In Regulation and Governance

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In Regulation and Governance, 2014
The Domestic Drivers of Transgovernmental Regulatory Cooperation


David Bach and Abraham Newman


Transgovernmental cooperation among domestic regulators has generated considerable interest among scholars and policymakers. While previous research has focused on describing such regulatory networks, we know very little about what drives individual jurisdictions to join them. The question of membership is important because it determines the reach of rules and standards promulgated by a given network, and because it is logically prior to understanding rulemaking dynamic within a network. We develop a set of hypotheses that highlight the role of domestic political factors in shaping network membership. Our empirical analysis, using an original data set for transgovernmental cooperation in securities and insurance regulation, finds that the institutional form of domestic market regulation as well as the relative domestic weight of the industry are closely correlated with membership. All else equal, jurisdictions with independent regulatory agencies and those where the industry in question represents a large share of GDP are much more likely to join the respective network than jurisdictions without these characteristics. The paper underscores the important interactions between domestic and international factors for informal cooperation, an issue that has become increasingly central to global governance.

Scholars of international cooperation increasingly recognize the importance of informal non-treaty-based institutions in the day-to-day management of global governance. Transgovernmental networks1 comprised of domestic regulatory officials have emerged in a broad range of policy domains including financial markets, pharmaceuticals, energy, the environment, data privacy, anti-trust, and human rights.2 Policymakers frequently rely on these networks to share best practices, coordinate policies, harmonize regulations, and provide mutual enforcement assistance. Despite the fact that agreements reached through transgovernmental networks are generally non-binding on members, research has shown that their promulgations can have discernible effects on domestic policy (Bach and Newman 2010). This is because network-based governance unfolds through a two-step process. First, domestic regulators – often without close supervision by elected officials – engage in international policymaking via networks to harmonize standards and technical rules across borders. Subsequently, these regulators implement these standards, rules, and best practices at home.

Most research so far has focused on describing the emergence and characteristics of such networks. A few studies have looked at policy dynamics within them. However, no effort has been made so far to systematically explain network membership patterns. Knowing who joins a given network when and why is critical, however, if we want to fully grasp the current role and future potential of transgovernmental networks in global governance. Moreover, network membership poses an intriguing puzzle in its own right. The economic costs of membership are quite low, more akin to the annual dues of a professional association. Nevertheless, many jurisdictions either fail to join a relevant transgovernmental network or wait many years before signing on. If membership is voluntary and there are few institutional barriers to entry or exit, what accounts for observable variation in membership patterns?

The first wave of research on transgovernmental cooperation in the 1970s stressed economic development and interdependence as underpinning demand for cross-border engagement – wealthy countries open to global markets were most likely to participate actively in global governance.3 Both arguments are compelling. However, they alone are insufficient to explain the significant variation in participation over time and the inclusion of an ever-growing number of small jurisdictions whose markets barely impact those of leading players. The US and Peru were founding members of IOSCO in 1983. Economic development and global integration might explain the former’s decision to link up with its foreign counterparts, but did they also drive the latter’s? And why did the United Arab Emirates only become a member in 2003, after more than 80 other countries had already joined?

We argue that domestic political factors play a key role in driving transgovernmental network membership. To understand a jurisdiction’s decision to join, we have to account for the interests, incentives, and constraints shaping the behavior of domestic regulatory institutions and actors (Wilson 1991; Goodman and Pauly 1993; Gilardi 2002; Gilardi 2007; Singer 2007). Drawing on the political economy of regulation literature, we hypothesize that the structure of domestic regulation and sector dynamics create powerful demands for transgovernmental cooperation. In particular, jurisdictions with independent regulatory agencies (in contrast to institutional alternatives, such as ministry- or parliamentary oversight) may see such cooperation as a means to avoid interference by political principals as well as a mechanism through which to build domestic political legitimacy (Thatcher 2002; Carpenter 2001; Singer 2007).4 In addition, we expect a jurisdiction’s incentive to join will vary with the importance of the sector in the domestic economy. The larger the domestic industry in question, the more domestic market participants have a stake in and are affected by global rules, and therefore the greater their interest in ensuring their jurisdiction gets involved in international regulatory efforts (Singer 2007).

