a host of assumptions that stem from traditional economic theory, such as that of the rational individual who, by virtue of the information provided on a label, is able to exercise free choice to maximise his or her personal welfare. This does not mean that state intervention in this context favours the logic of the market instead of social protection; but rather that marketisation and social protection are not always obvious alternatives. In this context it is shown that state measures of social protection may also be vehicles for a market-based globalising economy. Nanotechnology regulation emerges not as a black and white issue of either embedded social protection or disembedded marketisation, but instead as an area of fluid movement between those two approaches. In other words, the movement is not just ‘double’ (from self-regulating markets to collectivist regulation) but involves a more varied interaction. The examples discussed

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later in the chapter suggest that the EU legislative response to nanotechnology not only offers a ‘powerful protective reaction’19 to an expanding market, but it also reproduces and reinforces certain features of the market system and its attendant notions of economic liberalism.

III. THE EXISTING REGULATION OF NANOTECHNOLOGY

A. Tiny Technologies, Sizeable Uncertainties Nanotechnologies involve the design, production and application of materials (called ‘nanomaterials’) on a tiny scale. According to most definitions, nanomaterials have at least one dimension of the order of 1–100 nanometres (the ‘nano-scale’). The prefix ‘nano’, from the Greek ‘nanos’ meaning ‘dwarf’, is used to denote one billionth of a unit of measurement, making a nanometre one billionth of a metre. To put this into perspective, a grain of sand is about one million nanometres in diameter (at least 10,000 times larger than the upper limit of the nanoscale).20 The concept of ‘nano’ may sound completely new but nanomaterials can in fact be naturally occurring (for example, sea spray and volcanic ash contain nano-sized particles). However, there is a growing trend in various industrial sectors towards deliberately engineering materials on the same small scale. The emergence of these newer, engineered nanomaterials has fuelled intense policy debate about the appropriate regulation of nanotechnologies, which is the focus of this chapter. The reason for the increased political interest in nanotechnology regulation is that the properties of materials begin to change at the nanoscale, leading to concerns about the unconventional behaviour of some nanomaterials compared with their conventional-scale counterparts. The substance gold provides an illustrative example of how a reduction in physical size can influence a material’s properties. In its conventional form gold is inert but at the nano-scale it can be highly reactive.21 The chemical composition of gold at bulk and nano-scale is identical, but the change in size can cause new and unusual behaviour. The manipulation of physical matter down to a tiny scale (to the atomic level) allows for the production of unique materials assembled and applied with a high level of control and precision. Specialist applications in medicine use nanotechnology-enhanced structures for more targeted drug delivery therapies, for example. The capacity to create materials with new characteristics is being exploited in a number of other sectors besides, particularly in

19

See discussion above (n 11). Royal Commission on Environmental Pollution (RCEP), Novel Materials in the Environment: The Case of Nanotechnology (Cm 7468, 2008) 11. 21 ibid, para 1.16. 20

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consumables. A recent estimate suggests that there are already over 1,600 nano-enhanced consumer products on the market.22 The most dramatic growth has been in products in the health and fitness sector in clothing, sporting goods, cosmetics and sunscreens. These products rely on the use of new and advanced materials: odour-free socks, for example, will typically have a nano-scale silver coating, renowned for its anti-bacterial and antimicrobial properties. Embedding nanoparticles into cotton fibres helps to create water-repellent, stain- and crease-resistant clothing. Many sunscreens now contain nano-scale titanium dioxide or zinc oxide particles because they are transparent as well as extremely effective at absorbing and reflecting ultra-violet (UV) rays. It is becoming clear that nanotechnologies can be hugely beneficial and result in a wide range of novel, high-performance products and devices. It is precisely their unique ‘functionality’, however, that has raised concerns about safety. Specifically, these relate to exposure and toxicity. For instance, nano-scale particles may pose unique problems of exposure because they may be more easily absorbed into the skin and dispersed around the body than conventional forms.23 Size may also be important in determining toxicity. As a material becomes smaller, its surface area (relative to mass) increases. Thus nanomaterials have a larger surface area per unit mass than conventional scale materials, which may in turn render them more chemically reactive (because more surface is available to react). Notwithstanding the possibility of unwanted effects, many aspects of nanotechnology remain uncertain. Given that commercial uses of nanotechnology are still in their infancy, it is difficult not only to assign probabilities to the potential hazards but also to gauge the extent to which the technology will bring actual benefits. Moreover, until applications of nanotechnology mature, it will be impossible fully to appreciate the possible benefits and consequences, and even then, long-term prediction will remain a problem. There are other sources of uncertainty besides. For example, it is not necessarily clear how particular uses of nanotechnology fit within existing institutional, policy or legislative arrangements (hence the focus of this chapter). The roles and responsibilities of regulatory actors can also suffer from a lack of agreement or co-ordination, creating ambiguities and inconsistencies in approach.24 Finally, it ought not to be assumed that there is consensus regarding the acceptability of nanotechnology simply because it is already in use. There is ongoing disagreement over the desirability of particular applications of the technology, and the appropriateness of existing moral values and

22 Woodrow Wilson International Center for Scholars, The Project on Emerging Technologies, Consumer Products Inventory www.nanotechproject.org/cpi/ accessed 20 October 2013. 23 RCEP (n 20). 24 Douglas KR Robinson, Pascal Le Masson and Benoit Weil, ‘Waiting Games: Innovation Impasses in Situations of High Uncertainty’ (2012) 24(6) Technology Analysis & Strategic Management 543.

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norms for dealing with those developments is contested.25 Thus, the uncertainty brought about by nanotechnology (and indeed other ‘breakthrough’ technologies)26 extends beyond matters of risk prediction to issues such as the suitability of institutional frameworks or of prevailing normative commitments. Yet the policy discourse still tends to be dominated by questions of risk, encouraging an almost exclusive focus on strategies of control and prediction. One aspect in need of further exploration is the current regulation of nanotechnology. As the next section shows, the policy debate has thus far centred on two alternative approaches to regulation, which fall broadly into the two categories of ‘institutional aims … social forces and … distinctive methods’ described by Polanyi as economic liberalism and social protection.

B. To Legislate or not to Legislate? The fact that, in some contexts, certain applications of nanotechnology pose a plausible (albeit uncertain) risk of harm raises the inevitable question of regulation.27 The issue is high on the agenda of regulatory bodies across the EU (and elsewhere worldwide, including the United States,28 Canada29 and Australia),30 as evidenced by the steady flow of regulatory reviews published by EU institutions and policymaking departments in various Member States.31 In the UK, for example, the policy debate has been especially sensitive to the perceived shortcomings of regulatory responses to other technologies, such as genetically modified organisms, and there is a repeated emphasis on the importance of ‘getting it right’ this time round.32 25 See eg Phil Macnaghten, ‘Researching Technoscientific Concerns in the Making: Narrative Structures, Public Responses and Emerging Nanotechnologies’ (2010) 42(1) Environment and Planning A 23. 26 For a detailed critique of the dominant risk discourse in areas of technology regulation, see Maria Lee, EU Regulation of GMOs: Law and Decision Making for a New Technology (Edward Elgar, 2008); Brian Wynne, ‘Unruly Technology: Practical Rules, Impractical Discourses and Public Understanding’ (1988) 18(1) Social Studies of Science 147. 27 On nanotechnology regulation, see Maria Lee, ‘Risk and Beyond: EU Regulation of Nanotechnology’ (2010) 35 European Law Review 799; Ortwin Renn and Mihail C Roco, ‘Nanotechnology and the Need for Risk Governance’ (2006) 8 Journal of Nanoparticle Research 153. 28 eg United States Environmental Protection Agency (EPA), Nanotechnology White Paper (EPA, 2008). 29 eg Environment Canada and Health Canada, Proposed Regulatory Framework for Nanomaterials Under the Canadian Environmental Protection Act 1999 (Environment Canada/ Health Canada, 2007). 30 eg Australian Government Department of Innovation, Industry, Science and Research (DIISR), Nanotechnology and You: Safety and Regulations (DIISR, 2011). 31 For an overview, see Elvio Mantovani and others, Developments in Nanotechnologies Regulation and Standards: Report of the Observatory Nano (Observatory Nano, 2009). 32 The regulatory debate makes frequent reference to the need to act pre-emptively, to be ‘on the front foot, not on the back foot’ (Select Committee on Science and Technology, Session 2003–04, Minutes of Evidence, Examination of Witnesses (Questions 20–39), Professor Sir David King) and to avoid ‘[t]he mess that we have got ourselves into with GM [genetically modified organisms]’ (House of Commons Debates, 8 July 2003, Column 231WH, Dr Andrew Murrison).

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Perhaps it is no surprise, given the political pressures to take appropriate action, that the regulation of nanotechnology should become such a heavily contested issue. The matter is complicated by the fact that the technology is used across a diverse range of contexts, meaning that regulation needs to be considered in multiple commercial sectors and stages of product lifecycle (eg research and development, manufacture, supply and disposal). Until recently, there were no legislative provisions dealing specifically with nanotechnology. That is not to say that nanotechnology escaped regulation altogether. Instead, because nanotechnology is used in sectors and for purposes that are already subject to comprehensive regulation (such as workplace safety, consumer product safety, and environmental protection legislation), it is deemed to fall within the remit of existing regulatory regimes. A review of the regulatory position published by the UK’s (former) Department of Trade and Industry estimated that current and foreseeable applications of nanotechnology are covered by as many as 60 legislative provisions of EU and national origin.33 Owing to the breadth of regulatory coverage, the European Commission has concluded that existing legislative frameworks are sufficiently well equipped to deal with the challenges of nanotechnology.34 Those frameworks may require some fine-tuning, says the Commission, but they are not in need of any major legislative overhaul.35 It might be argued that the primacy accorded to existing legislation reflects a more deeply embedded commitment to the ‘light touch’ regulation of new technologies in general. Recent evidence of this comes from the Commission’s ‘Innovation Union’ initiative, introduced as part of the Europe 2020 strategy for jobs and growth.36 A core objective is the removal of obstacles that prevent innovative ideas from reaching the market and economic benefits from being realised. One notable barrier to innovation-related activities is over-regulation, the Commission warns. In its words: ‘Markets for innovative goods and services are often constrained by regulations that act as a disincentive to change’.37 The Commission notes that regulation can 33 Lori Frater and others, An Overview of the Framework of Current Regulation Affecting the Development and Marketing of Nanomaterials: A Report for the DTI (Office of Science and Innovation, Department of Trade and Industry, 2006). 34 European Commission, ‘Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee on Regulatory Aspects of Nanomaterials’ COM (2008) 366 final, 3 and 11. 35 ibid 11, where the European Commission notes that the focus ought to be on improving the implementation of existing measures with the implication that new measures will not be required. 36 European Commission, ‘Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on Europe 2020 Flagship Initiative Innovation Union’ COM (2010) 546 final. 37 European Commission, ‘Commission Staff Working Document: A Rationale for Action Accompanying Document to the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee

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sometimes be innovation-friendly, particularly when it is rooted in standardisation, which ‘complements market-based competition’.38 As such, not all regulation hinders market growth but the regulatory approach most likely to stimulate innovation is one that is market-led. The responsibility for such an approach, according to the Commission, ‘mostly belongs to its private stakeholders’.39 Similar themes emerge in the context of nanotechnology regulation, where there are also concerns about the detrimental effects of state intervention on the fledgling technological sector. While it is commonly accepted that nanotechnology is already covered by generic sectoral and product safety legislation, some argue that any additional regulatory activity ought to stem from the private sphere, for example through the development of industry-driven solutions.40 A partial justification is that the most appropriate regulation should take place where there is the greatest concentration of technological expertise: in the nanotechnology industry. Related to this is the idea that the costs of regulation are more suitably borne by those responsible for releasing nanotechnology-enhanced products into the market (and hence for bringing about increased chances of exposure and of potential harm).41 A further argument is that, until more is known about the impacts of nanotechnology, and in the absence of concrete evidence of unacceptably serious risks, legislatures (the world over, not just in the EU) will be reluctant to incur heavy costs of major legislative reform. Private sector alternatives tend, therefore, to find support where additional state regulation is perceived to be more burdensome and costly than is necessary. However, the adequacy of existing legislation is not universally accepted or known for certain, not least because existing legislation was never designed with nanotechnology in mind. Given the conditional and multivalent character of many issues surrounding the technology, such as its long-term controllability and its economic and social trajectory, achieving political consensus over the

of the Regions: Europe 2020 Flagship Initiative Innovation Union’ SEC (2010) 1161, 22–23, where it also notes the potential market-enhancing effects of smart regulation. However, it subsequently points out that the challenge is to remove outdated regulatory burdens: ‘markets evolve and regulations always seem to be in flux, with shifting regulatory schemes unavoidably leaving obsolescent regulations in their wake’ (23). 38 ibid 23, which cross-references European Commission, ‘Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, Towards an Increased Contribution from Standardisation to Innovation in Europe’ COM (2008) 133 final, 2. 39 ibid 6. 40 For a critical appraisal of the growth of industry-led solutions, see Diana M Bowman and George Gilligan, ‘The Private Dimension in the Regulation of Nanotechnologies: Developments in the Industrial Chemicals Sector’ (2010) 28(1) UCLA Journal of Environmental Law & Policy 77. 41 eg European Commission, Options for Strengthening Responsible Research and Innovation (Publications Office of the European Union, 2013).

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appropriate regulatory path has proved difficult. Across the EU there is a considerable divergence of preference, as shown by the different positions adopted by Member States.42 The heterogeneity of approach is also stark between the EU institutions, especially between the Commission and the European Parliament, both of which have issued official reports on nanotechnology regulation.43 In sharp contrast with the Commission’s position, the European Parliament (in particular, the Parliament’s Committee on the Environment, Public Health and Food Safety, hereafter ‘the Environment Committee’) has been highly critical of the current regulatory approach and has made repeated calls for reform. For example, in an early draft of an own-initiative report on nanotechnology regulation, the Environment Committee stated that it: [c]onsiders it highly misleading for the Commission to state, in the absence of any nano-specific provisions in Community law, that current legislation covers in principle the relevant risks relating to nanomaterials, when due to the lack of appropriate data and methods to assess the risks relating to nanomaterials it is effectively blind to its risks.44

That is to say, the fact that existing legislative provisions are generally broad enough to cover nanotechnology offers little indication of their appropriateness and effectiveness for that particular purpose. One of the difficulties of extrapolating existing legislation, which is aimed at more conventional types of technology, to new applications of nanotechnology is that those rules and obligations may simply be ill-equipped to deal with functions or properties unique to the nano-scale. The problem can arise in relation to any legislative provision governing the safety of new products or processes, where there may be a mismatch between generic obligations (eg risk assessment) and the specific, sometimes unconventional, characteristics of the intended regulatory subject (here, nanotechnology). For example, there are concerns that chemical substances comprising nanomaterials are not routinely subject to EU chemicals legislation because they may not always meet the threshold criteria.45 One of the principal aims of that legislation is to generate data on chemicals entering the EU market, to be achieved through a process of chemical registration, hence its strapline ‘no data, no market’.46 This process

42

Mantovani and others (n 31). There is also diversity of opinion among actors within these institutions, especially the European Parliament where a range of political interests are represented, eg European Parliament, ‘Debate of 24 April 2009 on Regulatory Aspects of Nanomaterials’, Explanation of Votes. 44 Note that in the final report the language was toned down quite considerably, but the spirit and sentiment remained the same. European Parliament, ‘Draft Report on Regulatory Aspects of Nanomaterials’ 2008/2208(INI), para 3. 45 The principal legislation in question here is Regulation (EC) No 1907/2006 of the European Parliament and of the Council of 18 December 2006 concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) [2006] OJ L396/1. 46 ibid Article 5. 43

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entails the submission of a ‘technical dossier’ containing certain information on the substance to the European Chemicals Agency.47 Registration is only required, however, where a substance is produced or imported in volumes of at least one tonne per year.48 The difficulty is that nanomaterials are less likely to meet the threshold because so many more nanomaterials are needed to make up one tonne compared with larger sized materials. This led the Royal Commission on Environmental Pollution in its comprehensive study of the topic to conclude that ‘[b]ecause of the very large number of (often highly interactive) particles present even in tiny quantities of a nanomaterial, one tonne may be too high a threshold to capture potentially problematic effects’.49 Compared with conventional materials, therefore, nanomaterials may be prone to escape the registration process and its accompanying data submission requirements.50 The European Parliament’s Environment Committee considers this potential loophole to be a major problem. As long as the data needed for risk assessment are missing or limited, the implementation of current law cannot, argues the Environment Committee, bring about the necessary level of protection. Instead, the Committee proposes the adoption of a regulatory and policy framework that ‘explicitly addresses existing and expected applications of nanomaterials as well as the very nature of potential health, environmental and safety problems’.51 It claims that such legislative reform is especially urgent in areas of chemicals, food, worker protection, air quality, water quality, and waste.52 To summarise, two key options emerge from the EU institutional debate on nanotechnology regulation. The first option is to maintain existing legislative arrangements without additional state intervention, and instead rely on private industry-led initiatives to provide clarity on the application of current law to nanotechnology. The second is to overcome the deficiencies in existing legislation by introducing new legislative requirements specifically to address the challenges brought about by nanotechnology. As explained above, these options split along institutional lines (the first being advocated by the European Commission, and the second by the European Parliament). They may also be said to reflect the different directions and temporal characteristics of Polanyi’s double movement. On the one hand, efforts have been made to protect the

47

ibid. ibid Article 6. 49 RCEP (n 20) para 4.37. 50 European Commission, ‘Communication from the Commission to the European Parliament, the Council and European Economic and Social Committee: Second Regulatory Review on Nanomaterials’ COM (2012) 572 final, especially paras 3 and 5.1. 51 European Parliament, ‘Resolution of 24 April 2009 on Regulatory Aspects of Nanomaterials’ P6_TA(2009)0328, para 1, emphasis added. 52 ibid para 9. 48

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nanotechnology market by maintaining the legislative status quo and creating a ‘level playing field’ for the nanotechnology industry. This approach still involves regulatory law (through existing legislative provisions), although the focus is very much on the potentially negative outcomes of further legislative activity in the area. On the other hand, there have been calls for new nanotechnology-specific legislation to improve levels of health and environmental protection, which self-consciously oppose claims that additional state intervention is unnecessary. Policy movement in one direction (ie towards market preservation or expansion) does not, of course, exclude the attainment of other goals (ie better social protection); however the two approaches described here differ in the emphasis they place on certain outcomes, and in the nature and course of proposed regulatory action. Although The Great Transformation is historically specific (written about the Industrial Revolution and also the post-war economic order), Polanyi is clear that the ‘double movement’ is of wider relevance,53 and recent contributions to critical theory bear testimony to that fact.54 This is further reflected in the context of nanotechnology regulation, where the two aspects of the ‘double movement’ can be seen to emerge: both the push for a more market-oriented approach and the mobilisation of countermovements against it. The following section explores regulatory responses to nanotechnology in greater detail, and highlights how those responses pull in different directions.

