Exit and voice in the age of globalization.

• Author: Benvenisti, Eyal

1. INTRODUCTION: THE NEED FOR A NEW PARADIGM TO ANALYZE GLOBAL MARKET FAILURES

   The "globalization" of commerce provides ever-growing opportunities for producers, employers, and service providers to shop the globe for more amenable jurisdictions. While they enjoy a "race to the top," an international "race to the bottom," spawned by decreasing relocation costs, threatens to compromise the, achievements of the welfare state and lower standards of consumer protection. National governments, weakened by competition that entails leaner budgets, find it increasingly difficult to cooperate in the appropriation of crucial shared natural resources, seriously endangering these assets while damaging the environment. Not only does the growing global competition create both efficiency losses and social-welfare problems, it also challenges principles of democracy and self-determination. As competition constrains nations' available choices, individuals have fewer opportunities to play a meaningful role in shaping their lives through the national collective decisionmaking process.

   Largely pessimistic analyses of these collective action challenges have been dominated by the Westphalian paradigm -- a model of international relations that views global conflicts solely in terms of the 200-some sovereign states that constitute the global arena. The paradigm operates on the still-prevailing premise that nation-states are unitary actors engaging in international competition.(1) Even those writers who are themselves aware of the diverse domestic forces that actually shape national policies stop short of identifying the deficiencies -- both descriptive and normative -- of the Westphalian paradigm.(2)

   This Article argues that the Westphalian paradigm is inadequate: by focusing exclusively on interstate relations, it obfuscates the crucial role played by competing domestic interest groups in the international arena. This Article advocates a different paradigm -- the transnational conflict paradigm -- that better explains various collective action failures and points the way toward mechanisms that might correct these problems. At its core lies the observation that states are not monolithic entities; and that many of the pervasive conflicts of interest are in fact more internal than external, stemming from the heterogeneity within, rather than among, states. Indeed, the transnational conflict paradigm shows how domestic interest groups often cooperate with similarly situated foreign interest groups in order to impose externalities on rival domestic groups. The better-organized, and hence more politically effective, domestic interest groups -- usually producers, employers, and service suppliers -- cooperate with similar interests in different states to exploit less-organized groups such as consumers, employees, and environmentally vulnerable citizens. Thus, the transnational conflict paradigm attributes many global collective action failures to conflicts among warring domestic groups rather than international competition among states.

   The transnational conflict paradigm also exposes how crucial constitutional and international norms actually perpetuate the power imbalance among rival domestic interest groups. Current norms and procedures, both constitutional and international, are inherently slanted in favor of groups with historically stronger domestic political power. Constitutional and administrative legal scholarship has long been alert to the observation that public life consists of "competition among pressure groups for political influence."(3) Accordingly, public choice theorists have analyzed domestic norms, procedures, and institutions as potential tools for regulating this competition. But at the same time, these scholars paid little attention to the domestic ramifications of international law's laissez-faire framework, which continues to provide a convenient exit option for those finding domestic controls too stringent. Producers can evade tight domestic regulations simply by shifting their activities to a different jurisdiction. In addition, international commercial organizations, such as the International Coffee Organization(4) and the International Tin Council,(5) enable producers and importers to perform a "virtual exit," whereby they obtain immunity from the jurisdiction of national courts, evade antitrust and other national regulations, and avoid liability in case of insolvency.(6) These exit options, facilitated by constitutional and international law and closely guarded by smaller domestic groups, drive the global race to the bottom as well as other collective action failures.

   This Article explores the ramifications of the still dominant Westphalian paradigm from the perspectives of efficiency, democracy, and equity. It then suggests norms, procedures, and institutions to correct the current intergroup imbalance, and thereby offers better prospects for transnational cooperation and more equitable, sustainable, and democratic management of national and global commons.

   Part II analyzes the transnational conflict paradigm and examines how sectarian domestic interests shape international negotiations and politics, and consequently influence the development of international law. Part III offers an overview of the systemic outcomes of that sectarian influence, namely the establishment and entrenchment of constitutional and international norms, procedures, and institutions to secure domestic small group influence. Part IV assesses the transnational consequences of the dominant, and essentially unregulated, role played by small interest groups in the formation of those norms. It then shows how the resulting legal bias has contributed to global market failures, current trends away from the welfare state, and the demise of effective citizen voice in collective decisionmaking. Part V then develops a theory of transnational institutions that could limit small interest group capture while offering more effective opportunities for democratic participation in national and transnational decisionmaking.

2. THE SOVEREIGN STATE AS THE AGENT OF SMALL INTEREST GROUPS

   After describing the domestic interaction among the various actors within the state, this Part applies public choice theory to demonstrate the relative edge smaller domestic interests enjoy over larger groups in shaping the outcome of international negotiations. As a result, specific treaties, and international law in general, are skewed in favor of such groups.(7)

   1. The Transnational Conflict Paradigm

      Political economists long ago demonstrated convincingly that state institutions provide an effective means for certain domestic interest groups to exploit less organized domestic groups in the competitive market for political goods (such as taxes, subsidies, and favorable market regulation).(8) In this market, more organized groups, namely those composed of a relatively smaller number of individuals, can outbid larger groups because the former realize both higher per capita benefits from cooperation with fellow group members and lower costs of monitoring and sanctioning free riders.(9) Hence, other things being equal, smaller groups, such as producers and employers, will obtain collective goods more efficiently than larger groups of consumers or employees, thereby securing a disproportionate share of the aggregate social welfare while externalizing part of their production costs onto the larger groups.(10)

      Small groups' greater organizational capabilities also provide them a competitive edge in obtaining and assessing information on policies.(11) More effective monitoring of the government prompts politicians and bureaucrats to bias policy in favor of those who can appreciate their efforts. The larger body of ill-informed voters hardly notices their relative loss or attributes it to random factors.(12) Thus, the information rationale suggests that small-group policy bias stems not necessarily only from more effective lobbying, but also from more efficient monitoring of the policies once adopted.(13) It also explains the growing influence of Non-Governmental Organizations (NGOs), which advance the cause of larger groups by promoting, for example, human rights or protection of the environment. The information they gather and disseminate improves the effectiveness of monitoring bodies, such as the legislature, and reduces the incentive to adopt policies that are biased against the larger groups.(14)

      As Olson elaborates in The Rise and Decline of Nations, because smaller groups could organize themselves more quickly within the nascent Westphalian system of sovereign states, they were able to use the states as instruments for obtaining a disproportionate share of resources for themselves.(15) Indeed, the political institutions of the emerging nations reflected just such a skewed power relationship between the smaller and larger groups. Constitutions insulated the smaller groups' share from majority vote(16) without restricting the opportunities for small groups to influence politicians and bureaucrats.(17)

      Domestic political dynamics (and consequently, transnational political dynamics) involve not only large and small groups vying for political influence, but also the interests and preoccupations of politicians, bureaucrats, and judges. Politicians, whose immediate interest is election or reelection, broker public goods in exchange for campaign contributions or other political support (in nondemocratic regimes) or personal financial gains (in nondemocratic regimes). The bureaucracy, on the other hand, if properly insulated from the political system, is relatively immune to the immediate influence of interest groups;(18) judges even more so.(19) The relative insulation of bureaucrats and judges from political influence provides a useful tool for competing interest groups. In matters where policy shifts due to fluctuating political influence are undesirable, groups may...