We test our domestic politics argument in a novel dataset of network membership for financial securities and insurance cooperation. Created in 1983, the International Organization of Securities Commissions (IOSCO) initially counted regulators from 12 countries amongst its ranks. By 2006, its membership had grown seven-fold and regulators from 85 jurisdictions were represented as full members, making IOSCO the preeminent global forum for securities regulation and a prime example of a transgovernmental regulatory network. IOSCO’s counterpart in the field of insurance, the International Association of Insurance Supervisors (IAIS), was founded in 1995 by regulators from 61 jurisdictions. Its membership had almost doubled by 2006 when it reached 116, making it one of the transgovernmental networks with the broadest membership scope. Importantly, both networks are prototypical informal institutions that rely on voluntary participation of domestic regulators (securities commissions and insurance supervisors, respectively) rather than treaty-based public international law (Zaring 2005).

Our econometric analysis finds considerable support for the domestic politics argument. Controlling for a broad range of other variables, we find for the securities- and insurance networks that jurisdictions with independent regulators were significantly more likely to have joined the corresponding transgovernmental network than those without independent regulators. Similarly, jurisdictions where the sector in question represented a larger proportion of GDP were significantly more likely to count their regulator among the network’s membership than those jurisdictions with comparatively smaller sectors.

The findings contribute to several important lines of inquiry in global governance. First, to our knowledge, they offer the first quantitative investigation of factors associated with membership in transgovernmental networks. Second, the findings further illuminate the two-way interactions of domestic and international factors, including law and regulation, in producing global governance.5 Our study shows that the development of regulatory institutions domestically plays an important role in the rise of networked transgovernmental cooperation as a distinct form of global governance. Third, by highlighting the role that sector size plays in underpinning demand for transgovernmental cooperation, we extend earlier insights about the role of sectors in shaping trade preferences to the domain of transgovernmental networks and global governance more broadly (Frieden and Rogowski 1996).

The paper proceeds in four sections. We first track the rise of transgovernmental networks, particularly those in securities and insurance. The subsequent section develops our domestic political economy argument. We then present the dataset, methodology, and our results. The conclusion considers implications for both research and public policy in the area of transgovernmental regulatory politics and global governance.

Transgovernmental Regulatory Networks in Global Governance

Since at least the 1970s, international relations scholars have tracked the growing international activities of domestic regulatory actors. Dubbed “transgovernmental relations” in seminal work by Keohane and Nye (1974; 1977), technocratic coordination among domestic officials from distinct jurisdictions was seen as a potent tool to confront governance challenges in a world of complex interdependence. Scholars examined direct links among lower-level government bureaucrats in areas such as economic and monetary policy (Russell 1973), food policy (Hopkins 1976; Hopkins and Puchala 1978), energy policy (Keohane 1978), and the specific case of US-Canada relations (Holsti and Levy 1974). More recently, scholars have identified such networks in policy domains as diverse as aircraft certification (Berman 1993), pharmaceuticals (Bach and Newman 2010), competition policy (Djelic and Kleiner 2006), data privacy (Newman 2008), human rights (Cardenas 2003), nonproliferation (Lipson 2005-2006), and the environment (Raustiala 1997). The literature uses the term ‘network’ because it captures the informal, non-treaty-based nature of cooperation, which places the lion’s share of work in the hands of members organized in committees rather than in a large centralized bureaucracy.

During the initial rise of transgovernmental politics in the 1970s, veteran diplomats such as America’s George Kennan (as quoted in Hopkins 1976: 413-14) frowned upon this form of global governance: “It is certainly true that there has been a growing incidence of these other departments outside the State Department going off on their own. This has been a chronic problem. How do you keep people who often have no idea about foreign policy from doing things completely uncoordinated with a President’s policy?” Yet by the late 1990s, this view had changed. Scholars heralded transgovernmental networks as the building block of a “new world order” in a post-Cold War world (Slaughter 1997; Slaughter 2004). Policymakers in both Brussels and Washington explicitly endorsed such cooperation and set an agenda to foster transgovernmental regulatory coordination via networks (Bermann, Herdegen et al. 2000). Besides the demand for cooperation resulting from globalization, scholars identified the transformation of the modern state as the principal driving force. “The state is not disappearing,” argued Anne-Marie Slaughter in 1997, “it is disaggregating into its separate, functionally distinct parts. These parts – courts, regulatory agencies, executives, and even legislatures – are networking with their counterparts abroad, creating a dense web of relations that constitute a new, transgovernmental order” (Slaughter 1997). The links established among domestic regulatory agencies are particularly strong. “Transgovernmental regulatory networks,” Slaughter (2001) argues, are “fast, flexible and decentralized – attributes that allow them to function particularly well in a rapidly changing information environment.” Echoing this sentiment, Raustiala (2002) sees transgovernmental networks as constituting the critical piece of the “architecture of international cooperation” for the 21st century.