IV. TWO DIFFERENT REGULATORY RESPONSES

A number of different regulatory options have been suggested at EU level, of which two remain serious contenders. As explained above, the first of these is founded on the argument that existing legislation is already largely able to deal with nanotechnology, and so any supplementary regulation ought to take place in the private sector. The second option takes as its starting point the notion that existing legislation is ill-equipped to deal with nanotechnology and will continue to be so unless and until there is legislative amendment. Even though each of these approaches reflects a different understanding of the suitability of existing legislation for nanotechnology regulation, both are being pursued at the same time (albeit by different EU institutions). It is commonplace for EU policies to address matters of the 53

TGT, 272, para (f): ‘Economic systems, as a rule, are embedded in social relations’. See eg Lourdes Beneria, ‘Globalization, Gender and The Davos Man’ (1999) 5(3) Feminist Economics 61; Rhoda E Howard-Hassmann, ‘The Second Great Transformation: Human Rights Leapfrogging in the Era of Globalization’ (2005) 27(1) Human Rights Quarterly 1; Christopher GA Bryant and Edmund Mokrzycki (eds), The New Great Transformation? Change and Continuity in East-Central Europe (Routledge, 1994). 54

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market and health/environmental protection simultaneously; indeed the Treaty on the Functioning of the EU establishes comprehensive obligations in both regards.55 The difficulty in reconciling the two goals is well recognised, and is arguably more pronounced where they are used by different policy actors to justify different types of regulatory response—as is the case with nanotechnology. Examples of the divergent approaches are explored below.

A. ‘Light Touch’ Regulation of Nanotechnology Following a series of reviews of the EU regulation of nanotechnology, which produced differing conclusions about the robustness of existing legislative frameworks, the regulatory space has come to be populated by numerous measures designed to deal specifically with the technology and its possible effects. Initially, these measures arose from the private sector and display many of the characteristics associated with ‘light touch’ regulation. One reason for this is that more flexible and less prescriptive measures are thought to be particularly well suited to conditions of uncertainty. Such an approach to regulation holds considerable appeal when dealing with aspects of nanotechnology that are contested and in flux. Complex problems, it is argued, call for complex solutions that involve drawing on a more varied regulatory repertoire.56 One way of achieving this is through greater regulatory experimentation and adaptive systems of governance (rather than rigid law-based rules) that respond quickly and easily to a rapidly evolving market and knowledge base.57 The International Risk Governance Council, for instance, notes that the challenge ‘is to develop a flexible and adaptive approach to risk governance that supports the responsible development of the technology while minimising harm’.58 Industrial actors are often thought to be in the best position to do this because they typically command a greater degree of technical knowledge of the practices and possibilities in the field. Policy and academic literature is replete with references to the ‘soft’ or ‘new’ 55 Treaty on the Functioning of the European Union (Consolidated Version) [2012] OJ C326/47, hereafter ‘TFEU’, see eg Titles I, XIV and XV. 56 See Cristie Ford, ‘New Governance in the Teeth of Human Frailty: Lessons from Financial Regulation’ (2010) Wisconsin Law Review 441, which argues that ‘new governance regulatory strategies are indispensable to modern regulation, because they are designed to handle the complexity, speed, and interconnection that characterize both contemporary society and contemporary capital markets’, 446. 57 David M Trubek and Louise G Trubek, ‘New Governance and Legal Regulation: Complementarity, Rivalry and Transformation’ (2006) 13 Columbia Journal of European Law 1, 4. 58 International Risk Governance Council (IRGC), Policy Brief: Nanotechnology Risk Governance—Recommendations for a Global, Coordinated Approach to the Governance of Potential Risks (IRGC, 2007) 15.

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governance of nanotechnology, and to ‘governing without government’.59 The increased involvement of non-state actors is understood to be not just desirable but pivotal in the design of suitable regulatory solutions. In this sense, uncertainty (especially where it relates to technical risks, commercial benefits and market conditions) is an important motivating factor behind the demand for more market-led and less traditional regulatory form. Private standard-setting bodies have been particularly active in this regard, such as the ISO (International Organization for Standardization), the CEN (European Committee for Standardization) and the BSI (British Standards Institution). Already there are technical standards and guidance on terminology and definitions for nanotechnology, occupational health and safety relevant to nanotechnology,60 nanomaterial risk evaluation,61 safety testing, nano-toxicology and risk assessment.62 The standards are voluntary, although the fact that they are globally recognised and facilitate international trade creates an incentive to comply.63 Private sector regulation is also evident in nanotechnology guidelines and codes of best practice published ‘in-house’ by individual companies (eg BASF,64 Bayer),65 trade associations (eg the Swiss Retailers Association66 and the Confederation of Netherlands Industry and Employers)67 and multi-stakeholder consortia (eg between DuPont and the Environmental Defense Fund).68

59 Diana M Bowman and Graeme A Hodge, ‘Governing Nanotechnology without Government?’ (2008) 35(7) Science and Public Policy 475; Carolyn Abbot, ‘Bridging the Gap— Non-state Actors and the Challenges of Regulating New Technology’ (2012) 39(3) Journal of Law and Society 329 for detailed analysis of pluralist, decentred approaches to regulating nanotechnology and new technology more generally; also, Markus Widmer and others, The FramingNano Governance Platform: A New Integrated Approach to the Responsible Development of Nanotechnologies (FramingNano Project Consortium, 2009), available via www.framingnano.eu accessed 2 December 2013. 60 ISO, Nanotechnologies—Health and Safety Practices in Occupational Settings Relevant to Nanotechnologies (Technical Report 12885, ISO 2008). 61 ISO, Nanotechnologies—Nanomaterial Risk Evaluation (Technical Report 13121, ISO 2011). 62 ISO, Nanotechnologies—Guidance on Physico-chemical Characterization of Engineered Nanoscale Materials for Toxicologic Assessment (Technical Report 13014, ISO 2012). 63 For discussion, see Aseem Prakash and Matthew Potoski, The Voluntary Environmentalists: Green Clubs, ISO 14001, and Voluntary Environmental Regulations (Cambridge University Press, 2006). 64 BASF, Code of Conduct on Nanotechnology, available at www.basf.com/group/corporate/ en/function/conversions:/publish/content/sustainability/dialogue/in-dialogue-withpolitics/ nanotechnology/images/BASF_Code_of_Conduct_Nanotechnology.pdf, accessed 31 October 2013. 65 Bayer, Code of Good Practice on the Production and On-site-use of Nanomaterials (Bayer, 2007). 66 Interessengemeinschaft Detailhandel Schweiz, Code of Conduct: Nanotechnologies (IG DHS, 2008). 67 Verbond van Nederlandse Ondernemingen-Nederlands Christelijk Werkgeversverbond, Guidance Working Safely with Nanomaterials and Nanoproducts: The Guide for Employers and Employees (Version 1.1, VNO-NCW 2011). 68 Environmental Defense-DuPont Nano Partnership, Nano Risk Framework (Environmental Defense/Du Pont, 2007).

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The UK’s Responsible NanoCode is another example of collaborative activity between industry organisations, and like other codes it aims to clarify the application of existing legislation to nanotechnology and sets out general principles of good conduct. The NanoCode responds to the grey areas of regulation, where the suitability of current legislation for nanotechnology is unclear and open to interpretation. It offers ‘potential indicators of good practice to guide their responsible behaviour … during the transitional period while the appropriate national and international regulatory frameworks are being evaluated and, if necessary, developed, and to complement any existing regulation’.69 Similarly, the Swiss Retailers Association Code of Conduct offers an additional layer to the obligations already enshrined in EU product safety legislation. In relation to nanotechnology, the Code explains that ‘only products considered to be harmless to humans, animals and the environment may be included in the product range’.70 While there has been a flurry of regulatory activity in the private sphere, resulting in the non-legislative standards, codes and procedures described above, it is not the case that the state has had no role whatsoever in the ‘light touch’ approach to nanotechnology. In addition to the measures emanating from the private sphere, a number of hybrid regulatory measures (combining the efforts of governmental and non-governmental actors) on nanotechnology have emerged. Inter-governmental bodies like the OECD (Organisation for Economic Co-operation and Development) have worked with non-governmental organisations (NGOs), trade associations and industrial representatives to pool expertise and develop methods of assessing nanomaterial safety.71 There are also various initiatives that, although introduced by the state, rely entirely on private sector buy-in for success. For instance, a number of EU Member States have introduced data reporting schemes aimed at manufacturers and suppliers of nanotechnology-enhanced products. In the UK, the Department for Environment, Food and Rural Affairs (Defra) in 2006 implemented a two-year reporting scheme designed to gather evidence on the potential risks of manufactured nanomaterials. Anyone involved in the research, production, use and disposal of such materials was invited to submit details on the materials’ physical/chemical properties, safety implications and impacts to allow Defra to develop appropriate controls in respect of potential risks from human and environmental exposure. By improving the knowledge base, Defra hoped to be able to

69 Insight Investment and others, Information on the Responsible Nano Code Initiative www.nanoandme.org/downloads/The%20Responsible%20Nano%20Code.pdf, accessed 31 October 2013. 70 As cited in Elvio Mantovani and others, Synthesis Report on Codes of Conduct, Voluntary Measures and Practices Towards a Responsible Development of N&N (NanoCode, 2010) 29. 71 OECD, Current Developments/Activities on the Safety of Manufactured Nanomaterials (OECD, 2011).

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understand better the nature and size of the nanotechnology market and to predict future trends. Similar reporting schemes have been introduced in other jurisdictions, including the United States72 and Australia.73 They too operate on a voluntary basis, which is often cited as the reason for the generally poor rates of compliance. However, there is a reluctance to place generic data reporting schemes on a legislative footing because of fears that it would impose too heavy a burden on the nanotechnology industry. In other words, one of the perceived benefits of voluntary regulation is that it offers an alternative to rigid statutory obligations that could cause the EU market to lose its competitive edge.74 It is perhaps also relevant that nanotechnology regulation is being worked out in the light of broader EU policy on the ‘Innovation Union’.75 Achieving ‘smart, sustainable and inclusive growth’,76 the primary purpose of the Innovation Union, is said to depend in part on ‘better regulation’, meaning lower regulatory costs, more stimulus to competition and innovation, and the substitution of state intervention with non-state modes of governance.77 This is particularly pertinent to new technologies (including nanotechnology) that have been singled out for their capacity to strengthen the EU’s global market position.78 As well as increased investment in research, the Innovation Union requires an industry-driven approach under which regulation is not a barrier to technological development but supports the commercial exploitation of new products.79 In line with these market-making objectives, some EU regulatory agencies have explicitly rejected the idea of additional legislation and have instead chosen to issue non-binding practical guidance on the role and application of existing legislative frameworks.80 These guidance documents, prepared at the request of the European Commission, 72

US EPA http://epa.gov/oppt/nano/stewardship.htm, accessed 29 May 2012. Australian National Industrial Chemicals Notification and Assessment Scheme, http:// www.nicnas.gov.au/, accessed 29 May 2012. 74 Materials UK, Nanotechnology: A UK Industry View (2010) www.matuk.co.uk, accessed 17 July 2012, 9; HM Government, Response to the Royal Commission on Environmental Pollution (RCEP) Report ‘Novel Materials in the Environment—The Case of Nanotechnology’ (Cm 7620, 2009) 22. 75 European Commission (n 37). For discussion of ‘regulatory innovation’, see Julia Black, ‘What is Regulatory Innovation?’ in Julia Black, Martin Lodge and Mark Thatcher (eds), Regulatory Innovation: A Comparative Analysis (Edward Elgar, 2005) ch 1, where regulatory innovation is described as the application of new solutions to new or newly constructed problems. 76 European Commission (n 37). 77 See eg Better Regulation Task Force (BRTF), Principles of Good Regulation (BRTF, 2000). 78 European Commission, High-Level Expert Group on Key Enabling Technologies: Final Report (CEC 2011). 79 ibid 33. 80 European Chemicals Agency (ECHA), Guidance on Information Requirements and Chemical Safety Assessment (ECHA, 2012), for example see Appendix R7-1 Recommendations for Nanomaterials; European Food Safety Authority European Food Safety Authority (EFSA) Scientific Committee, ‘Scientific Opinion: Guidance on the Risk Assessment of the Application of Nanoscience and Nanotechnologies in the Food and Feed Chain’ (2011) 9(5) EFSA Journal 2140. 73

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offer practical guidance for the risk assessment of uses of nanomaterials to facilitate market entry.

B. Nanotechnology-Specific Legislation More recently, and notwithstanding the policy drive towards market expansion, there has also been a spurt of EU regulatory activity aimed at introducing nanotechnology-specific rules into existing legislation. This legislative campaign has for the most part been led by the European Parliament’s Environment Committee, following on from the Parliament’s own-initiative Resolution (discussed above) which found that existing legislation was not specific enough to deal with nanotechnology. To date, seven pieces of EU legislation containing nano-specific provisions have been introduced in four commercial sectors: food,81 cosmetics,82 electrical and electronic equipment,83 and biocidal products.84 In most cases, the legislative reforms followed the same pattern. The Commission proposed the amendment of an existing Directive, although the proposal made no explicit mention of ‘nanotechnology’ or ‘nanomaterial’. When the proposal came to be scrutinised as part of the legislative procedure between the EU institutions, the European Parliament filed a series of amendments that included the insertion of new provisions on nanotechnology. More often than not, the Parliament’s amendments were accepted (in the original or a modified form) and, where the legislative procedure was carried through to completion, enacted in law.85 Through these examples, the Parliament has demonstrated its considerable agenda-setting power and further nanotechnology-related amendments in other commercial sectors look likely. 81 Regulation (EC) No 1333/2008 of the European Parliament and of the Council of 16 December 2008 on Food Additives [2008] OJ L354/16, Article 12; Commission Regulation (EU) No 10/2011 of 14 January on Plastic Food Contact Material Regulation [2011] OJ L12/1, Articles 9(2), 13(4)(b); Regulation (EU) No 1169/2011 of the European Parliament and of the Council of 25 October 2011 on Food Information to Consumers [2011] OJ L304/18, Articles 2(2)(t), 18(3), 18(5). 82 Regulation (EC) No 1223/2009 of the European Parliament and of the Council of 30 November 2009 on Cosmetic Products [2009] OJ L342/59, Articles 2(3), 13(1)(f), 16, 19(1) (g)(i). 83 Directive 2012/19/EU of the European Parliament and of the Council of 4 July 2012 on Waste Electrical and Electronic Equipment [2012] OJ L197/38, Article 8(4); Directive 2011/65/ EU of the European Parliament and of the Council of 8 June 2011 on the Restriction of Certain Hazardous Substances [2011] L174/88, Recital 16, note that this contains merely a reference to ‘nanomaterials’. 84 Regulation (EU) No 528/2012 of the European Parliament and of the Council of 22 May 2012 concerning Biocidal Products Regulation [2012] L167/1, Articles 4(4), 19(1)(f), 25(c), 58(3)(d), 65(3)(d), 68(2)(b). 85 Note that at conciliation talks on updating the Novel Foods Regulation, the Parliament and the Council were unable to reach agreement, hence the Novel Foods Regulation (EC) No 258/97 of the European Parliament and of the Council [1997] OJ L43/1 remains in force.

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Almost all of the new legislative provisions distinguish between conventional and nanotechnology-enhanced products by imposing additional assessment and informational requirements on the latter. For example, the new Biocidal Products Regulation states that products containing nanomaterials must now undergo separate assessment86 and market approval procedures.87 Similarly, the Food Additives Regulation stipulates that a food additive that has been altered considerably, including through the use of nanotechnology, shall be deemed to be a ‘new’ additive and subject to separate assessment processes.88 The reason for the introduction of such measures, according to the European Parliament, is that there is currently little known about the health and environmental risks of nanotechnology and it is not clear that the rules and methods for traditional products and nanotechnology-products should be the same.89 Accordingly, it is necessary to develop more targeted regulatory obligations to better assess and obtain more information on the potential risks posed by nanotechnology, thereby ensuring a higher level of consumer protection.

