The views expressed in this report are those of the authors. Their statements are not necessarily endorsed by the affiliated organisations or the Global Challenges Foundation.

What are possible alternatives to top down reform that may result in lasting positive change of our global governance institutions? Grand design projects rarely deliver on their promises, but there are other options. Existing authorities could act as change agents, and selected change institutions, by offering different rules for participation in decision making, could open pathways to a better future.

Institutions have been called the ‘rules of the game’ that humans give themselves to coordinate and constrain their actions. They come in different flavors, formal and informal, private and public, highly specific and scalable. This descriptive account of institutions does not explain where they come from and how institutional change can be instigated. Yet, these are the critical questions for anyone attempting major reforms with the purpose of changing collective behavior. The bigger the quest for change, the greater the temptation to resort to grand design. Unfortunately, grand designs have rarely delivered what they promised.

The debate about the pros and cons of sweeping top down reforms vs. incremental bottom up change went viral during the early stages of transition in the former socialist world. Radical reformers urged for speed and the wholesale adoption of institutions that were compatible with a market economy. Gradualists warned that such reforms would remain at the surface and not result in lasting change. Students of comparative history argued that the combination of pre-existing conditions and the choice of strategy would invariably produce outcomes different from the ideals pursued, possibly caricatures, even mutants.

In the field of comparative law, a similar debate has been waged under the headline of “legal transplants”. The same formal laws that work in one country often have little effect when transplanted into foreign countries. Sometimes they bring about minor irritations before being absorbed into existing practices; at others, they are resented and circumvented wherever possible. Not infrequently, well meant reforms are captured by existing power wielders who subvert them to serve their own interests.

The legal transplant effect can be observed in common law and civil law jurisdictions alike. There is, however, an important difference between the two regimes: the codified civil law system creates the appearance that it is easily transplantable simply by enacting an identical code elsewhere. And yet, the civil codes are codifications of existing practices and well-known legal principles in their countries of origin. When transplanted to another setting, they fail as a guide of behavior for populations or groups with different values, customs and habits. The common law travels even less well. It has to be codified prior to transplant, thereby altering its very nature, or courts and judges trained in the common law have to be transplanted along with the law.

Historical and comparative evidence seems to indicate that grand design has only rarely brought about lasting change. There is a simple reason for this difficulty: when it comes to human behavior, it is impossible to start from a blank slate. Humans are social creatures that follow the rules of the game they know. They are reluctant to give up what works for them in light of the conditions they face (and likely sanctions for deviant behavior), especially if the new rules are untested. After all, institutions are meant to coordinate the expectations of the many, not the few, and unless first-movers can be assured that others will follow, they will not make the leap.

Is change therefore impossible? Will humans necessarily stick to a given institutional path even if, as in the case of climate change, they collectively and knowingly approach the abyss? Not necessarily. Change can be brought about by ‘change agents’ or by ‘change institutions’.

Historical and comparative evidence seems to indicate that grand design has only rarely brought about lasting change.

The most important change agents are existing authorities whose actions already serve as a coordination device. The legitimacy of an authority, however, cannot be commandeered: it must be earned and can be lost. Today’s faith in a given authority (the leader of a country, a political party, a religion, or judges of the highest courts) may dissipate tomorrow. Not even the most powerful state can hold an entire people at gun point for too long, and no legal system has resources sufficient to ensure that law breaking on a massive scale will be effectively sanctioned. The fear of losing followers thus ties the hands of incumbent authorities. Revolutionaries often employ violence to affect regime change. They often have to rely on brute force for extended periods, lest anarchy takes precedence over regime change or the system regresses into its previous self.

Like other institutions, ‘change institutions’ establish the rules of the game, but they do so with a twist. They do not seek to determine behavioral outcomes, but are process oriented. They set forth who should participate, what counts as a decision, and the procedures that shall be followed for implementing the decisions that have been taken. Change institutions are most effective within existing rules of the game. They do not openly challenge existing norms and they piggy back on available enforcement mechanisms. By changing access and participation rules, they can change (or subvert) the system from within.

Two examples may help illustrate the power of change institutions: the English courts of Chancery, and arbitral tribunals. Both are parallel systems for resolving similar disputes within a given legal order, but under different adjudicators and with different decision making rules. Both institutions openly compete with state courts by offering special rewards (equitable outcome, speed, secrecy, expertise) to those who opt into their regime, and their rulings are enforceable on the same terms as court rulings. In fact, rulings by foreign and international arbitral tribunals are more likely to be enforced than foreign court rulings, if only because there is an international convention that compels countries to do so, and there is not comparable convention for courts. 

Powerful global actors, also dubbed the ‘new global rulers’, have used similar strategies for altering the rules of the game in countries where they wish to do business. They have created parallel decision making processes and dispute resolution mechanisms that insert themselves at critical junctures into existing institutional practices, whether legislative and regulatory processes, or law enforcement. Similar strategies could and arguably should be pursued for protecting global public goods, such as our climate. The trick is to infiltrate the existing rules of the game, not to invent a new scheme from scratch.

Katharina Pistor

Katharina Pistor is the Michael I. Sovern Professor of Law at Columbia Law School and director of the Center on Global Legal Transformation. Her research and teaching spans corporate law, corporate governance, money and finance, property rights, and comparative law and legal institutions. She has published widely on questions of comparative and global governance of economic relations, including in the Journal of Comparative Economics, the American Law and Economics Review, and with Chicago and Columbia University Presses. In 2012 she was co-recipient (with Martin Hellwig) of the Max Planck Research Award on International Financial Regulation and in 2015 she was elected member of the Berlin-Brandenburg Academy of Sciences. She is also the recipient of research grants by the Institute for New Economic Thinking and the National Science Foundation.