Transgovernmental regulatory networks come in many variations. The scope of membership is one key dimension along which such networks vary. Some networks are quite exclusive. The International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH), for example, only comprises regulators from three jurisdictions: the US, Japan, and the EU (Bach and Newman 2010). Membership in the Basel Committee of Banking Supervisors has grown from initially 10 members in 1974 to 27 in 2010, but it remains an exclusive club of leading financial markets (Kapstein 1989; Singer 2004). Membership in other transgovernmental networks, in contrast, is open to all jurisdictions. Such open networks span a broad range of issue areas including the International Competition Network (ICN), the International Association of Insurance Supervisors (IAIS) or the International Network for Environmental Compliance and Enforcement. In this study we are primarily interested in the second group, networks that are in principle open to all jurisdictions rather than the more exclusive, invitation-only clubs.6

The spread and growing importance of transgovernmental regulatory networks focuses attention on an issue that is as of yet wholly unexplored empirically: the question of membership. In fact, a large number of transgovernmental networks fall into the second camp and are open to any jurisdiction that meets basic membership criteria. Annual membership fees are nominal, often amounting to just a few thousand dollars. Despite the fact that membership is open and virtually free, there are several reasons to think that membership matters. In a formal sense, membership is required to fully participate in the organization. It provides voting rights, the ability to serve and head committees, attend meetings, and receive network information and updates. There is growing evidence that membership correlates with information sharing and capacity building (Bach and Newman 2010). Similarly, membership is required to participate in the development of the network’s agenda. While membership is only one indicator of network participation, it is clearly the most basic form and thus a logical starting point for any inquiry in this space.7 What then makes a jurisdiction join a given network? And why do some jurisdictions refuse to join or hold out for many years? More generally, what accounts for the timing of membership decisions across jurisdictions and policy domains?

We explore these questions empirically for two distinct transgovernmental regulatory networks with open membership policies: the securities networks anchored by IOSCO and the insurance network organized around IAIS. Just a casual look at the evolution of membership in the two networks shows some intriguing patterns and puzzles. IOSCO started out with 12 ordinary members in 1983 and in 2006 counted regulators from 85 jurisdictions amongst its ranks.8 The network’s initial membership thus represented fewer than 20 percent of countries that had stock exchanges at the time, whereas its 2006 membership encompassed more than 80 percent of such countries. In contrast, IAIS had 61 founding members in 1995 and the organization’s membership had swelled to 116 by 2006. IOSCO was founded 12 years before IAIS so the fact that most jurisdictions joined the securities network before the insurance network should not surprise. Yet a closer look reveals some interesting patterns and variations. Some countries, such as Russia, Slovakia, and Mongolia, joined both IOSCO and IAIS in the same year, though the year in which they did differed sharply – 1995 for Russia, 2001 for Slovakia, and 2003 for Mongolia. Others, such as Colombia, a founding member of IOSCO in 1983, and Trinidad and Tobago, an early IOSCO member in 1986, only joined IAIS in 2007 and 2001, respectively. Still others, such as Ghana, were founding members of IAIS in 1995 and only joined IOSCO several years later, in the case of Ghana, for example, in 2000. Finally, more than 30 countries, including Iceland, Namibia, Azerbaijan, and Kuwait, are members of IAIS but not IOSCO. In contrast, all IOSCO member jurisdictions are also represented in IAIS.

The principal reason for our focus on the securities and insurance networks is that they offer a good mix of similarities and differences. Both are exemplary of contemporary transgovernmental politics as membership is open to regulatory authorities from any jurisdiction, decisions are non-binding, and involvement varies from those members active in multiple working groups to those who barely participate in annual meetings. Both networks are also concerned with aspects of global financial market regulation. At the same time, there are important differences between them as a brief look at the two networks’ respective evolution shows.