C. Introducing the Nano-Label Another mechanism for enhancing consumer protection, introduced in three of the seven pieces of legislation mentioned above, is nano-ingredient labelling. The first of these to be enacted was in the recast Cosmetic Products Regulation, which now requires that: ‘All ingredients present in the form of nanomaterials shall be clearly indicated in the list of ingredients. The names of such ingredients shall be followed by the word “nano” in brackets’. Similar requirements have been included in the Biocidal Products Regulation90 and the Food Information Regulation.91 The use of labelling in this context is significant for several reasons, not least because it has been rejected in other jurisdictions (notably the United States) as an appropriate means of regulating nanotechnology.92 It has also proved to be a particular bone of contention between EU institutions. As already noted, none of the Commission’s initial legislative proposals contained references to ‘nanotechnology’ (let alone nanotechnology-specific labelling requirements); these were inserted at later 86

Biocidal Products Regulation (n 84) Article 19(1)(f). ibid, Articles 4(4), 65(3)(d), also see Annex II, para 5, and Annex III, para 5. 88 Food Additives Regulation (n 81) Article 12. 89 European Parliament, ‘Legislative resolution of 22 September 2010 on the proposal for a regulation of the European Parliament and of the Council concerning the placing on the market and use of biocidal products’ P7_TA(2010)0333, Recital 61; also European Parliament, ‘Report on the proposal for a regulation of the European Parliament and of the Council on food additives’ A6-0154/2007, Explanatory Statement. 90 Biocidal Products Regulation (n 84) Article 58(3)(d). 91 Food Information to Consumers Regulation (n 81) Article 18(3). 92 eg US Food and Drug Administration, Nanotechnology: A Report of the US Food and Drug Administration Nanotechnology Task Force (FDA, 2007) 35. 87

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stages of the decision-making process during European Parliament readings of the draft texts. There, the European Parliament’s Environment Committee played a pivotal role in ensuring the inclusion of nano-labelling obligations notwithstanding objections to the initiative.93 One Member of the European Parliament commented (in relation to the recast Cosmetics Regulation) that nanomaterials were ‘the biggest stumbling block in the negotiations’.94 It was also a potential sticking point for the Council, which noted: The only remaining element for an agreement with Parliament on nanomaterials consists of the labelling thereof in the list of ingredients. A number of delegations hold that this is not useful. A majority of delegations however have indicated a margin of flexibility in the framework for an overall compromise. Parliament attaches a particular importance to this amendment. The Presidency therefore asks for a margin of flexibility with regard to this element.95

Nano-labelling may not have been a universally popular option but it was introduced as an uneasy compromise, brokered under intense political pressure. Compared with other nanotechnology-specific options suggested by the Parliament (including a blanket ban on certain nanomaterials in electrical and electronic goods),96 nano-labelling offered perhaps the least controversial way forward; a happy medium between ‘doing nothing’ and prohibiting nanotechnology-enhanced products from circulating the EU market.97 The other key to its success is that product labelling has a long history in EU law as an important tool for protecting not only the health but also the rights of consumers.98 The two goals are interlinked: by protecting their right to

93 Council of the European Union, ‘Statement on Proposal for a Regulation of the European Parliament and of the Council on Cosmetic Products (recast)’, 17 November 2009, 12682/09 ADD1 REV1, 2 includes a statement by the Federal Republic of Germany: ‘it cannot in Germany’s view be excluded that the general mention on labels of nano-scale materials in cosmetic products using the term “nano” might be misunderstood by consumers as a warning’. 94 European Parliament, ‘Debate of 23 March 2009 on the Cosmetic Products Regulation (recast version)’ CRE 23/03/2009-15, MEP Eva-Britt Svensson, representing the Confederal Group of the European United Left–Nordic Green Left. 95 Council of the European Union, ‘Note from General Secretariat of the Council/Presidency to Committee of Permanent Representatives on the Proposal for a Regulation of the European Parliament and of the Council on Cosmetic Products (Recast)’, 3 March 2009, 7014/09 LIMITE, 3. 96 European Parliament, ‘Report on the proposal for a directive of the European Parliament and of the Council on the restriction of the use of certain hazardous substances in electrical and electronic equipment (recast)’, 15 June 2010, A7-0196/2010, Amendment 88, Annex IV. 97 Elen Stokes, ‘You Are What You Eat: Market Citizens and the Right to Know About Nano Foods’ (2011) 2(2) Journal of Human Rights and the Environment 178. 98 For discussion, see European Parliament, ‘Resolution on the Commission Communication to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions on “Consumer Policy Strategy 2002–2006”’ P5_TA(2003) 0100, paras 25–26 and 29. Treaty on European Union [1992] OJ C191/1, Title XI, Article 129a; Treaty of Amsterdam Amending the Treaty on European Union, the Treaties Establishing the European Communities and Certain Related Acts [1997] OJ C340/173, Article 129a (now enshrined in the TFEU (n 55) Title XV, Article 169). Prior to Maastricht, consumer protection was recognised as an autonomous policy aim under the Single European Act (SEA) [1987] OJ L169/1 however SEA did not offer a specific legal basis for consumer legislation.

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know the characteristics relating to a product’s safety, consumers can make informed decisions about any undesirable effects and take steps to protect themselves against the possible harm.99 It is a fundamental principle of EU consumer protection policy that consumers should be given all essential product information so that they can make choices in full knowledge of the facts. The ‘right to know’ rhetoric has also risen to prominence in the debate on nanotechnology, having developed from the notion that consumers ‘might like to know’100 whether a product has been manufactured using nanotechnology to one that portrays consumers as having the right to know such information and make purchase decisions accordingly.101

D. Protecting and Empowering Consumers As measures introduced in the name and interests of consumer protection, nano-labelling requirements may be said to exhibit certain features of Polanyi’s countermovement. One difficulty with this analysis is that Polanyi envisaged that countermovements would start ‘in a spontaneous way’;102 a description not easily applied to legislative procedures in the EU or elsewhere. However, Polanyi also noted that the ‘countermovement’ was an ‘organising principle’103 more than a fixed concept, and there are other ways in which the new nano-labelling legislation displays similarities to ‘the social forces’104 and ‘distinctive methods’105 of social protection. For example, Polanyi observed that countermovements tended to come in the form of state measures of protection,106 as ‘collectivist methods of regulation and restriction’.107 Periods of market facilitation were ‘followed by a period of antiliberal legislation in regard to public health, factory conditions … and so on’.108 As will be seen, it is at least arguable that newly enacted legislation on nano-labelling represents one such ‘collectivist countermovement’.109 The ‘social protection’ element of the legislation emerges in different ways. Nano-labelling may be viewed in instrumental terms as contributing to the

99

European Parliament (n 98). European Parliament, ‘Report on the Proposal for a Regulation of the European Parliament and of the Council on Novel Foods’, 18 December 2008, A6-0512/2008, Amendment 59, emphasis added. 101 See generally European Parliament, ‘Debate of 5 July 2011 on Food Information to Consumers’ CRE 05/07/2011–12. 102 TGT, 141. 103 TGT, 132. 104 ibid. 105 ibid. 106 TGT, 147. 107 TGT, 148. 108 TGT, 147. 109 TGT, 145. 100

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EU’s broader strategy on informed consumer choice. It may also be defended as a means of promoting more substantive values and ideals, such as the empowerment and political mobilisation of consumers, which may provide yet further momentum for Polanyian countermovements, particularly ‘spontaneous’ countermovements, in favour of greater social protection. On the latter point, there is growing recognition of the potential role of consumption in developing EU citizenry and public engagement, as observed by the European Commission: ‘[t]he 493 million EU consumers are central to the three main challenges facing the EU: growth, jobs and the need to reconnect with our citizens’.110 From this perspective, consumption appears not as a passive or isolated private action but as a more meaningful and practical way of relating to the world.111 The exercise of consumer choice can even be seen as ‘an act of allegiance and a protest against the undesired model of society’.112 In a particularly vivid account of the permeability of consumption choices to broader social and political issues, the Commission has noted that: The next three years will see consumer policy coming of age as consumer interests, together with other issues that directly affect ordinary citizens, become increasingly important. The importance of the inter-linkages and overlaps between consumer policy and other policies is set to grow. This coming of age is driven by the political and economic currents running through the EU. It will bring a new influence for consumer policy that will have to be matched by a new maturity on the part of consumers and their representatives. If consumers are to play their role fully as equal stakeholders in society, they need to understand the interlinkages between their interests and those of others. Their awareness of their rights as stakeholders also demands a greater recognition of their responsibilities to the environment and society at large.113

Not only does EU policy seek to furnish consumers with opportunities to turn to the marketplace to express political, moral or other social concerns (eg through the provision of nano-labelling), but it also creates an expectation that they will do so. This has firmly established the role of the ‘citizen-consumer’,114

110 European Commission, ‘Communication on EU Consumer Policy Strategy 2007–2013’ COM (2007) 99 final, 2, emphasis added. Also see page 5 for the Commission’s key objectives, which include empowering EU consumers (‘Putting consumers in the driving seat benefits citizens’). 111 For discussion, see Margaret Scammell, ‘Citizen Consumers: Towards a New Marketing of Politics?’ in John Corner and Dick Pels (eds), Media and the Restyling of Politics (Sage, 2003) ch 7, 123. 112 Mary Douglas, Thought Styles (Sage, 1996) 43. 113 European Commission, ‘Communication on Consumer Policy Action Plan 1999–2001’ COM (98) 696 final, 1. 114 Mark Bevir and Frank Trentmann, ‘Civic Choices: Retrieving Perspectives on Rationality, Consumption, and Citizenship’ in Kate Soper and Frank Trentmann (eds), Citizenship and Consumption (Palgrave Macmillan, 2007) ch 1; Michelle Everson and Christian Joerges, ‘Consumer Citizenship in Postnational Constellations?’, European University Institute Working Papers, Law No 2006/47.

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the ‘empowered consumer’,115 or the ‘political consumer’116 in the machinery of EU governance.117 The turn to richer conceptions of consumption has been explored in the expansive literature on the use of the market as a political tool.118 Consumption, notes Roberta Sassatelli, is undergoing a process of reconfiguration; it is beginning to be seen less as a sphere of negative freedom and more as a domain for the exercise of positive freedom.119 Through purchasing decisions, citizens ‘can always cast their ballot—on a world scale, no less’,120 an idea explored further by Mary Douglas in an essay on ‘shopping as protest’.121 Seen through this perspective, it may be argued that the nanotechnology market faces a countermovement in the form of legislative intervention ‘checking the expansion in definite directions’122 but also through the newly created opportunity for further political consumerism. The extent to which nano-labelling actually achieves this is explored in the next section. There it is argued that, even though the enactment of nano-labelling can be understood as an attempt by the European Parliament’s Environment Committee to remedy the perceived inadequacies of existing legislation and to afford a level of protection not otherwise available, nano-labelling does not fit entirely comfortably with Polanyi’s notion of social protection.123

V. EMBEDDING AND DISEMBEDDING

Polanyi’s ‘double movement’ concept has been widely deployed by social scientists as a critique of capitalist society,124 and it resonates strongly with

115 Emily Reid and Jenny Steele, ‘Free Trade: What is it Good for? Globalization, Deregulation, and “Public Opinion”’ (2009) 36(1) Journal of Law and Society 11, 30. 116 Scammell (n 111) 129. 117 On the multiple identities of the EU consumer see Marco Darni, ‘Assembling the Fractured European Consumer’ (2011) LSE Europe in Question Discussion Paper Series, Paper No 29/2011; and Bente Halkier and others, ‘Trusting, Complex, Quality Conscious or Unprotected?’ (2007) 7(3) Journal of Consumer Culture 379. 118 eg Michele Micheletti and Andreas Follesdal, ‘Shopping for Human Rights’ (2007) 30 Journal of Consumer Policy 167; Roberta Sassatelli, ‘Virtue, Responsibility and Consumer Choice: Framing Critical Consumerism’ in John Brewer and Frank Trentmann (eds), Consuming Cultures, Global Perspectives: Historical Trajectories, Transnational Exchanges (Berg, 2006) ch 9. 119 Sassatelli (n 118) 236. 120 Ulrich Beck and Elisabeth Beck-Gernsheim, Individualization: Institutionalized Individualism and its Social and Political Consequences (Sage, 2002) 44. 121 Douglas (n 112) 86. 122 TGT, 130. 123 TGT, 132. 124 eg Eppo Maertens, ‘Polanyi’s Double Movement: A Critical Reappraisal’ (2008) 29 Social Thought and Research 129; Kurtuluş Gemici, ‘Karl Polanyi and the Antinomies of Embeddedness’ (2008) 6 Socio-Economic Review 5; Fred Block and Margaret R Somers, ‘Beyond the Economistic Fallacy: The Holistic Social Science of Karl Polanyi’ in Theda Skocpol (ed), Vision and Method in Historical Sociology (Cambridge University Press, 1984) ch 3.

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current themes in regulation scholarship (even if it has received less attention in the law and regulation literature compared with that of other social science disciplines).125 The link with regulation is seen perhaps most clearly in cases of crisis (eg the financial crisis, food safety crises), which, many would argue, have their roots in efforts to relieve markets from regulatory constraints.126 In the context discussed here, the double movement helps to prise open the regulatory responses to nanotechnology, allowing them to be viewed not just as isolated examples of ‘weak’ or ‘strong’ intervention but as expressions of more united movements towards marketisation on the one hand, or social protection on the other. However, notwithstanding its immediate intuitive appeal, the double movement does not necessarily develop in the way originally described by Polanyi. In particular, the notion that countermovements emerge as ‘powerful protective reactions’127 to the ‘tendencies inherent in market institutions’128 is not so clearly illustrated, even when legislative measures are introduced with ‘conscious social direction’.129 In part this is because Polanyi’s categorisation of marketisation and social protection is itself problematic because of the value judgements that flow from it. The implicit understanding is that disembedded markets (and hence marketisation) are bad, whereas embedded markets (and social protection) are good. Nancy Fraser explains why this causes difficulty: On the one hand, his account of embedded markets and social protections is far too rosy. Romanticizing ‘society’, it occults the fact that the communities in which markets have historically been embedded have also been the locus of domination. Conversely, Polanyi’s account of disembedding is far too dark. Having idealized society, it occludes the fact that, whatever their other effects, processes that disembed markets from oppressive protections contain an emancipatory moment.130

Life and regulation are more complex than the separation of ‘markets’ from ‘society’ suggests. This is also true of the Polanyian pairing of marketisation and self- (or limited) regulation, and of social protection and regulatory intervention.131 While it can help to explain certain aspects of the regulatory landscape, it can also mask the ebbs and flows between, or blending of, features of socially disembedded and embedded markets. Here it is argued

125 Notable exceptions include David Levi-Faur, ‘The Global Diffusion of Regulatory Capitalism’ (2005) 598(1) Annals of the American Academy of Political and Social Science 12; Bruno Amable and others, ‘Crisis in the Regulation Regime—A New Paradigm?’ (2010)8 Socio-Economic Review 537, particularly 550–52. 126 Nancy Fraser, Fortunes of Feminism: From State Managed Capitalism to Neoliberal Crisis (Verso, 2013), especially ch 10. 127 See text around n 11. 128 TGT, 129. 129 ibid. 130 Fraser (n 126) 232. 131 TGT, 132.