Beginning in the mid-1970s, the securities regulators from a handful of Latin American countries along with the US Securities and Exchange Commission (SEC) and regional Canadian regulators began to meet occasionally, mostly to foster North-South knowledge transfer. After the British and French regulators showed interest in joining the group, the existing members in 1983 agreed to open membership beyond the Americas and formally re-named their group the International Organization of Securities Commissions. Besides regulators from Britain and France, their counterparts from South Korea, Australia, and Hong Kong were among the first from outside the Americas to join the incipient organization.

According to IOSCO’s bylaws,

[Ordinary Membership] is open to a securities commission, or a similar government or statutory regulatory body that has primary responsibility for securities regulation in its jurisdiction. If there is no governmental, or statutory, regulatory body in a jurisdiction then a self-regulatory body, such as a stock exchange, in that jurisdiction is eligible for ordinary membership of IOSCO. However, the ordinary membership of a self-regulatory body admitted to IOSCO will lapse if a governmental regulatory body from the same jurisdiction becomes the ordinary member for that jurisdiction. (IOSCO 1995).

Indeed, the organization’s membership features (or has featured in the past) the full institutional diversity of securities market regulation. Ireland, Uruguay, and Malawi, for example, are represented by their central banks. Until 2004, the voting rights for Malta, Bahrain, and Barbados were exercised by these countries’ stock exchanges. Japan was represented by its Ministry of Finance until it created an independent regulatory agency in 1999. Germany is a particularly interesting case. During the 1990s, its voting rights were exercised first by the self-regulatory German Federation of Stock Exchanges, then the federal Ministry of Finance, and, since 1995, by an independent regulatory agency modeled on the SEC (Lütz 1998). According to IOSCO’s first Secretary General Paul Guy, from the beginning, IOSCO’s members preferred the greatest possible geographic coverage to any “ideologically driven quest for member homogeneity.”9 Nevertheless, in its landmark Objectives and Principles of Securities Regulation, a set of regulatory benchmarks, the organization took a clear stand by stating that “the regulator [over a market] should be operationally independent,” it “should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers,” and its staff “should observe the highest professional standards” (IOSCO 1998). While formally open to diverse member organizations, IOSCO thus clearly favors members who are independent regulatory agencies such as the SEC. In fact, a not insignificant number of stock exchanges, central banks, and finance ministries that had at one point been voting ordinary IOSCO members subsequently passed on voting rights to newly created independent securities regulators in their respective jurisdictions.10 Overall, ordinary membership grew steadily after 1983, experienced a boost during the time of post-communist market-oriented transitions, and began to level off during the 2000s (Figure 1).

Figure 1: Membership in IOSCO and IAIS

IAIS cumulative membership

IOSCO cumulative membership


IAIS has its origins as a loose network of market regulators who would meet alongside the annual conference of the U.S. National Association of Insurance Commissioners (NAIC). A small number of foreign regulators began to attend the meetings in the late 1980s, including Bermuda and a few European representatives. Initial efforts focused primarily on capacity building and information exchange. In 1995, IAIS began formal meetings and established a secretariat at the Bank of International Settlement (BIS) in Basel. IAIS quickly started working on sector standards and was integrated into the International Monetary Fund’s economic standards project. IAIS core standards are now used by the IMF to evaluate national sector stability and development.

As is the case with IOSCO, institutional representation among IAIS’ membership ranks varies considerably, including central banks, economy- or finance ministries, and insurance commissions. Membership is open to any insurance “regulator/supervisor,” according to IAIS’ bylaws. Ireland, for example, is represented by its central bank, Germany by the financial markets supervisor, and New Zealand by the ministry of finance. In several cases, such as the US, sub-national insurance commissioners lead delegations. While membership is not conditioned on regulatory independence, the IAIS benchmark core principles recommend supervisory structures that are, “operationally independent and accountable in the exercise of its functions and powers” (IAIS Core Principles p. 9).

Table 1 provides a quick summary snapshot of the two networks.