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that the distinction maintained by the double movement is artificially clearcut and that there can be more fluid (not just ‘double’) movement between the two extremes. Nanotechnology regulation does not fall neatly into either of the categories. This is notwithstanding a clear sense of ‘countermovement’ emerging from the EU policy debates leading up to the introduction of nanotechnologyspecific legislation. For example, during the legislative procedure the European Parliament’s Environment Committee staked out its position on improving the level of protection afforded to EU citizens. There, the Committee (through official Committee reports)132 and its constituent members (in Parliamentary debates133 and in the negotiation of legislative amendments)134 emphasised not only the importance of nano-labelling in achieving better social protection but also its capacity to ‘push back’ against market-centred policies. As one Member of the European Parliament explained, action to remove barriers to trade ‘is counterbalanced, however, by Parliament’s introduction of the regulation of nanoparticles [via measures such as nano-labelling] and thus the application of the precautionary principle’.135 However, while the aim of ‘counterbalancing’ market-oriented policies is apparent from the legislative dialogue, it becomes more difficult to discern in the nano-labelling requirements later enacted. As well as serving the purpose of consumer protection, product labelling is also seen as an important means of improving the functioning of the market because ‘[i]nformed and empowered consumers who have effective rights and confidence in them constitute a driving force for economic success and change’.136 Moreover, labelling also reinforces the idea of individualised responsibility which is at odds with Polanyi’s ‘collectivist countermove’137 and more in tune with narratives of neoliberalism. Although increased opportunity for informed choice can open up new possibilities for collective action through the medium of markets and consumerism (as discussed above), there are practical limits to what the nanolabel could achieve in this regard. For example, the use of labelling, which is a long-used regulatory technique in the EU, may result in the marketing of nano-products becoming regularised and routinised. This is compounded by the fact that the nano-label is designed to operate in precisely the same manner as generic product labelling. EU policymakers have been keen to stress that 132

European Parliament, ‘Resolution of 24 April 2009’ (n 51), especially paras 6 and 9. eg European Parliament, ‘Debate’ (n 94). 134 eg European Parliament, ‘Report on the proposal for a regulation of the European Parliament and of the Council on cosmetic products (recast)’ A6-0484/2008. 135 European Parliament, ‘Debate’ (n 94). Explanation of votes, MEP Hanne Dahl, representing the Independence/Democracy Group, emphasis added. For detail on the precautionary principle, see TFEU (n 55) Article 191(2); also Elizabeth Fisher, Risk Regulation and Administrative Constitutionalism (Hart Publishing, 2007). 136 Council of the European Union, ‘Resolution on the Consumer Strategy of the EU (2007–2013)’, 31 May 2007, 2007/C 166/01, 1; also European Commission (n 110). 137 TGT, 146. 133

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the label ‘nano’ implies neither a specific risk not an increased hazard;138 it is designed only to communicate the presence of a particular form of ingredient. Given this, nano-labelling does little more than impose a standard condition for market entry and in this sense may have the effect simply of mainstreaming nanotechnology-enhanced products. Rather than serving to distinguish the products of nanotechnology from those of more conventional sources, the use of ‘pro forma’ regulation that relies on established legislative practice (ie ‘This product contains…’) may do little to differentiate between them. Furthermore, in the absence of more concerted efforts to recast decisionmaking responsibilities in collective rather than individualising ways, for example through ‘upstream’ public engagement and more deliberative models of participation, it is difficult to see how the nano-label alone will lead in more collective directions. Instead, by employing an accepted EU regulatory method, the nano-label may help to create certainty over market entry conditions (even though it is less obviously capable of dealing with other important questions about nanotechnology’s potential social and ethical implications). Developing more certain market conditions can in turn be regarded as a first step towards market success.139 In other words, nano-labelling may have been introduced on grounds of health/environmental protection but it can also work to facilitate the functioning of the nanotechnology market, and in this sense displays a hallmark of Polanyian disembeddedness. Notwithstanding the expectation that product labelling in general helps to empower and mobilise EU citizens, there is also a tendency in the policy discourse to view labelling as an important contributor to market efficiency. The concern is that, without sufficient information, a consumer is unable to make choices that correspond with his or her preferences, giving rise to an inefficient allocation of resources. Equipped with adequate information, a consumer will make decisions in a ‘rational’ manner; that is, by choosing the best means to his or her ends in order to maximise personal utility.140 Under the rational choice model, ‘utility’ is seldom clearly defined but, Herbert A Simon notes, ‘[m]ost often, it is equated with income or wealth or (for the firm) profit; maximizing utility is identified with maximizing economic reward’.141 This corresponds

138

Council of the European Union (n 93) and accompanying text. Elen Stokes, ‘Demand for Command: Responding to Technological Risks and Scientific Uncertainties’ (2013) 21(1) Medical Law Review 11. 140 Richard A Posner, ‘Rational Choice, Behavioral Economics, and the Law’ (1998) 50(5) Stanford Law Review 1551, 1551; also FY Edgeworth, Mathematical Physics: An Essay on the Application of Mathematics to the Moral Sciences (C Kegan Paul & Co, 1881) 16: ‘the first principle of Economics is that every agent is actuated only by self-interest’, as cited in Amartya K Sen, ‘Rational Fools: A Critique of the Behavioral Foundations of Economic Theory’ (1977) 6(4) Philosophy & Public Affairs 317, 317. 141 Herbert A Simon, ‘Altruism and Economics’ (1993) 83(2) The American Economic Review 156, 158. 139

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with Polanyi’s view that a defining feature of modern market society is the centrality of self-interest. He notes: ‘An economy of this kind derives from the expectation that human beings behave in such a way as to achieve maximum money gains’.142 Although Polanyi is sharply critical of the idea that people are naturally profit seeking,143 the thing that makes the market economy distinct from the rest of society (and hence disembedded) is that it is driven by economic motives and governed by economic laws. Even though many of the ideas bound up in traditional conceptualisations of individuals as calculating, ‘unbehavioural’ maximisers have been shown to be problematic,144 the rational choice model continues to govern areas of EU consumer policy, product labelling included. While consumer product legislation pursues a host of different goals (including market transparency, safety), at its heart is the EU consumer’s right to information which requires that ‘[s]ufficient information should be made available to the purchaser of goods or services to enable him to … make a rational choice between competing products and services’.145 Product labelling, in other words, carries with it a certain amount of ideological baggage from classical economic theory. Returning to the example of nanotechnology, the continuing influence of market economy principles on EU consumer policy does not mean that nano-labelling is incapable of offering consumer protection. But it does make it difficult to interpret nano-labelling solely as a measure of social protection in the Polanyian sense, or as the intended ‘counterbalance’ to market forces.146 Instead, nano-labelling might be more accurately described as having a foot in both camps. At the legislative decision-making stage, the insertion of nano-labelling requirements by the European Parliament’s Environment Committee bore some resemblance to the collectivist countermovement, for ‘what else would one expect than an urge on the part of a great variety of people to press for some sort of protection?’147 Yet, the subsequent implementation of nano-labelling is difficult to decouple altogether from a received tradition of welfare economics. This suggests that, although

142

TGT, 68. Polanyi explains that systems other than the market economy (eg feudalism in Medieval Europe) were organised around ‘a great variety of individual motives disciplined by general principles of behavior [such as custom and religion]. Among these motives gain was not prominent’, TGT, 55, emphasis added. 144 Note that the rational choice model of economic behaviour is heavily criticised for being psychologically unrealistic and predictively weak, eg Daniel Kahneman, Paul Slovic and Amos Tversky, Judgment Under Uncertainty: Heuristics and Biases (Cambridge University Press, 1982). 145 Council of the European Union, ‘Resolution of 14 April 1975 on a preliminary programme of the European Economic Community for a consumer protection and information policy’ [1975] OJ C 92/1, Principle 34, emphasis added; for a more recent expression of this, see European Commission (n 110) 10. 146 See discussion above (n 135). 147 TGT, 150. 143

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some semblance of the double movement can be identified in the regulation of nanotechnology, the goals of market liberalism and social protection are pursued without the level of separation and oppositional movement intimated by The Great Transformation.

VI. CONCLUSION

Polanyi’s concept of the ‘double movement’, and in particular the underpinning distinction between notions of economy and society, holds considerable appeal where crisis and social degradation are believed to have been brought about by unrestricted market forces. However, the concept is not unproblematic and ought not to be adopted uncritically. For one thing, it is recognised that the separation of the market economy and social protection can produce wide and sometimes questionable generalisations about the relationship between markets and society.148 The example of nanotechnology regulation offers further evidence of the limits of this categorisation and demonstrates that the contrast between marketisation and protective measures is not necessarily clear-cut. As this chapter has sought to illustrate, even though nanotechnology regulation is often framed in ways that begin to resemble the double movement (eg self-regulating markets versus state intervention), the EU regulatory response can more accurately be described as a blend of different approaches. This is true not only of the high-level policy on nanotechnology, which simultaneously pursues goals of protection and market expansion, but also of specific regulatory provisions. It is argued here that although the insertion of new legislative provisions on nano-labelling was motivated by concerns about a lack of consumer protection, nano-labelling may equally be regarded as an important market-opening device. On the latter point, it is also worth noting that general EU policy on product labelling commonly uses the language of free choice and efficient resource allocation, which has tended to be associated with a dominant tradition of economic welfarism. The underlying assumption of the welfarist framework—that individual choices are driven exclusively by maximising individual gains—dovetails with Polanyi’s account of economic self-interest under market economy conditions. This is not to say that new nano-labelling requirements do not provide consumers with higher levels of protection than would otherwise be the case. Rather the suggestion is that measures of social protection may also operate

148 See the discussion on ambiguities in Polanyi’s framework in Gareth Dale, ‘Double Movements and Pendular Forces: Polanyian Perspectives on the Neoliberal Age’ (2012) 60(1) Current Sociology 3.

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to promote free (or freer, given the already broad coverage of existing legislation) market principles. This may be especially the case where measures of protection are inserted into policy and legislative regimes that are already predisposed to achieving multiple regulatory goals. After all, many areas of EU policy seek to both promote the internal market and protect citizen health and the environment, as dictated by the Treaty. Yet even though it is to be expected that nano-labelling would pursue different ends, policy aspirations do not necessarily translate into regulatory outcomes and it could be that the success of certain goals is diluted by the regulatory context in which they emerge. For example, it has been suggested that, notwithstanding the protective nature of the legislation, the label ‘nano’ conveys little that is useful to consumers. Moreover, ongoing uncertainties around nanotechnology and the lack of orchestrated opportunities for deliberative and participatory public engagement in the policy process may make it doubly difficult to mobilise a united movement against a market-oriented approach. Thus, even when a measure is described as protective it may not be wholly effective at achieving that goal. All of this suggests that nanotechnology regulation does not just move in one or the other direction, as suggested by the notion of the ‘countermovement’, but instead follows a more complex pattern of interaction and alliance between marketisation and social protection.

10 Risk-Free Debt: The Distorting Promissory Narratives in Sovereign Debt Law and Policy DANIA THOMAS

I. INTRODUCTION

G

LOBAL STOCK MARKETS fell in response to news of the Syriza victory in Greece. The victory of the radical left party reportedly posed a ‘threat to global financial stability’. Earlier, the announcement of its imminent victory triggering the biggest drop on the Athens stock exchange since the 1980s … sending reverberations through world markets’.1 Syriza was elected with a mandate to renegotiate Greece’s ‘sovereign debt and increase public spending’.2 The possibility of renegotiation not default triggered the precipitous drop in stock markets. In effect, this story reinforces the risk-free status of Eurozone sovereign debt. Syriza threatened this hallowed status with its moderate but humane democratic mandate. To make amends Greece’s (mostly official)3 creditors justifiably expect repayment in full and on time whatever the associated cost of repayment on its citizens and European taxpayers or the risks they took by lending to Greece. This debtor-focused narrative is also evident in the public debate in response to recent developments in US law. In a prescient article responding to the inevitable ‘technical’ Argentine default triggered by judicial intervention, Martin Wolf drew a parallel between Victorian debtor prisons and the punishment meted out to a debtor nation. For individuals, ‘in 1869 imprisonment for debt was abolished and bankruptcy introduced. Both society

1 E Moore, Robin Wigglesworth, Kerin Hope and Peter Speigel, ‘Snap Election in Greece Reignites Fears for Eurozone’ Financial Times (December, 2014). 2 ibid. 3 The Greek debt workout in 2012 exchanged privately held debt for official debt. See J Zettelmeyer, C Trebesch and M Gulati, ‘The Greek Debt Restructuring: An Autopsy’ (2013) Economic Policy 28, 513–63 (‘The Greek debt workout’).

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and economy survived’.4 However, like in the Eurozone, US law constructs a ‘world in which the choice for sovereigns and creditor is between full payment and absolute non-payment’.5 In the dominant contemporary stories and the worlds they construct, profligate, ‘rogue’6 debtors are the sole protagonists. They bring this fate upon themselves as ‘autonomous’ individuals. They are condemned for failing to fulfill their contractual promises. For this behaviour their citizens are justifiably ‘punished’. The sanctions can range from reputational sanctions that exclude them from access to primary markets, official sector bailouts conditional on structural reforms, deep, indeterminate, misdirected and inefficient austerity measures.7 Mainstream commentators have repeatedly questioned the dominant narratives that justify debtor-focused interventions in contemporary sovereign debt crisis interventions. Paul Krugman for instance, argues that the problem lies with the way in which the story is told. For instance, ‘German officials … portray the euro crisis as a morality play, a tale of countries that lived high and now face the inevitable reckoning’.8 The eurozone interventions are thus justifiably both debtor-focused and overlook structural constraints namely ‘… the equally inconvenient fact that German banks played a large role in inflating Spain’s housing bubble’.9 There is thus a complex plural reality obscured by this simplistic contemporary narrative. However, the conditions in which a new story can be told are unclear. Like Krugman, Wolf hints at an alternative story. As a ‘creditor country’, he argues ‘Germany must accept responsibility for what it finances and how’.10 It can accept its responsibility by restructuring the debt owed to it by countries in distress. This is a shift from the simple debtor-focused narrative to one that recognises that creditors can justifiably share the pain of resolving the eurozone debt crisis. To this end, Wolf calls for widespread debt restructuring starting with Greece and Ireland ‘which should be freed of the onerous burden of bailing out foolish foreign creditors of its banks’.11 His preferred resolution attributes part of the responsibility on the creditors who accepted the risks of sovereign lending and partly on sovereigns who will have to suffer the reputational consequences of debt workouts through increased risk premiums on new borrowing for instance. With

4

M Wolf, ‘Defend Argentina from the Vultures’ Financial Times (2014). ibid. AC Porzecanski, ‘From Rogue Creditors to Rogue Debtors: Implications of Argentina’s Default’ (2005) Chicago Journal of International Law 6, 311. 7 D Stuckler and S Basu, The Body Economic: Why Austerity Kills (Basic Books, 2013). 8 P Krugman, ‘What’s the Matter with Europe’ Krugman.blogs [Online] (2014). Available from: http://krugman.blogs.nytimes.com/2014/08/13/whats-the-matter-with-europe/. 9 ibid. 10 M Wolf, ‘Europe’s Lonely and Reluctant Hegemon’ Financial Times (2014). 11 ibid. 5

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their stories of debtor and creditor profligacy, they implicitly acknowledge the shifting dynamic between debtor obligations and creditor entitlements and how the context justifies that the balance between the two be struck in a way that facilitates widespread and deep debt workouts. This plural narrative also obviates the debtor-focused justification for imposing austerity as sanction for profligate behaviour. Thus, Krugman defends a policy ‘to rescue … debtor nations … without demanding more pointless pain’.12 By revealing how austerity is normalised by entrenched debtor-focused narratives, both Krugman and Wolf direct attention to their persistence and resurgence in the law and policy. This chapter reveals the deep sources that sustain this revival of debtor narratives in contemporary legal and policy interventions. This chapter begins by drawing out the relevance of Polanyian scholarship to explain this narrative resurgence. This section is followed by two that delineate the promissory narrative in two market interventions—the Argentine debt litigation and ECB policy interventions involving sovereign bond purchases in the Eurozone. This is followed by an attempt to delineate a legally defensible, conventional, plural narrative and conclusions.

II. NARRATIVES AND POLANYIAN SCHOLARSHIP

The focus on narrative in the context of sovereign debt law and policy in this chapter extends and modifies ideas developed in ‘The Narratives of Financial Law’ by Joanna Benjamin.13 Building on the work of Robert Cover,14 Benjamin attributes the regulatory failures that led to the recent financial crisis as a failure of legal narratives. In a similar vein, this chapter delineates a debtor focused promissory narrative embedded in legal and policy interventions as the source of the failure to resolve what have become intractable sovereign debt problems—the failure of debt repayment in Argentina and a failure of crisis resolution and more in the Eurozone. In another extension of Benjamin’s view that ‘[n]arratives provide the law with its unreflective assumptions’,15 the narratives delineated here contextualise the role and influence of single institutional ‘narrators’, in particular US courts and the ECB. The ‘narrators’ rely on narratives to align wider networks of influence. In both cases, the role of public communication becomes critical. In the case of the ECB, policy statements are made in press conferences aimed at influencing markets. In the case of the Argentine litigation, the media was used by all the parties to tell their stories. In the absence of empirical 12

ibid. J Benjamin, ‘The Narratives of Financial Law’ (2010) Oxford Journal of Legal Studies 30, 787–814. 14 Robert Cover, ‘Nomos and Narrative’ (1983) 97 Harvard Law Review 4–68, 4. 15 Benjamin (n 13) 30, 787–814 at 788. 13

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evidence, it is assumed that the networks that accrete around narratives resist alternatives. In any event, narratives entrench the trajectory of legal and policy interventions ensuring a high rate of return on the assets of a political class.16 The Syriza victory for instance, offers an opportunity to engage in alternative narratives. However the Greek government proposals have been resisted by Germany and policy makers. Narratives are used here as an analytical tool to track the distribution of material resources through networks that eventually influence (more likely distort) perceptions about the risks of sovereign debt. The long term implications are self-evident as debt to GDP ratios in the Eurozone have increased. In the main, the debtor-focused narrative resists debt-negotiation. In the neo-Polanyian scholarship, the idea of narratives as used here is distinguished from Holmes’ conceptualisation of ‘ideational tendencies’.17 Narratives in this sense are not confined to either the social or the economic realm but they do have a moral content. In both interventions examined here, the power, influence and legitimacy conferring attributes of narrative draws from deep rooted cultural and legal traditions and beliefs. However, the conditions that make narratives salient are unclear. There is some indication that narrative salience depends on market conditions. In current conditions low bond yields, high liquidity and enhanced demands for regulatory compliance in post-crisis financial markets make the debtor-focused narrative salient in US law and ECB policy. The consequent promise of risk-free debt is held out to placate markets paving the way for sovereign primary market access. It follows then that the idea of ‘narrative’ cannot be conceptualised as a ‘general social tendency without any intrinsic institutional or moral content’ as Holmes states.18 Narratives are not morally neutral. They infuse what are viewed as the neutral legal and policy responses with moral content. In doing so they direct the flow of material resources towards realizing morally defined legal and policy goals (debt repayments, bailouts, austerity). The debtor-focused narrative adopted by US courts aims to redirect material resources to ensure Argentina repays its debts. Similarly, in the eurozone official bailouts conditional on austerity justifiably redirect welfare budgets towards debt repayments. By directing the flow of material resources in the

16 In his discussion on public debt Thomas Piketty identifies a class of creditors in the core economies that benefit from ECB asset purchases that ensures them high returns on their capital. They in turn use these returns to lend to sovereigns. Thomas Piketty, Capital in the Twenty First Century (The Belknap Press of Harvard University Press, 2014) 541. 17 Christopher Holmes, ‘Problems and Opportunities in Polanyian Analysis Today’ (2012) 41 Economy and Society 468. 18 ibid.

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manner described, the debtor-focused promissory narrative legitimizes the Polanyian double-movement.19 In the case of the Eurozone and Argentina debt repayment is the goal of both narratives. The promissory narrative sustains the double movement. This is evident when both interventions are viewed from a private law perspective. From this perspective, the promise to pay as imperative in effect ‘empties’ out the contract,—the contract’s terms that distribute risk between the debtors and creditors do not matter. Consequently, the debt as asset is rendered risk-free for the creditors as the liability of the debtor to repay the face value remains. The contract operates as an institutional scaffold that signals the debtors’ liability. To achieve the goal of debt repayment, this justifies the conversion of what are deemed to be necessary cuts in ‘real’ commodities namely wages and welfare entitlements into ‘fictional’ commodities namely creditor property (debt repayments). The cuts in real wages and welfare entitlements become creditor property. The narrative thus legitimizes a counter-movement by the ECB and the courts to limit the social effects of the conversion. In the absence of an alternative, the narrative justifies the unlimited and indefinite conversion of real commodities into fictional commodities. In the absence of a consensual renegotiation of a debtors’ liabilities sovereign liability is perpetual as in the absence of redemption, the debts must be rolled over on maturity. In this context, the possibility of debt renegotiation (and the cessation of austerity and conditionality) requires a political struggle to redefine the dominant narrative rather than a contractual or policy fix.

III. THE PROBLEM OF SOVEREIGN DEBT

Lee Buchheit explains, ‘sovereign debt involves the engagement of the credit of a legal fiction—the state—for the repayment of money at some point in the future’.20 Debt once incurred binds ‘the continuing legal entity of the state, including future governments and future generations of citizens’.21 This is a necessary corrective in a market where, ‘short of armed conflict, asset seizures, creditors cannot compel debtors to honour their debt obligations’.22 In general, sovereign immunity protections in international law protect

19 Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time: Forward by Joseph Stiglitz and Introduction by Fred Block (Beacon Press, 2001) 59–80. 20 Lee C Buchheit and G Mitu Gulati, ‘Responsible Sovereign Lending and Borrowing’ (Fall 2010) 73 Law and Contemporary Problems 63–92. 21 ibid. 22 M Bradley and M Gulati, ‘Collective Action Clauses for the Eurozone’ (2013) Review of Finance.

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its assets such as its ‘embassies, central bank funds, military installations’ from attachment by creditors.23 The exceptions are the commercial assets of a sovereign in relation to which immunity is waived. They have in turn been privatised by sovereigns to immunise them from attachment.24 In the face of sovereign power, the focus of market interventions have been on sustaining sovereign debt markets by making default costly. When compared to personal and corporate finance, ‘[s]overeign finance is uniquely unforgiving of mistakes’.25 There are no pre-established rules to adjust debtor liabilities. Sovereign debt is ineradicable absent the consent and cooperation of creditors.26 Therefore, sovereign debt is not ineradicable because a moral imperative has been breached but because of impediments to debt negotiation. This is consistent with historical evidence where debt workouts are the norm.27 The situation in the Eurozone and changes in US law are anomalous. The nature of the costs imposed depends on the market perception of whether a debtor is ‘willing’ or ‘able to pay’.28 Argentina, Greece and Ukraine are deemed able but ‘unwilling’ to pay. The inability to identify why a sovereign is unwilling to pay segues into the rational choice justification for debtor-focused sanctions on default. Here a debtor always makes a choice to default—the context such as natural disasters, a currency union, etc do not matter. However, contrary to this ‘institution-free’ view in the real world debt workouts are common and official narratives matter in the eventual resolution of a debt crisis. A more straightforward and reliable route would be to examine contract terms.29 Sovereigns incentivise markets to lend by limiting their powers of rescission with contractual terms that drastically modify their liabilities. For instance, on default acceleration clauses make all capital and interest payable. Sovereigns also use contract terms to facilitate consensual debt workouts. The variations in bond contracts are evidence of the risks of sovereign lending and the evolving dynamic between debtor obligations and creditor entitlements to counter them. The debtor-focused narrative reinforced

23 L Buchheit, A Gelpern, M Gulati, U Panizza, B Di Mauro and J Zettelmeyer, ‘Revisiting Sovereign Bankruptcy’ (Committee on International Economic Policy and Reform, Brookings Institution, 2013) 15 (‘CIEPR’). 24 Faisal Z Ahmed et al, ‘Lawsuits and Empire: On the Enforcement of Sovereign Debt in Latin America’ (Fall 2010) 73 Law and Contemporary Problems 39–46. 25 Lee C Buchheit and G Mitu Gulati, ‘Responsible Sovereign Lending and Borrowing’ (Fall 2010) 73 Law and Contemporary Problems 63–92. 26 ibid. 27 AF Sturzenegger, J Zettelmeyer, Debt Defaults and Lessons from a Decade of Crisis (The MIT Press, 2006). 28 CIEPR (n 23). 29 M Gulati and RE Scott, The Three and a Half Minute Transaction: Boilerplate and the Limits of Contract Design (University of Chicago Press, 2012); Anna Gelpern and M Gulati, ‘The Wonder Clause’ (2013) Journal of Comparative Economics 41, 367–85.

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by policy makers and the courts overlooks this dynamic, the contract terms and the conventions that sustain debt workouts (and debt markets). Sovereign debt markets in the US and in the Eurozone are defined by their distinct cultural, historical and political contexts. There is no attempt made here to collapse the specificities of each intervention. This cross-jurisdictional analysis delineates a dominant debtor-focused promissory narrative- each legitimized by distinct cultural sources and legal traditions. The idea to examine them together is motivated by new evidence30 that reveals the crossAtlantic influences of US law on policy interventions in the Eurozone31 and happenstance. In the autumn of 2012, the US courts were in the process of exercising extraordinary feats of judicial creativity in interpreting a standard term in sovereign bond contracts. At the same time, the Eurozone sovereign debt crisis was reaching a tipping point requiring significant official intervention. As it happens, at this time the US courts and the ECB both rely on the promissory narrative to achieve the goal of debt repayments in full. In the context of competitive pressures between jurisdictions, the narrative becomes a green flag for investors indicating that their respective markets are open for business at whatever cost to the debtor economies and citizens.

IV. THE ARGENTINE DEBT LITIGATION: DEBTOR PROMISES MUST BE ENFORCED IN FULL

The Argentine debt litigation has a long and colourful history. Justice Thomas Griesa of the Southern District Court of New York (SDNY) was the main judge in this litigation. His decisions have been described by commentators as being motivated by irritation and grumpiness with what he perceived to be a debtor ‘currently … able to make payments’ on all its debts.32 Argentina has persistently refused to repay a creditor minority demanding the face value of their claims (holdouts). The holdouts have been equally intransigent in their refusal to negotiate Argentina’s obligations and, accept a write-down with the consenting majority. His decision was affirmed by the Second Circuit in August 2013.33 It became law after Argentina’s appeal and interventions sought by the majority were eventually dismissed by the US Supreme Court in June 2014.34 The contracts under challenge refer to some of the New York law denominated debt securities (‘bonds’) Argentina began issuing in 1994. They were 30

Wolf (n 4); A Powell, ‘Lessons for Europe in Argentine Debt Wrangle’ Financial Times (2014). Bradley and Gulati (n 22) 2045–2102. 32 NML Capital Ltd v Republic of Argentina SDNY Case 1:08-cv-06978-TPG Document 371 (23 February 2012). 33 NML Capital Ltd v Republic of Argentina F3d Court of Appeals, 2nd Circuit 2013. 34 Argentina v NML Capital Ltd et al Supreme Court of the United States Order list (13-990) (16 June 2014). 31

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purchased by distressed asset investors, mainly hedge funds in the secondary market, at various times since the first issuance. Argentina defaulted on payment in 2001. This followed a Presidential declaration of a ‘temporary moratorium’ on principal and interest payments to all its creditors. The default plunged the country into a deep recession with significant social costs.35 In financial terms, the default affected more than $80 billion of its foreign debt. For this, Argentina remains excluded from primary capital markets. Default triggered by executive action highlights one of the risks of sovereign lending and the power of sovereigns in the market. In contract law, the default was a clear breach. As per the contract terms, the breach gave every one of several hundred thousand creditors the right to a remedy. Before the law settled, a majority of Argentina’s creditors consensually agreed to settle their claims in two debt workouts (2005, 2010). In line with established convention, they exchange their defaulted bonds for new bonds with adjusted debtor liabilities. Roughly in line with debt workouts in the past, Argentina eventually restructured over 91 per cent of its defaulted external debt.36 Since the workouts, payments to the exchange bondholders (EBH) have been processed through the US clearing system. The holdouts did not participate in either workout, claiming full payment of their original bonds ($1.33 billion). The contract terms gave each individual bondholder a right to sue the debtor. In a disruption of convention, Argentina refused to recognise holdout claims due to a legislative embargo in place37 and restrictions in EBH contracts.38 The holdouts have refused to accept the EBH offer. To remedy the breach of their contractual right to payment, they sought injunctive relief. This included specific performance of a contested39 interpretation of the pari passu or equal treatment clause.40 In an innovative interpretation, the holdouts successfully argued that pari passu mandated that they are paid with

35 P Blustein, And the Money Kept Rolling In (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (Public Affairs, 2006) 10–14. 36 This is roughly in line with debt restructurings in the past, Porzecanski (n 7) 6, 311. The holdouts also purchased Credit Default Swaps to cover default risk. 37 Two ‘Lock Laws’ were passed by Argentina prohibiting its National Executive Power from reopening the debt workouts. 38 The 2005 offer closed with a 76% participation rate, representing a par value of $62.3 billion. The remaining 24% were holdouts. In 2010, Argentina suspended the Lock Law and initiated a second exchange offer with a payment scheme substantially identical to the 2005 offer. The prospectus contained a similarly worded warning for potential holdouts. 39 The EBH and interveners which included the US State Department and other debtor countries contested this interpretation. 40 This chapter however does not examine the legitimacy or otherwise of the judicially preferred construction though this aspect of the contemporary debate is germane to revealing the imperative for the court to find a remedy once the promise of equal treatment was breached. For a classic discussion of the conventional understanding of the term, see LC Buchheit and JS Pam, ‘Pari Passu Clause in Sovereign Debt Instruments’ (2004) The Emory Law Journal 53, 869.

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the EBH. Admittedly however the meaning of the clause was not clear.41 In January 2011, the SDNY granted NML (a holdout) partial summary judgment on this ground.42 In effect, the Court was redirecting payments due to the EBH to enforce original holdout claims in full. The EBH have collectively and repeatedly tried to intervene in the proceedings. The courts have repeatedly dismissed their interventions on the ground that each of them can individually approach the courts for enforcement of their claims on default.43 In the Second Circuit, Argentina was permanently ordered to specifically perform its obligations to its minority creditors on the following grounds: The balance of equities; harm to the plaintiff and the debtor’s conduct. The decision was confined to the facts of the case with the finding that Argentina was a ‘uniquely recalcitrant debtor’.44 The promissory basis of the debtor’s obligations is evident in the following finding of Judge Barrington D Parker (Second Circuit Court, New York): In order to enhance the marketability of the bonds, Argentina made a series of promises to the purchasers. Argentina promised periodic interest payments. Argentina promised that the bonds would be governed in US law. Argentina promised that in the event of default, unpaid interest and principle would become due in full … Finally Argentina promised to treat the … Bonds at least equally with its other external indebtedness. As we have held, by defaulting on the Bonds, enacting legislation specifically forbidding future payments on them and continuing to pay interest on subsequently issued debt, Argentina breached its promise of equal treatment.45

The justification to remedy the breach fashioned is evidenced in the following reasoning: our decision affirms a proposition essential to the integrity of capital markets; borrowers and lenders may, under New York law, negotiate mutually agreeable terms for their transactions, but they will be held to those terms. We believe that the interest—one widely shared in the financial community—in maintaining New York’s status as one of the foremost commercial centers is advanced by requiring debtors, including foreign debtors, to pay their debts.46

A debtor’s promises must be upheld. The negotiable balance between creditor entitlements and debtor obligations is overlooked in the face of ‘a recalcitrant debtor’. The promise becomes the normative justification for their preferred 41 This was affirmed by the second circuit in its decision dated October 26 2012 NML Capital Ltd v Republic of Argentina F. 3d. Court of Appeals, 2nd Circuit (p 17). 42 NML Capital Ltd v Republic of Argentina SDNY Case 1:08-cv-06978-TPG Document 371 (23 February 2012). 43 The Court found that ‘If Argentina defaults on its obligations to them they retain their rights to sue.’ NML Capital Ltd v Republic of Argentina F3d Court of Appeals, 2nd Circuit (p 10). 44 ibid 7. 45 ibid 5. 46 ibid 24.

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outcome—the remedy though unprecedented and contested is nonetheless fundamental to maintain the ‘integrity of capital markets’47 and ‘New York’s status as one of the foremost commercial centres’.48 This will be lost if they fail to attach available assets in the face of a breach. This understanding they find is ‘widely shared in the financial community’.49 The remedy is imbued with context meaning and legitimacy by the promissory narrative. This ensures that judicial intervention is neither arbitrary nor imposed on the market. The outcome desired by the court requires the normative assent of the creditors. The narrative is relied on to reinforce a normative benchmark. The promissory basis of this intervention however mandates full payment (rather than negotiation). As a non-legal deliberation, the promissory narrative is an anachronistic move by the courts as it has deep roots in classical common law reasoning. This narrative can be traced back to nineteenth century contract law where the map of the ‘law relied … upon the morality of promise-keeping’.50 In addition to this reference, there is a wider, more general demand attributed to ‘equity and good conscience’ that debtors pay their debts.51 Argentina’s breach of its promises is a moral breach. The common law roots of this narrative invests the decisions with their authenticity. This enhances the legitimacy and role of the courts in the networks to which it belongs. The common law tradition invests this narrative with its normative authority and power. As narrators of the dominant narrative the courts have powers that they do not have in ‘real’ markets. ‘Judges’ Buchheit argues ‘are … ill-equipped and ill-positioned to decide how the discomfort of a financial crisis can be apportioned among the citizens of the debtor country and the various classes of its creditors. Judges can only hand down judgements saying that as a matter of law, the sovereign is bound. They cannot prescribe the nature or degree of the sacrifices that the sovereigns would be needed to impose on its other stakeholders in order to make those payments or to satisfy those judgements’.52 In the absence of legislative intervention that immunises third party EBH claims from attachment or bankruptcy-like rules that permanently adjust debtor liabilities, the promissory narrative becomes a powerful and authoritative default normative rule. Further, the contracts in dispute did 47

ibid. ibid. ibid. 50 Hugh Collins, ‘The Sanctimony of Contract’ in Richard Rawlings (ed), Law, Society and Economy: Centenary Essays for the London School of Economics and Political Science 1895–1995 63–89 at 65. 51 The morality that underpins economic transactions is discussed in detail by David Graeber, Debt: The First 5000 years (Melville House, Brooklyn, New York, 2011) 97–134. 52 R Lastra and L Buchheit, Sovereign Debt Management (Oxford, Oxford University Press, 2014) 466. 48 49

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not have terms such as Collective Action Clauses (CACs) to contractually re-negotiate changes in creditor entitlement and debtor liabilities. Historically, US creditors have been less accommodating of collective rights, preferring individual enforcement rights in their bonds. In this context, on finding a breach of a promise of equal treatment, if attachable asset streams are found the judges have no option but to order attachment. As mentioned, the international law immunities protecting sovereign assets leave few of them around. It has been argued that the decisions will have limited effect on the law or on debtors other than Argentina. It is argued here that this view of the courts insufficiently contextualises its role and influence as a key ‘narrator’ that legitimizes the dominant promissory narrative. The decisions must be seen in a context where there is political acceptance of the promissory narrative. Here the courts become key actors within wider networks of academics, lawyers and policy makers that collectively influence perceptions about the risks of sovereign lending. Mario Blejer, a former finance minister of Argentina, reinforces this point when he warns that the danger of the decisions is that it engenders the perception that sovereign debt is a risk-free asset. This is ‘[b]ecause a default can be a clear threat, albeit one that evolves over time, sovereign bond yields incorporate a risk premium (or country risk)’.53 He argues that ‘Investors are free to choose the combination of risk and return that suits their needs and preferences’.54 This information is available to creditors through ‘sovereign credit ratings by specialist agencies’.55 ‘[I]f ’, he continues, ‘investors are willing to accept higher risks in order to cash in on the additional spread, they cannot renege on the potential cost when default becomes a reality’.56 ‘Default, in this context’, he continues, ‘is not a crime but a legitimate, if unfortunate, part of the game’.57 When viewed as part of a network, the courts become influential. US law now offers investors both the benefits of a risk-taking premium and ‘full payment in all circumstances’.58 In effect, sovereign debt is rendered risk-free for some creditors at the cost of others. When viewed from the perspective of a network the judicial interventions in sovereign debt markets are clearly not ad hoc, disparate or necessary responses to the immediate needs of US markets. The influence of the network that makes the courts key actors is evidenced by the multiple responses to limit its consequences. The decisions pushed Argentina into a ‘technical’ default. It also remains excluded from primary capital markets. The US administration has not intervened to resolve the

53 54 55 56 57 58

M Blejer ‘Argentina Shows the Integrity of Default’ Financial Times (2012). ibid. ibid. ibid. ibid. ibid.