Table 1: IOSCO and IAIS



Year of Creation



Number of Founding Member Countries



Number of Member Countries in 2006



Areas of Activity

Regulatory harmonization, standard setting, best practice development and diffusion; technical assistance and training; enforcement cooperation; coordination with other international financial forums

Development of principles, standards, and guidelines for insurance supervision; technical assistance and training; coordination with other international financial forums

Based in


Bank for International Settlements, Basel

Explaining Membership – Domestic Roots of Global Cooperation

While the literature on transgovernmental politics reaches back to the 1970s, the question of membership in transgovernmental networks has been virtually ignored. In fact, there is a general lack of rigorous empirical research, particularly quantitative research, on these networks. As Slaughter asserts in a far-reaching study, “for present purposes, it is more important to identify and describe government networks than to explain them” (Slaughter 2004:40). Most existing studies indeed merely describe networks in particular domains, compare them across domains, and explore the ways they work. Few empirical studies have focused on the effects of networked cooperation specifically on participating substate actors (Bach and Newman 2010).

The goal of this article is to develop a domestic political argument to shed light on demand factors that drive a jurisdiction’s decision to join a regulatory network (Mattli and Wood 2009). In particular, we highlight the incentives and constraints faced by domestic regulatory actors as well as the interests and influence of national firms. We focus on domestic political factors for several reasons. One of the major insights of the interdependence literature of the 1970s and 1980s was to refocus attention on the role of domestic politics in international affairs. Since then, scholars have examined the role of domestic politics in a host of political economy concerns ranging from cooperation on trade to membership in international organizations (Mansfield and Pevehouse 2006). The overarching finding is that the configuration of the state and state-society relations affects the drivers, intensity, and preferences of actors engaging in global politics. We think such an approach should be particularly relevant for transgovernmental cooperation as such networks are comprised of domestic regulatory actors and are thus likely to be affected by national political dynamics. Moreover, regulation frequently involves distributional trade-offs that go to the heart of firm- and sector competitiveness. We therefore anticipate that the organization of regulation as well as the structure of the market will matter for whether jurisdictions join such networks. In what follows, we develop our argument about domestic political factors that favor membership. We then review existing literature to identify additional factors that might play a role.
Domestic Demand Factors – Regulator- and Sector Incentives

Our starting point is to scrutinize the domestic organization of regulation. Regulatory structure can vary across economies, sectors, and time. Formal delegation of regulatory authority to an independent regulatory agency is only one among several institutional alternatives (Epstein and O'Halloran 1999; Bendor, Glazer et al. 2001; Thatcher and Stone Sweet 2002). An institutional innovation frequently associated with the New Deal in the US, regulation through delegation to independent agencies has only recently spread around the world, with few instances prior to 1990 (Jordana, Levi-Faur, Marin 2011; Gilardi 2005). In fact, the prevailing model in many countries and sectors is still that regulatory authority is not delegated and is instead exercised by a ministry or other public body serving at the whim of elected officials or political leaders. Even where regulatory authority is delegated to a public agency, the degree of independence can vary. Earlier research has identified non-partisan personnel rules, independent funding sources, budgetary autonomy, and leadership tenure that exceeds any single electoral term as factors associated with greater independence. Building on this literature, we argue that formal autonomy from conventional centers of foreign policymaking – especially cabinet-level officials in foreign-, trade-, or economic ministries ordinarily involved in external affairs – increases the likelihood of domestic regulators forging cross-border links. To be sure, there are also instances where regulatory authority is delegated to multiple, partially overlapping and at times competing agencies, and this might affect a jurisdiction’s likelihood to engage in transgovernmental cooperation. We do not explore this additional dimension of institutional variation in this article and focus instead on the presence or absence of an independent sector regulator.