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impasse, indicating the salience of the network.59 In one estimate, the cost of making debt risk-free for minority holdouts is over $15 billion with the inclusion of penalty interest.60 Further, Argentina has since made a failed attempt—at an unaccounted cost to its domestic taxpayers—to resume payments to the EBH domestically (avoiding US law). There has also been widespread market response to counter the enhanced risks posed by the promissory narrative. Market bodies such as the International Capital Markets Association (ICMA)61 and the International Monetary Fund (IMF)62 have both proposed new renegotiation terms to facilitate debt workouts. The Argentine press has condemned the decision and, as discussed, so have mainstream commentators and scholars. A recent high powered report issued by the Brookings Commission (CIEPR 2014), raises grave concerns about the US decisions. The report argues that the decisions require a reassessment of current thinking on sovereign debt problems. In particular, the report raises concerns that in theory US law make debt workouts vulnerable to challenge. Their legitimacy has been undermined. For this reason, they argue for legislative change that allows for permanent adjustment of debtor obligations. In the absence of which US law will exacerbate the severity and depth of sovereign crises in the future. This indicates a need to examine the contract law techniques and reasoning deployed by the courts to resolve contract disputes. It also requires the decisions to be situated within larger networks that influence risk perceptions in sovereign debt markets. The role and influence of courts both individually and collectively also become key determinants of the impact and effectiveness of regulatory interventions such as those proposed by the CIEPR 2014. In particular, proposals that recommend bankruptcylike rules to permanently adjust debtor obligations and thereby facilitate debt workouts. When viewed as part of larger network of transnational risk governance, the judicial decisions justified by the promissory narrative delegitimise the norms that have so far make debt workouts possible. For instance, norms such as EBH consent to adjusting debtor obligations, inter-creditor equity that has so far prevented holdout attachment of payment streams flowing to creditors in the position of the EBH. In a situation where attachable assets are available, all creditors have in theory the same contractual rights. In reality however, the default promissory basis of this intervention makes sovereign debt risk-free for holdouts at a necessary and justified cost to the 59 See G Palast, ‘How Barack Obama Could End the Argentina Debt Crisis’ ECONOMICSBLOG [Online] (2014). Available from: www.theguardian.com/business/economics-blog/2014/ aug/07/argentina-debt-crisis-barack-obama-paul-singer-vulture-funds. 60 Eichengreen, Project Syndicate [Online] (2014). 61 The new clauses are available at www.icmagroup.org/resources/Sovereign-Debt-Information/. 62 The IMF view is available at www.imf.org/external/pubs/ft/survey/so/2014/new100614a. htm.

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EBH and the debtor. The significance of this is not appreciated when the decisions are viewed as confined to disciplining a ‘recalcitrant’ debtor or as expressions of an ‘irritated’ and ‘grumpy’ judge. Its systemic significance is also evidenced when viewed from the perspective of the competitive advantage of US law. By making Argentine debt risk-free, US law gains a significant competitive advantage drawing emerging market sovereigns to this jurisdiction. The offer of risk-free debt held out by US law attracts investors. Its success is evidenced by the distribution of debt as set out in the table below: Table 163 Kind of Debt Defined by Issuer Category

Percentage of Whole (100%)

1

Domestic developed country

83.2%

2

Domestic developing country

11.1%

3

International developed country

4.3%

4

International developing country

1.4%

Table 1 is a snapshot of a constantly changing distribution. It sets out the percentage of debt defined by issuer category. At this point, by far the most significant amount of debt is issued domestically by developed countries (1) which would include both the US and the Eurozone. In either case, the level of debt reflects the effectiveness of their laws in attracting this level of investment. In comparison, the percentage of debt issued by developing countries to their own citizens (2) is significantly smaller. This is also true when a similar comparison is made in relation to international debt. Here again developed country debt (3) is much larger than developing country debt (4). This table indicates that jurisdictions that actively and publically reinforce the promissory narrative garner a significantly larger percentage of debt issued. It also evidences the significance of the debt hierarchy in maintaining the competitive advantage of primary capital markets and developed country debt. It operates in two ways. In the first instance, it obviates the need for debtor prudence, and restraint in sovereign borrowing—key values to ensure sustainable debt.64 This enhances risk-taking and imprudence. In the event of a crisis, this narrative justifies unlimited and unconditional public guarantees of enforcement. This off-sets the inevitable fallout of improper risk assessments made by investors and debtors. In the Argentine litigation, the imperative to achieve debt repayment as a narrative goal justifiably diverts the flow of material resources away from the EBH to the holdouts.

63 64

The table tabulates a pie-chart in Gelpern and Gulati (n 28) 369. Buchheit and Gulati (n 20).

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The legal jurisdictions alone do not however explain what drives a distribution like that set out in Table 1 above. This distribution is subject to underlying market conditions such as bond yields—for instance, a part of the returns on investments in sovereign debt. In the Eurozone for instance, policy makers have had to deal with an unprecedented situation in which ‘the scale and breadth of sovereign indebtedness has reached multi-century extremes, yet the cost of borrowing for sovereigns globally is at record low levels in real and nominal terms’.65 Market conditions will change the distribution in Table 1 quite significantly in the future. This is a picture of the interplay between changing debtor power due to favourable borrowing conditions and demands for individual creditor protections to counter this enhanced power. In some sense, lawyers endeavor to anticipate and respond to this dynamic through contract clauses. This is however imperfect as evidenced in the contested interpretation of the pari passu clause. In any event, the significant risks of sovereign lending make negotiability a key aspect of debt resolution. In this context, the reinforcement of the debtor-focused promissory narrative obviates negotiability limiting the role of the market in resolving debt crisis. Here the courts come to play an enhanced, influential and as Buchheit states an unsustainable role. The next section tracks the promissory narrative in the policy interventions in the Eurozone sovereign debt crisis. In doing so it highlights the similarly expanding influence and role of the ECB in resolving sovereign debt crisis. In both cases, the costs of repayment in full are socialized, that is, borne by constituencies outside the debt contracts in play.

V. ECB POLICY INTERVENTIONS: DEBTOR PROMISES MUST BE FULFILLED

In his critique of ECB policy, Paul Krugman recently argued that the focus on reducing debt deficits at the cost of mass unemployment in countries such as Spain is the source of the problem rather than the solution. According to Krugman, part of the explanation is that in Europe, as in America, far too many Very Serious People have been taken in by the cult of austerity, by the belief that budget deficits, not mass unemployment, are the clear and present danger, and that deficit reduction will somehow solve a problem brought on by private sector excess.66

The impact and effectiveness of the solutions proposed by Krugman to limit the social consequences of ECB policy rely on an appreciation of its role in a

65 Gene Frida, ‘Sovereign Debt Markets’ in R Lastra and L Buchheit, Sovereign Debt Management (Oxford University Press, 2014) 288. 66 P Krugman, ‘What’s the Matter with Europe’ Krugman.blogs [Online] (2014). Available from: http://krugman.blogs.nytimes.com/2014/08/13/whats-the-matter-with-europe/.

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network in which it is a key actor. Like in the case of the US courts discussed above, in the absence of a legislative role, the ECB relies on a promissory narrative to legitimate its interventions. When compared to the common law roots of the promissory narrative in US law, the roots of the narrative in ECB policy interventions in the Eurozone are found elsewhere. The promissory narrative is referenced to uphold the esteemed reputation of Europeans countries that always repay their debts. Unlike emerging markets that repeatedly break their promises and therefore demand debt forgiveness through debt workouts, the promises of European sovereigns once made will be fulfilled at any cost. In their empirical examination of bond contract changes, Anna Gelpern and Mitu Gulati reveal the fear of Eurozone policy makers that Europe may become like Zimbabwe and other emerging markets if by adopting new negotiation clauses it signalled the possibility of debt negotiation. Eurozone policy makers shun the possibility of negotiated workouts in fear of ‘the perennial bogeyman in the European morality tales, the end of the slippery slope where Europe would end up if it did not stop in time’.67 As the authors note, their fear was not substantiated by any empirical examination of Zimbabwe’s contract terms. The cultural roots of this narrative makes it impervious to historical evidence where even with negotiated debt workouts creditors’ losses are exceptional. As Buchheit explains, ‘[h]istory tells us that creditor majorities will eventually find ways in which to protect themselves’.68 This narrative is also impervious to historical evidence to the contrary where all European countries have defaulted and sought debt restructurings in the past.69 The authors’ findings also reveal evidence of an informal debt hierarchy— consisting of mainly emerging markets such as Mexico, Argentina and Zimbabwe which adopted similar negotiation clauses in their foreign bonds and developed countries such as France and the US which resisted adopting them until much later. They found that ‘[t]he “French Objection” was absolute: if you had renegotiation clauses in your debt, your debt would cease to be the equivalent of money’.70 This resistance was shared by policy makers from Greece, Portugal and Spain. It follows that the ECB must do everything within its mandate to ensure that as ‘much or all Eurozone sovereign debt [continues to be] treated as a risk-free reserve asset, in the same category as U.S. Treasuries’.71 The deep cultural roots of the promissory narrative invests the ECB with the authority, power and legitimacy to ensure this does not change.

67 68 69 70 71

ibid. ibid. Sturzenegger and Zettelmeyer (n 26) 7–9. ibid. Gelpern and Gulati (n 29) 367–85.

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In its wake, the narrative justifies austerity conditional on official sector bailouts imposed on countries such as Greece and Ireland. The narrative also justifies conditions imposed on countries such as Spain and Italy availing of the ECB’s bond purchase programs. The costs of tax payer funded ECBfacilitated-debt-repayments are justifiably borne by the citizens72 of debtor states. They are otherwise in danger of enhancing debtor moral hazard with debtors failing to fulfill their promises and sliding down the debt hierarchy. The Eurozone sovereign debt crisis is in its sixth year with no resolution in sight. As far as significantly indebted states such as Greece, Spain, Portugal, Ireland and Italy are concerned, their banking sectors remain weak, growth though encouraging remains low and unemployment remains high. All the while debt as a percentage of GDP has ballooned.73 In the aftermath of the financial crisis, ECB policy intervention in sovereign debt markets has been marked by its reluctance to impose private sector losses through widespread debt workouts. For the economies in the periphery, this trajectory eventually extended the loss of market access and called for official sector bailouts.74 Debts are first issued by sovereigns in primary markets and are then resold to investors who purchase them on the secondary market. In situations where sovereigns are in distress and investors fear they will default, the interest rates at which countries can borrow spike sharply and there are fire sales of existing debt on secondary markets. ECB policy including proposals to purchase sovereign bonds (and other assets) for as long as necessary artificially reduces interest rates. It is aimed at putting a floor under the current deflationary trend affecting sovereign bonds held as assets on the books of national central banks.75 However, there are signs that by manipulating interest rates, ECB policy is distorting a key indicator of sovereign default risk. This is a concern raised by a former chairman of the German Bundesbank. In his view, ‘Debt markets think the euro zone debt crisis is over and are “under-pricing” the risks’.76

72 Here the term ‘citizens’ is used loosely—as investors who benefit from the promissory narrative are citizens. A more nuanced view would require an appreciation of ‘social inequality’ where the adjustment costs are borne by some citizens. 73 Wolf (n 10). 74 The bailout policy adopted eventually was itself a significant shift from the earlier position which prohibited them. The legal framework that set up the single currency was agreed in the Maastricht Treaty. The substantive provisions of this Treaty are found in Title VII of the Treaty on the Functioning of the European Union (TFEU). Article 125 of the TFEU prohibits bailouts. Accordingly, the responsibility for repaying its debts remained the sovereign’s. Both the ECB and other Member States were barred by Article 125 to repay another government’s debt. Article 125 supplemented with Article 123 prohibits the ECB from directly purchasing debt instruments issued by Member States. TAKM Petch, Legal Aspects of the Eurozone Crisis (Slaughter and May, 2012). 75 C Jones, ‘Economists back Mario Draghi’s Call for Eurozone Action’ Financial Times (2015). 76 BSAJ Chatterley, Markets Wrong to Think Euro Crisis Over: UBS chair [Online] (2014). www.cnbc.com/id/101579100#.

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This is leading to the anomalous situation where sovereigns such as Greece can borrow from markets when ‘growth is still stagnant in Europe and a host of economic and social problems of the crisis, such as high youth unemployment, remain’.77 Markets are ‘under-pricing’ debt as interest rates remain at historic lows. Consequently, ‘Spain, … now has to pay less to get its funding from the market than the U.S., despite having much worse unemployment and growth figures than the U.S’.78 Further, ECB policy adds to rather than reduces the debt burden of countries is receipt of official sector assistance. In the case of Greece on which this section is focused, the two bailout funds from the troika (ECB, IMF and the EU) have been diverted to service debt payments while adding to its debt burden. Its net sovereign debt as a percentage of GDP of over 100 per cent in 2007 has now shot up to over 160 per cent.79 ECB intervention is aimed to ensure debt repayment not restore debt sustainability nor growth. ECB policy must be seen as part of wider trends in response to specific market conditions. Bond markets are sluggish and investors are biting at the bit of enhanced regulatory pressures after 2008.80 Sovereign bond yields are typically ‘at or near record lows’ in developing and developed markets.81 The financial crises exposed the weaknesses of developed economies. Central bank interventions in the UK, US and now the eurozone are aimed at enhancing sovereign dependence on debt markets to meet their ‘huge fiscal deficits’ and service the ‘40-60 per cent increases in public sector debt levels as a share of GDP’.82 In a market flush with liquidity, investor gains can be made with riskier behavior as long as the costs of risks materializing are borne elsewhere. More specifically, ‘the debtor country rather than on external creditors and financial systems, and in particular … on those supported by or working for the public sector’.83 In this milieu, ECB policy is actively encouraging over indebted sovereigns to borrow more without restraint or prudence—both values critical to maintaining sustainable debt liabilities.84 In his critique of ECB policy of austerity, Wolf argues that ‘the struggle for competitiveness within the Eurozone via wage cuts is not a route to widely shared prosperity’.85 This is a situation in which bailouts become

77

ibid. ibid. 79 Wolf (n 10). 80 As a result of lower interest rates in the US and the UK and quantitative easing in the aftermath of the 2008 credit crisis, sovereign debt markets have been flush with money. 81 Frida (n 65) 288. 82 ibid. They have been described as the ‘decrepit economies’, given that populations are ageing rapidly, potential GDP growth is rarely above 2% per annum and debt burdens from past crises are high. 83 ibid. 84 Buchheit and Gulati (n 20). 85 Wolf (n 10). 78

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transfers.86 By making bailouts conditional on austerity, ECB policy transfers resources directed towards welfare to debt repayments.87 In effect, ECB policy offers creditors an unconditional public guarantee of repayment. At present, there is no political appetite for debt workouts88 or bankruptcy-like solutions to the problem. The promissory narrative is the default ‘political’ narrative. The threat of debt negotiation by Syriza (and the fear of a Greek default and exit from the Eurozone) has however set the cat among the pigeons. The IMF recently agreed to revisit the austerity conditional on bailouts. In an unprecedented89 move, it has questioned its policy of austerity-linked official bailouts.90 It has been careful to placate investors that Greece will not default and debtor moral hazard is contained.91 Sovereign debt crises cannot be viewed as either a real or threatened contractual or moral breach. They are not arcane contractual disputes but political disputes. As such the moral justifications and the legitimacy constraints on debt management and crisis resolution cannot be defined by individual narrators such as the courts or unelected central bank authorities. The Syriza victory that resists interventions justified by this dominant narrative may be the beginning of a narrative shift. The possible contours of a legally defensible alternative narrative are set out in the following section.

VI. A ‘CONVENTIONAL’ NARRATIVE: THE ROAD NOT TAKEN

The need for an alternative to the promissory narrative is clear, however the conditions in which such an alternative can become salient are not. As mentioned above, in his recent op-ed piece in the Financial Times, Martin Wolf argues that Germany is a key protagonist whose lack of leadership is worsening the problems. He also argues that the monetary union raises structural problems that require solutions other than austerity and ECB monetary policy fixes. Wolf makes a similar argument when he defends Argentina against the ‘vultures’ (holdouts). He highlights that in the absence of a bankruptcy framework, judicial decisions favoring the holdouts amounts

86

ibid. CIEPR (n 23). 88 The policy preference is for ‘quantitative easing’. This is further complicated in the context of inequality where an intervention to protect the base value of assets will protect some assets but not others. The distortionary benefits of policies such as these have not been considered here. 89 Austerity linked bailouts have been the policy preference for the IMF in its interventions in ‘emerging markets’ since its role as lender of last resort in sovereign debt crisis. The crisis in the developed economies changes this rhetoric. 90 Stiglitz, ‘Europe’s Lapse of Reason’ (2015) available at: www.project-syndicate.org/ commentary, accessed 19 January 2015. 91 ibid. 87

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‘to extortion’ legitimized by US law.92 Implicit in Wolf’s critique is the recognition that a sovereign debt crisis is not an individual moral failing. The intractability of a debt crisis indicates that a crisis is a complex structural problem resolvable by structural solutions. It has been argued here that the structural solutions must begin with a narrative shift. As mentioned, a fundamental feature of self-regulating, sovereign debt markets is that ‘debts are ineradicable absent the consent and cooperation of the creditors’.93 In contrast to the fixity of the promissory narrative, debtor liability is negotiable, subject to creditor consent and cooperation. The extent to which a debtor’s liability will be adjusted is sensitive to market conditions, as Bradley and Gulati find in their empirical analysis of the pricing effects of new renegotiation clauses.94 Debt workouts also define the history of sovereign lending. They arguably sustain sovereign debt markets. This indicates that there are conventional, collective and objectively identifiable values that guide the behaviour of investors and debtors influencing their perceptions of the risks of sovereign debt. In this context, it is assumed that debt workouts derive their legitimacy from social norms and conventions. ‘Convention’ is defined as ‘…temporarily stabilized regularities of social behaviour’.95 The promissory narrative is premised on the debtors’ promise as a fixed source of legitimacy. Debt workouts in contrast are justified by plural, conventional social norms. They derive their legitimacy from conventional social rules of contracting sustained by norms such as inter-creditor equity, fairness and good faith. Evidence of the conventions referred to here are found in the cultural preferences for certain contractual arrangements. For instance, creditors in the UK prefer to rely on trustees while US investors prefer fiscal agents. Table 2 below classifies the values at play in both narratives. It has two columns that set out monist and conventionalist values. Each of these is set out horizontally with narratives in two rows. Table 2 Narratives

Monist Values

Conventional Values

1

Promissory (subjective)

a) Yes (promise to pay ONLY)

b) Excluded by definition

2

Conventional (objective) c) Yes (eg efficiency)

92

d) Yes (eg inter-creditor equity)

Wolf (n 4). Buchheit and Gulati (n 25) 73, 63. 94 Bradley and Gulati (n 22). 95 B Lomfeld and D Wielsch, ‘Public Dimension of Contract: Contractual Pluralism beyond Privity’ (2013) The Law & Contemporary Problems 76. 93

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As discussed in the previous section, interventions legitimised by the promissory narrative are debtor-focused. Breach of a contract is viewed as a subjective and intentional act. The narrative validates the individual autonomy of the debtor. US law holds the debtor to its abstract contractual promise of equal treatment to ensure debts are repaid. In the Eurozone, ECB policy reinforces the superiority of developed sovereign debt in an abstract debt hierarchy by ensuring debts are repaid. Each intervention is justified with reference to an inflexible debtor promise to pay. The promissory narrative is ethically monist. Here contracting is assumed to be guided by a single value—the a priori and unchanging debtor promise (1, a). In this narrative the promise becomes the ‘super’ or prime value that excludes all other values (1, b). The prevalence of debt workouts however indicate that contracting in sovereign debt markets is also guided by plural values. Contractual obligations are binding on account of ethically plural social conventions (2, c, d). Debt workouts are unique as each settle in social contexts in which conventional values differ. The values at play are specific to historical context and contracting cultures in which debt workouts settle. In the absence of an empirical examination, the nature and robustness of these conventions are unclear. However, as binding obligations are justifiable by reference to an open-ended set of conventional values, such as inter-creditor equity, fairness, negotiability and good faith, this could be viewed as a legally defensible alternative to the promissory narrative.

A. Evidence of a Conventional Narrative? Within the structural constraints mentioned, the law can, under some conditions, facilitate workouts. In an earlier phase of the litigation discussed above, Judge Griesa was instrumental in allowing the second Argentine debt workout to settle. In an interim decision (affirmed by the Second Circuit), attempts by the holdouts to attach the old EBH bonds were denied. However, this is neither sustainable nor reliable where, as discussed, courts have no option but to attach available assets to satisfy outstanding enforcement orders. It is not within the power of a US court to change its role defined by the default promissory narrative. This change requires political intervention. The acceptability of the kind of intervention required has been evident in recent moves by policy makers that have mandated the adoption of debt renegotiation clauses in US and Eurozone debt contracts. This is however not enough. There has been no attempt in either jurisdiction to accept proposals for legislative change that call for the immunisation of attachable third party assets from seizure in satisfaction of enforcement orders.96 96

CIEPR (n 23).

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B. Challenges to the Conventional Narrative The objections to the idea of a conventional narrative as the basis of contractual obligations articulated here are that this narrative lacks both conceptual and legal uncertainty. The conventional narrative moves the source of contractual liabilities away from its grounding in an a priori and inflexible promissory narrative. It locates the source of contractual liabilities in shifting and evolving moral, political and cultural values. In this respect this alternative can be said to lack the conceptual certainty afforded by an ethically monist position defined by a debtor’s promises. The problem of conceptual uncertainty is less concerning in sovereign debt law—broadly defined by the common law, market convention and financial law. In sovereign debt law, bonds are simultaneously viewed as things and relationships.97 The US courts for instance, have viewed bonds as both a contractual relationship between a creditor and a debtor and as creditor property. They have held that default constitutes a taking of creditor property.98 As Benjamin argues in relation to other financial positions, the dual nature of bonds makes certain conceptual tensions inherent. In sovereign debt this duality is evident in the continuing tensions between collective actions required for debt workouts and property right protections that make both alienation and negotiation possible. In this context, the promissory narrative provides an abstract conception of certainty. In the absence of powerful and influential narrators such as the courts and the ECB defining the dominant promissory narrative, contracts are negotiable, the interpretation of terms is both uncertain and contested. As mentioned, contract terms also evolve and change to counter debtor power. Thus outside the interventions described the balance between collective and individual entitlements are negotiable and dependent on market conditions. The extent to which conventional social norms provide contractual certainty relies on an examination of the role of market conventions in debt resolution. The significance of market conventions was an issue that came up in criticisms of the unprecedented judicial interpretation of the pari passu clause in sovereign bonds as discussed above. In the face of the promissory narrative relied on by the court as the source of its preferred default normative rule, the conventional interpretation of the term was found to lack any established justification and legitimacy. The risks of sovereign lending make debtor obligations adjustable. This is the context in which contract terms evolve and are sustained by contracting norms embedded in social practice. Stephen Choi and Mitu Gulati in

97 This is contrary to the view Benjamin takes in the context of financial positions viewed as things rather than relationships: Benjamin (n 13) 792–97. 98 The availability of non-contractual rights to remedy a contractual harm opens up the possibility of a wider framework of fiduciary claims as argued in Buchheit and Gulati (n 25) 73, 63.

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their paper ‘Contract as Statute’ make a similar claim.99 They propose that contracts should be interpreted as statutes.100 Based on their empirical findings they argue that the judicial interpretation of contract terms must defer to historical tradition and the context in which the terms were framed. In the absence of a comparative template for sovereign bonds like the Market Agreement or a market committee like the International Swap and Derivative Association for Credit Default Swaps, the authors propose that bonds function as statutes and should therefore be subjected to techniques of statutory interpretation. This work offers an early theorisation of the need for judicial deference to conventional values as the source of contractual obligations in performing its interpretative function. When viewed from this perspective, conceptual certainty in sovereign debt markets is not absolute but relative to the context in which contracting takes place. The challenge to the promissory narrative that ensures full payment on breach raises a justified concern about legal certainty. The conventional narrative proposed here relies on a particular reading of legal certainty. Legal certainty in the promissory narrative is defined by the ex-ante predictability of enforcement. According to this argument, it is assumed that to preserve legal certainty, the courts when called upon to enforce contracts have no option but to do so. Legal certainty is a technical assumption. The requirement for certainty is satisfied when the law assumes a particular market reality. It holds in a perfect world where there are no constraints on enforcement, in particular, no constraints on attachable sovereign assets. In this market all debt is rendered risk-free as each contract is in theory enforceable in full. This is not applicable in jurisdictions where attachable assets are rarely available. In such a situation, to preserve legal certainty, assets—even third party claims—must be attached. Legal uncertainty is inherent and as such cannot be removed and must be managed by contract terms and legislative intervention. As discussed above, the conventional narrative as the source of contractual obligations accommodates the plurality of interests at stake in the resolution of a debt crisis. In doing so it does not define the trajectory of the counter movement aims at limiting the social affects consequent on the conversion of real commodities into fictional commodities. Its frames of reference are contract terms norms generated by contracting a social practice and the historical conditions and conventions that give them certainty. The latter ensure that risks associated with contracting are shared between debtors and creditors, and the costs when they materialize are not socialized.

99 100

SJ Choi and GM Gulati, ‘Contract as Statute’ (2006) Michigan Law Review 1129–73. ibid.

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VII. CONCLUSIONS

At the time of writing Ukraine is on the brink of a full blown sovereign debt crisis as warned by the IMF. At official talks it was reported that there was tepid support from senior western officials for increasing bailout funds ‘at a time Kiev has dragged its feet over the economic and administrative reforms required by the programme.’ The reforms are also demanded by the EU which can disburse funds ‘only if Kiev made a “stronger effort” towards implementing reforms’.101 Both demands were being made from a country that the same report states has seen a ‘7 per cent contraction in its gross domestic product and a collapse in exports to Russia, the country’s biggest trading partner, leading to capital outflows and a rundown in central bank reserves’.102 In the absence of official aid, the options available are either ‘slashing its budget or be forced to default on its sovereign debt’.103 The consequences of realising the promissory narrative are so destructive of the very fabric of society that there are countermoves to limit this outcome. For instance, markets in the Eurozone and globally have responded to the US decisions by replacing individual rights to enforce debtor promises with contractual provisions that recognise collective rights to adjust debtor obligations.104 Contract change is a welcome move in the right direction. This is however not a paradigm shift. As a morally blameworthy debtor, Ukraine is the sole protagonist in a new edition of the same morality play. In the absence of widespread cultural acceptance of the legitimacy of the conventional basis of debt workouts through political change, the promissory narrative remains entrenched.

101 PARO Spiegel, ‘IMF Warns Ukraine at Risk of Collapse Unless an Additional $15bn is Found’ Financial Times (2014). 102 ibid. 103 ibid. 104 Bradley and Gulati (n 22).

Index Abbreviations and acronyms used in the index DSU (WTO Dispute Settlement Understanding) ECA (export credit agency) ECB (European Central Bank) ECBS (WHO Expert Committee on Biological Standardization) ECGD (Export Credits Guarantee Department) (later UKEF) EDQM (Council of Europe Directorate for the Quality of Medicines & Health Care) EFIC (Export Finance and Insurance Corporation) (Australian ECA) EIA (environmental impact assessment) EU ETS Directive (EU Emissions Trading Directive (2003/87/EC)) EU (European Union) Ex-Im Bank (Export-Import Bank (US)) FLO (Fairtrade Labelling Organization) GATT (General Agreement on Tariffs and Trade (1947)) GCBS (Global Collaboration on Blood Safety) IFC (International Financial Institutions) IRGC (International Risk Governance Council) NGOs (Non-Governmental Organisations) OECD Common Approaches (for Officially Supported Export Credits and Environmental and Social Due Diligence) OECD Consensus (OECD Arrangement on Officially Supported Export Credits (1976)) OECD (Organisation for Economic Co-operation and Development) OPIC (Overseas Private Investment Corporation (US)) SPS Agreement (WTO Sanitary and Phytosanitary Agreement) TFEU (Treaty on the Functioning of the EU) UKEF (UK Export Finance) WHO (World Health Organization) WTO (World Trade Organization)

Note: Author citations are limited to those where there is significant discussion or quotation Akerlof, GA and RJ Shiller 58 Allais, M 63n 25 Amoore, L 110, 111, 113, 126–7 Aristotle 68 arms sales 83 austerity programmes, criticism of 2–3, 230–1, 232–3, 242–3, 244, 245–6 Australia: see EFIC; Ethical Clothing Australia Barber, B 153, 154, 156, 157 Baumol, W 66 Beck, L and E Beck-Gernsheim 222 Beck, U 5, 12, 111–12, 186 Beckert, J 38, 152–3, 154, 155, 156, 157, 158n 45, 167

behavioural economics 8, 15, 56, 62–5, 71n 48, 73, 77, 78 Benjamin, J 231–2, 249 Bergmann, BR 64n 26 binary categories, value 13–14, 15, 17, 59, 83, 92–3, 97–8, 103, 184n 18 Polanyi’s overemphasis on economic/ social dichotomy 153–7 Black, J 88, 93, 182, 185, 201n 2, 216n 75 Blejer, M 239 Block, F 12, 14, 31, 38, 39, 51, 89, 152, 153–5, 156, 157 Block, F and M Somers 9, 11, 12, 13, 23, 159–60, 182, 183, 184, 222

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Index

blood regulation 187–99 approaches to blood and plasma products distinguished 198 black market 17–18, 191 civil society and 23, 192 consumer role 190, 193 Council of Europe (EDQM) 196–7 democratic accountability 185, 197 economic sphere 190–4 EU Blood Directive 194–6 Humanplasma case 196n 84 implementation problems 195–6 medicinal products code compared 196 GCBS 23 gift vs commodity 17–18, 187–90, 194–5, 198 haemophilia 190–1, 192 historical context 188–90, 198–9 HIV contamination scandals 192–3 changes following 21, 193–4 regulatory vacuum 17–18, 191–2 social sphere dimension 17–18, 181–2, 188–90, 198–9 standards/technical harmonisation approach 196–7, 198 striking the balance 193–4 WHO ECBS 197 Bogojeviċ, S 133, 136, 145n 89, 167, 169, 175, 176, 177, 180 Bradley, M and M Gulati 233, 235, 247, 251 Braithwaite, J 3, 6 Braithwaite, J and P Drahos 6n 32, 19–20, 22–3, 184, 197 Buchheit, LC and GM Gulati 233–4, 241, 245, 247, 249 Buchheit, LC and JS Pam 236n 40 Butler, J 132 Callon, M 132, 133, 136, 138, 144 capitalism/free market economy: see also market economy double movement as response to 7–8, 12, 106, 108, 182, 184 globalisation 106, 109–10, 112–13, 184 socialism differentiated 48–9 carrot mobs 1–2, 20, 27 Cassidy, J 61n 13 civil society: see also social sphere, role in regulation ‘Big Society’ 2 blood regulation and 23, 192 definitions 2, 3–4, 22n 78 ECAs and 16, 86–7, 97–102, 103 enhancement of regulatory role 22–5 nanotechnology and 21–2 transnational role 4, 5–7, 21–2

class considerations 37, 43, 163, 232 co-production (state/market) 17, 136, 137 Coase, RH 40, 72 competition policy/transnational risks, economists’ approach to: see also EU ETS Directive competition vs social objectives 15, 76–7 distributional and social impacts current vs future consumer impact 76 as policy criterion 74–6 ‘rational agent’ assumption 72–3 behavioural economics corrective 72 reassessment following 2008 crisis 73 Council of Europe (blood regulation) 196–7 counter-movement: see double movement Cover, R 231 cultural evolution, state’s role 41, 42 cultural impact of socio-economic change 49–51 cultural variation, role 33, 39, 152–3, 156–7, 183–4, 235, 243, 247, 248, 249 culture-jamming 5–6, 21, 27 Dale, G 7, 12, 14, 39, 152, 153, 183, 184, 203, 227 Delmas-Marty, M 25–6 discourse theory: see also EU ETS Directive as alternative to institutionalist approach 23–4, 159–60 ideational embeddedness 38, 95–6, 159–60 Laclau and Mouffe 17, 151, 160–2, 165–6, 168–9, 170, 178–80 neo-classical economic narrative 159 Somers and Block’s use of 159–60 double movement 19th century market extension and 12, 14–15, 36–8 definition 14–15 ECAs and 92–3 historical context as key factor 14–15 human rights regulation as 95–6 incompatibility with market mechanism 37–8 nanotechnology and: see nanotechnology Polanyi on counter-movement 7–8, 13–14, 17–18, 23, 45–6, 49, 154, 162, 183 as spontaneous societal reaction 11–12, 45–6, 152, 201–3, 220–1 technological/zoological determinism 23, 61 ‘Polanyi problem’ 50–2 promissory narratives and 233 as response to effects of capitalism 7–8, 12, 106, 108, 182, 184 responses to 2008 financial crisis as 152

Index as sequential process 203, 228 social sphere framing and 181–2, 184–90, 198–9 socialism/fascism as alternative 15, 48–9, 60n 10, 183 EC—Hormones II 137, 142–4 ECAs (general) 81–103 arms sales and 83 development mandate 84, 96 economic–social tensions and 82–3, 91–2 examples 84–5: see also EFIC; Ex-Im Bank history 84 home and host country impacts distinguished 97 nationalist protectionism vs neo-liberal free market 16, 82, 85–6, 94–5, 101–2, 103 OECD Consensus (1976) 86, 94, 95 role 82, 84–5, 102–3 sovereign debt and 82, 86, 94n 43, 97, 99–100 transparency 85, 87, 95, 101–2 ECAs and human rights/environmental abuses ECA project causing abuse 86–7 ECAs as regulators 82, 88–101, 102–3 reluctance, reasons for 95–6 ECAs as regulators, constraints differing evaluations of project 98–9 exclusion of affected communities 99 inequality of resources for advocacy 99–100 limited influence of ECAs 100–1 limited influence of NGOs/civil society 98–9 EIAs 82, 87–8 embedding (post-Polanyi) and 88–92, 95–6, 97–101, 102–3 double movement 92–3 human rights regulation as re-embedding 95–6 IFC Performance Standards 87–8, 97–8, 100 NGO/civil society concerns/role 16, 86–7, 97–102, 103 nodal governance and 16, 83, 88–92, 102–3: see also nodal governance/ECAs as node OECD Common Approaches 87–8, 97–8 ECB sovereign debt policy 2–3, 18, 231–2, 233, 242–6, 248, 249 economics and economists (Polanyi’s criticisms of): see also competition policy/ transnational risks, economists’ approach to