Not only should independent regulators be less constrained and more capable to network with foreign counterparts than institutional alternatives, they also have powerful incentives to do so. Drawing on literature on bureaucratic politics and bureaucratic autonomy, we argue that transgovernmental cooperation helps independent regulators minimize political interference in their affairs while building up their reputation and authority. On the one hand, independent regulators, as agents, are always weary of interference by their principals (Thatcher 2002). Independence is not the same as insularity. As Singer (2007) and others have shown, even formally independent and quite powerful regulatory agencies must be responsive to constituents. In the US, legal mandates such as the Administrative Procedures Act ensure that regulators engage in constituent dialog as they make rules, or else the courts might intervene (Kagan 2001). More broadly, large-scale scandals or regulatory failures cannot only provoke focused intervention by political principals but even lead to the replacement of a given regulatory regime by a new order (Singer 2007). Transnational regulatory networks serve as a source of regulatory best practice and capacity building, and we hypothesize that independent regulators therefore have an interest to join such organizations in order to improve regulatory quality at home. Moreover, harmonization and enforcement cooperation at the transgovernmental level can reduce interdependence frictions that might reverberate through the domestic political economy. By joining a network, domestic regulators can access information that may forestall regulatory failure as well as prevent shocks emanating from the global level, thus reducing the likelihood of political intervention at home.

Moreover, independent regulators face a legitimacy problem when compared to the institutional alternatives they commonly replaced, as they are not elected to their posts or benefit from the political-base of parties. The literature on bureaucratic autonomy has found that technocratic agencies therefore try to build their reputation as an alternative source of authority (Carpenter 2001; Singer 2007). Reputation can then be used as political capital as regulators work to maintain market stability and defend against efforts to weaken regulatory standards (Carpenter 2010). In this context, regulatory cooperation may serve as a powerful mechanism to bolster an independent regulator’s legitimacy at home. For many smaller countries, such networks bring regulators in contact with counterparts from leading markets. Members can then reference relationships with other regulators as well as recognition by the international community as they navigate domestic political reform or policy implementation debates.

The bureaucratic politics and bureaucratic autonomy literatures strongly suggest that the form of domestic regulation matters for global cooperation (Putnam 2009; Bach 2010). All else equal, jurisdictions that have delegated regulatory authority over a given sector should be more likely to join the corresponding transgovernmental network than those that rely instead on institutional alternatives, such as industry self-regulation or ministerial control. It is worth stressing again that neither IOSCO nor IAIS restrict membership to independent regulatory agencies. While expressing a preference for this model, membership is open to any domestic regulatory authority, regardless of its institutional form.

There is considerable anecdotal evidence that supports our expectation. When Armenia’s securities regulator joined IOSCO in 2005, its Chairman Eduad Muradyan was clear as to the main benefit: “The importance of membership in this organization is that it first of all enhances the RA Securities Commission's reputation,” he explained.11 In addition, he said, “Armenia’s membership in the organization will allow the country to receive the information on other countries’ legislation on nonbank financial risk management, which is necessary for the RA Securities Commission’s activities.” Finally, Muradyan concluded, “From now on the RA Securities Commission has unlimited access to the international experience in the management of nonbank financial markets.”12 This focus on learning and access to expert know-how was also at the heart of Uzbekistan’s decision to seek membership in IAIS for its insurance supervisor: “Membership in this association will allow access to the insurance legislation of IAIS member states and thus will make it possible for Uzbekistan to harmonize its insurance legislation and bring it in line with international standards,” a government official explained.13 Echoing this sentiment, the Director General of the Jordanian insurance supervisor, Bassel Hindawi “strongly encouraged the insurance regulatory and supervisory authorities from the [Arab] region to join the IAIS to benefit from and to contribute to the ongoing activities to develop best practices in insurance supervision.”14 Finally, when Iraq’s insurance regulator – the Insurance Diwan – joined IAIS in 2006, its spokesperson declared that “Membership of the IAIS will help the Diwan to carry out its responsibilities as we can learn from solutions and approaches that have been implemented in other countries, and which may be suitable for Iraq.”15

In addition to examining the incentives and constraints of the regulators, we probe the preferences of the regulated. Since the subject of network cooperation is frequently the establishment of industry standards and best practices, transgovernmental networks can have distributional consequences in domestic markets. Agreements on capital adequacy, licensing, or disclosure standards all have potentially significant dollars-and-cents implications for companies (Drezner 2007). Research on regulatory politics as well as liberal theory in International Relations suggests that domestic firm pressure will affect a jurisdiction’s decision to join a regulatory network. Liberal theory generally expects the interests of large industries to inform state preferences in international relations (Frieden and Rogowski 1996). At the most basic level, we hypothesize that firms affected by regulation set globally will be interested in having their jurisdiction represented in such negotiations. Network membership plays two important roles for firms. On the one hand, it offers industry an opportunity to lobby for rules that will help them compete. On the other hand, it offers an information channel through which the firms can learn and prepare for rules that might be coming in the near future (Buthe and Mattli 2011). Singer (2007) shows for the case of financial markets the link between industry interests and a jurisdiction’s preferences for regulatory cooperation. Regulators must address the concerns of key domestic stakeholders or risk constituent pressure on regulators’ political principals. At the same time, principals will be more likely to take action if the sector in question is large and domestically important. Size and salience determine to what extent turbulence in the sector could disrupt the domestic economy and thus become a source of powerful political pressure (Copelovitch and Singer 2008). That is why we suspect that relative sector size is another domestic variable driving jurisdictions’ decision to join a given network.

When it comes to the relative domestic importance of securities and insurance markets, jurisdictions vary widely. In 2006, for example, the total value of the Ugandan stock market amounted to barely more than one percent of the country’s GDP. Mongolia, Tanzania, Uzbekistan, Paraguay, and Venezuela are countries whose respective stock markets in 2006 were worth less than five percent of each country’s GDP. In these cases, all else equal, we would expect the pressure on domestic regulators to get a seat at the global negotiation table to be quite low. In sharp contrast, the total value of all firms listed on the Hong Kong stock exchange in 2006 was nine times the size of Hong Kong’s economy. Switzerland, South Africa, Iceland, Jordan, and Singapore are among the diverse set of countries whose total stock market capitalization amounted to more than double their respective GDP in 2006. In these cases, industry pressure to be represented – and the salience of such pressure domestically – should be quite high. Variation in sector size reflects on the one hand the maturity and development of the financial system – and private property – more broadly. On the other hand, even among developed countries, the size of the stock market varies (a) with the importance that equity finance has as compared to debt finance in the domestic economy (Zysman 1983; Kitschelt, Lange et al. 1999), and (b) with the extent to which a given jurisdiction attracts foreign listings and capital and thereby serves as a global finance hub (Sassen 1991).

Similarly, the size of the insurance sector varies widely across jurisdictions. In countries as diverse as the Cayman Islands, South Africa, the United Kingdom, Taiwan, and the Netherlands, it accounted for between 12 and 16 percent of GDP in 2006. In contrast, Armenia, Uzbekistan, Syria, Saudi Arabia, and Algeria are countries where the total contribution of the insurance industry to the domestic economy was less than one percent of GDP.

Anecdotal evidence underscores the plausibility of this expectation as well. For instance, in 2004, the Bahamas decided to adopt IOSCO guidelines for financial licensing despite the prominence of an earlier, less-intrusive domestic registration system. As the legal news service Mondaq explains, “The Bahamas model for licensing is due to the membership by the Securities Commission of The Bahamas (SCB) in the International Organization of Securities Commissions (IOSCO). Although industry preferred the registration route, it recognised and agreed that IOSCO membership is in the best long-term interest of the funds industry in The Bahamas, since it reinforces the legitimacy of the jurisdiction as one which is properly regulated within established and recognised international standards.”16 Financial services are a key economic sector on the islands. According to the CIA World Factbook, “Financial services constitute the second-most important sector of the Bahamian economy and, when combined with business services, account for about 36% of GDP.”17

A very similar argument was made at the other end of the world and in a completely different setting. When making a public pitch for his country joining IOSCO, Heydar Babayev, Chairman of the State Securities Committee of Azerbaijan, told the media: “Membership in IOSCO will enable Azerbaijan to improve its interaction with overseas investors for whom the country's being this organisation's member will be the sign of civilisation and the transparency of its market. The market is progressing successfully in general doubling its turnovers every year, but the quality leaves much to desire yet.”18

Our two hypotheses can be summarized as follows:

H1: A jurisdictions that has delegated regulatory authority over its securities (insurance) industry to an independent regulatory agency is more likely to join the transgovernmental securities (insurance) network than a jurisdiction that regulates the sector through institutional alternatives.

H2: The larger the securities (insurance) industry as a share of the domestic economy, the greater the likelihood a jurisdiction will join the transgovernmental securities (insurance) network.

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