255

early economists/orthodox economic theory 56–8 evolution of economic thinking postPolanyi 56, 57–60, 77–8 behavioural economics 8–9, 15, 56, 62–5, 71n 48, 73, 77, 78 methodological issues failure to address equity issues 65–6, 74–7 failure to take account of the real world 57, 62–5 as main focus of criticisms 55–6, 57–8, 60–6 over-abstraction/simplification 60–5, 78 ‘zoological determinism’ 61–2 neo-liberal economists’ disembedding as ‘socially catastrophic’ 55, 61 overview 55–6 self-correcting nature of market mechanisms theory 58–9 economic–social tensions: see ECAs (general), economic–social tensions and economy as ‘instituted process’ 32–8: see also market economy EU carbon market and 165–6 independence of government 33 inevitability of embedding 9–11, 33–4, 93, 96, 182 institutional structures 33, 34, 93 EDQM (blood and plasma products) 196–7 EFIC limitations on influence 100–1 National Interest Account 85, 95 neo-liberal criticism of 94–5, 101–2 structure and legal status 85 EIAs 65–6, 82, 87–8 embedded liberalism 135, 157n 41 embedding, definitions 38, 152–3, 158: see also double movement embedding/disembedding, criticisms of Polanyi ambiguity of ‘embedding’ 158 ambiguity of ‘social’ 157–8, 180 analytical imprecision 183 ‘economistic’ approach 154–5 embeddedness paradox 12–13, 153–60 emphasis on economic/social dichotomy 153–7 interdisciplinary criticisms 183–4 misunderstanding of market economy 31–2, 38–44, 183–4 real/fictitious commodities distinction 183 reification of economic activity 13n 61, 154, 155–6, 179 risk of neoliberal disembedding 184

256

Index

environmental protection: see ECAs and human rights/environmental abuses; labelling; nanotechnology Ethical Clothing Australia 114–20 mandatory codes 118 objectives 16, 116–17 as re-embedding process 114–20 Ethical Clothing Australia (Homeworkers Code of Practice) 117–20 accreditation under 117–18, 119 consumer preference, reliance on 119 limited applicability 119 manufacturers’ resistance to 119–20 sticks and carrots 117–18 unions’ monitoring role, pros and cons 117, 118–19 EU Blood Directive 194–6 EU carbon market: see EU ETS Directive EU ETS Directive common energy policy, Member State’s right of veto (TFEU 194(2)) 177–8 competition (definitions) level playing field 168 in relation to EU trading rivals 167–8 TFEU 101–6 (competition rules) 168 competition, threats within the Common Market 169–73 conflicting EU policies 170 domination by large suppliers 169 grandfathering 169–70 migration of EU ETS installations 171 national opt-outs from EU auctioning 170 windfall profits/rent-seeking 170, 180 ‘economy’ discourses on competition 167–9 cost-effectiveness 166–7 distinction between trading and taxing greenhouse gases 172 as legal discourse 165–6 ‘low carbon economy’ 172–3 market failure 164–5, 167 as paradigm of Polanyi’s embedding metaphor 162–3 Pareto and Kaldor-Hicks’ efficiency criteria 174–5 relational construction of ‘economy’ and ‘society’ discourses 178–9 ‘society’ discourses, key features ‘citizens in the market’ 173–4 ‘fairness’ 174–6, 179–80 multi-level governance/national energy security 176 national sovereignty considerations 176–8 ‘polluter pays principle’ 175–6

summary of Directive 162–3, 164–5 related Directives 166n 93 transnational impact 163 EU nanotechnology regulation: see nanotechnology Ex-Im Bank 81, 84, 85–6 expertise, role in framing economic/social sphere interactions 17, 131–49: see also SPS Agreement; WTO regime co-production 17, 132, 136, 137 defining the requirement 136–7 lawyers’ performative role 132–3, 134–48 as restriction on citizen’s regulatory role 21–2 types of expertise 136–7, 139–40, 144–8 fair trade and the unequal distribution of social risk 120–5 constraints 124–5 contributory factors fragmentation of control 122–3 liberalisation and deregulation 122–3 transnational corporate concentration 122–3 Fairtrade Labelling Organization (FLO) 121 institutional structure 120–1 normative and institutional system 120 overview 16, 120 rationale 121 regulatory strategies mobilisation of financial resources for development 123 redistribution and capacitybuilding 123–4 standards 123 targets inequalities/instability of income 121 vulnerability and insecurity resulting from inability to control material conditions 121–3 weakness of state-based governance 122 fascism 15, 48, 59, 203 fictitious commodities 12, 36–7, 38–9, 61, 183, 233, 251–2 financial crisis (2008) 73, 86, 152: see also sovereign debt; sovereign debt and the promissory narrative Fraser, N 223 Freeman, PJ 75, 76 Friedman, M 63, 73n 57 GATT: see WTO regime Gelpern, A and M Gulati 234 Gerber, D 69n 41 Germany, EU EST and 169, 175

Index Ghezzi, S and E Mingione 115 globalisation 6, 106, 109–10, 112–13, 159, 184: see also capitalism/free market economy Granovetter, M 12, 13n 61, 39, 132, 155, 156, 158, 184 Greece/Syriza (sovereign debt problem) 2, 229, 230, 232, 234, 243–6 greenhouse gases: see EU ETS Directive Hayek, F von/Mises, L von 47, 48, 56–7 Heilbroner, R 60n 10 historical factors, role 14–15, 31–3 Holmes, C 83, 90, 182, 232 human rights: see ECAs and human rights/ environmental abuses Hutter, B 3–4, 21n 75 Hutter, B and J O’Mahony 152 ideational embeddedness 38, 95–6, 159–60 ideational tendencies 83, 89–90 IFC Performance Standards 87–8, 97–8, 100 institutional perspectives: see also economy as ‘instituted process’ discourse theory as alternative 159–60 disembedding of economic relationships from institutional 155–6 EU carbon market 163 expertise and 137 fair trade 114, 124, 125 the institutional-political 90–2, 103 institutionalisation of social risk regulation 107, 108–9 nodal governance and 89, 90 international trade law: see competition policy/transnational risks, economists’ approach to; social risk regulation; SPS Agreement; transnational risk regulation; WTO regime Ireland EU ETS 175 sovereign debt crisis 230–1, 244 Jönsson, C and J Tallberg

6

Kay, J 60 Keynes, JM 47, 55, 157n 41 Konings, M 152, 154, 155–6, 158, 163 Krippner, G 13, 39, 154 Krippner, G and A Alvarez 132, 133 Krugman, P 230–1, 242–3 labelling consumer regulation and 4, 21, 224–5 Ethical Clothing Australia 118–19 FLO 121, 124

257

environmental regulation and 3, 21 nanotechnology 3, 204, 220–8 Lacher, H 183 Laclau and Mouffe’s discourse theory 17, 151, 160–2, 165–6, 168–9, 170, 178–80: see also discourse theory Lang, A 134–5, 138, 144, 148, 149 Lastra, R and L Buchheit 238, 242 lawyers’ performative role 132–3, 134–48 Leontief, W 63n 24 Lie, J 183 Mackenzie, D 132, 133, 136 Maine/Tönnies 34 Malthus, T 5n 23, 56, 156–7, 159–60 market economy: see also capitalism/free market economy; EU ETS Directive as 19th century phenomenon 7–8, 34–8, 44, 48, 49–50 as autonomous system 47–8, 55, 77–8, 132–3, 182, 203 class considerations 8, 11n 51, 37, 43, 45, 46, 163, 232 disembedding of 34–6 double movement: see double movement features of 35–6 fictitious commodities 12, 36–7, 38–9, 61, 183, 233, 251–2 self-regulation market prices, role 35–6 and social protectionism 37 state as driving force 40–4 ancient societies 41 mercantilism 42–3 state intervention/public policy and 39–44 potential violence of/anti-democratic nature 44 social protectionism 37, 38, 42, 44, 46–7, 50–1 social regulation as stabilising/ destabilising force 8–9, 37, 44, 46–8, 51 state-building/territorial sovereignty and 43, 46–7 welfare state 2, 8n 36, 43, 45–6, 49–51, 159–60 state/market interface as coproduction 17, 132, 136, 137 Marx, K/Marxism 7n 35, 8, 9, 11n 53, 162 Mauss, M 188–9 Mill, JS 56–7, 168 Mises, L von/Hayek, F von 47, 48, 56–7 More, T 68 Morgan, M 137 Muris, TJ 67n 36

258

Index

nanotechnology definition 205 EU legislation options 207–12 balancing TFEU market and social protection (health/environmental) obligations 203–5, 212–13 diversity of views 209–12 light touch approach 18, 204, 208–9, 213–17 EU nano-labelling as double movement 3, 220–8 examples 218–20 legislative presumptions 204 EU nanotechnology-specific legislation 217–18 examples 205–6 role/views of academics 213–14 codes of best practice 214–15 governmental bodies/NGOs/non-state actors 215–16 Innovation Union 216–17 IRGC 213 private standard-setting bodies 214 uncertainties relating to 206–7 narratives: see sovereign debt and the promissory narrative national law, role disconnects international trade law/national regulation 131–3, 137–44 transnational control/national regulatory institutions 112–13 EU–Member State relationship 25–6 ordered pluralism 25–6 private risk regulatory regimes 26, 106–7, 113–27 networked regulation: see nodal governance/ ECAs as node NGOs: see also social sphere, role in regulation ECAs and 16, 86–7, 97–102, 103 nanotechnology and 215–16 nodal governance/ECAs as node: see also ECAs and human rights/environmental abuses analytical value 16, 83 definition 88–9 economic–social tensions/competing policies 82–3, 91–2 focus on methods/resources/ mentalities 89 multiplicity of networks/objectives 93, 103 political legitimacy 91–2 post-Polanyian perspective 88–92, 102–3

OECD Common Approaches 87–8, 97–8 OECD Consensus (1976) 86, 94, 95 pari passu clause 236–7, 242, 249 Parson, T 9, 13n 60 performativity 132–3, 136, 149 Piketty, T 232n 16 ‘Polanyi problem’ 50–2: see also embedding/disembedding, criticisms of Polanyi; embedding/disembedding, criticisms of Polanyi ‘polluter pays principle’ 175–6 private risk regulatory regimes 26, 106–7, 113–27 Randles, S 83, 90, 93 regulation, definitions 88, 182 Ricardo, D 567 risk regulation: see social risk regulation Rosch, JT 73n 57 Rosenberg, A 63 Ruggie, J 82 rule of law 34, 41, 177 Scott, J 138, 146–7 self-regulation current importance 19–20 financial self-regulation 2, 18 influencing corporate behaviour 20–1 market economies and: see market economy neo-liberalism and 19, 36–7, 43–4, 55, 56–7, 202 private property rights and 12 ‘self ’ 20 social norms and 20–2 as social sphere regulation 18, 19–22 technological innovation and 18, 204–5, 227–8 transnational risk regulation and 19–20, 25 Shapiro, C 71n 48 Shubik, M 72n 49 Simon, HA 225–6 Smith, Adam 12n 59, 35, 56–7, 61–2, 68, 71n 71, 153 social regulation as stabilising/destabilising force 8–9, 37, 44, 46–8, 51 ‘Red Vienna’ 50 social risk regulation embedding as means to fair allocation 105–6 externalisation of economic risk 106, 110–11, 115 intensification of risk 106 private regulatory schemes Ethical Clothing Australia 16, 114–20, 126

Index fair trade 16, 120–5 lessons from 125–7 pluralised approach 106–7, 113–14 state measures labour law/market regulation 108–9 social insurance 108 state responsibility for, challenges/failures disconnect between transnational control and national regulatory institutions 112–13 globalisation 109–10, 112–13 informational problems 111–12 labour law/market regulation failures 109, 116–17 restructuring of supply chains 109–13 state regulation failures 109 social sphere, role in regulation: see also civil society; labelling; NGOs; social risk regulation activism, importance 19, 22–4, 123, 192 conditions facilitating 22–3 Polanyi’s embedding metaphor as analytical basis 7–10: see also embedding/disembedding, criticisms of Polanyi blood regulation and 17–18, 181–99 discourse theory approach 17, 151 economic interests/social norms nexus 10–11, 20–1 embeddedness paradox 12–13, 153–60 financial market regulation 18–19 post-Polanyi developments 15, 89–91, 152–60 political sphere and 14, 90–2 rise of ‘regulatory capitalism’ 1–3, 18–19 scope 4–7 meaning making 5–6, 21–2 spatial dimension 5 transnational risk regulation 6–7 self-regulation and 18, 19–22 state law and 25–6 transnational risk regulation 14–19: see also transnational risk regulation ECAs and 16 nanotechnology 18 transnational institutions and 16–17 socialism 15, 48–9, 60n 10, 183 soft law regulation 25, 52, 88: see also Ethical Clothing Australia; fair trade and the unequal distribution of social risk Solow, RM 58, 59 sovereign debt Argentina 229–30, 231–2, 233, 234, 235–42, 243, 246–7 Brookings Commission Report (CIEPR 2014) 240

259

NML Capital cases 235–9, 248 punishment of/cost as result of NML Capital decisions 239–40 ECA projects and 82, 86, 94n 43, 97, 99–100 German role 19, 230, 232, 246–7 Greece/Syriza 2, 229, 230, 232, 234, 243–6 Ireland 230–1, 244 social sphere regulation 18–19 Ukraine 234, 251 Victorian bankruptcy law compared/ desirability of bankruptcy option 229–30, 240, 246–7 sovereign debt and the promissory narrative 18–19, 229–51 austerity programmes 2–3, 230–1, 232–3, 242–3, 244, 245–6 competitive advantage of making Argentine debt risk-free 240–2 conventional narrative alternative 246–50 conventional and promissory narrative compared 246–8 a modest but insufficient step 248 multi-value approach/conceptual and legal uncertainties 249–50 conversion of real into fictional commodities 233 cross-Atlantic influences 235 debt renegotiation dependence on creditor consent 233, 234, 247 the ‘French objection’ 243 impediments to 229, 233 judicial intervention, scope for 248 market bodies preference for 240 pricing effect of renegotiation clauses 247 debtor focus vs creditor responsibility 230–1, 234–5 double movement 233 ECB policy 2–3, 18, 231–2, 233, 242–6, 248, 249 debt repayment vs sustainability 245 US approach distinguished 243 interest rate manipulation, effect 244–5 justifiable punishment of rogue debtors 230, 234–5 moral basis 232–3 moral hazard and 244, 246 narrative salience 232 pari passu clause 236–7, 242, 249 political nature of problem 246 public communication, role 231–2 regulatory failure as failure of legal narratives 231–2

260

Index

socialisation of costs of repayment 242 sovereign immunity and 233–4 SPS Agreement determination of compliance DSU 11 standard of review approach 138–44, 148 legal dominance 134–48 scientific/risk assessment benchmarks for (SPS 2.2 and 5.1) 138, 146–8 EC—Hormones II 137, 142–4 expertise administrative nature of SPS regulation, significance 134, 139, 146–7 appointment of experts (DSU 13/SPS 11.2) 139–40 disconnect between international trade law and national regulation 131–3, 137–44 Dumb Duck Disease simulation 140, 141–2, 148 types of expertise required 24, 139–40, 144–8 WTO dispute settlement framework (DSU 11 and ancillary materials) 148 state’s right to control trade vs level playing field principle 137, 144–5 state: see market economy, state as driving force; market economy, state intervention/ public policy and; welfare state Stewart, F 106 Stigler, G 65 Stiglitz, J 58, 59, 60, 72, 184, 246 technological innovation, overview 201–3: see also nanotechnology Titmuss, R 188–90, 198 transnational risk regulation: see also social risk regulation blood regulation 17–18, 187–99: see also blood regulation civil society/non-state actors 4, 5–7

competition policy: see competition policy/transnational risks, economists’ approach to democratic accountability 185, 197 ECAs: see ECAs and human rights/ environmental abuses EU regulatory practice 185–7 examples 6–7 historical context 14–15, 181–2, 186–7, 188–90, 198–9 social sphere role 14–19 soft-law approach 185 striking the balance 186–7, 193–4 technological innovation and: see nanotechnology upsurge 184–5 WTO regime/SPS Agreement 16–17 transparency (ECAs) 85, 87, 95, 101–2 Ukraine (sovereign debt)

234, 251

Weiler, J 144 welfare state 2, 8n 36, 43, 45–6, 49–51, 159–60 WHO (ECBS) work on blood and plasma products 197 Wolf, M 229–31, 235, 244, 245–7 Woo, HKH 63–4 World Bank 86–8 WTO regime: see also SPS Agreement derogations/justification for violations 134, 135 as disembedded regime 134 GATT/WTO compared 135 legal domination 132–3, 134–48 national regulation and 134–7, 138 standard of review (DSU 11 and ancillary sources) 138–44, 148 trade liberalisation as core 134–5 Yeung, K 67n 37