Summary of Thoughts on Reforming the UN

Aug 4, 2015 — Neil Boyle

This paper suggests a “new technology” could be applied to reform the UN by paying attention to the incentives that make transactions work as planned.  It follows on General Scowcroft’s description during the 2013 Atlantic Council conference Getting to Fusion: A Conversation with Strategists, “how the Arab uprisings demonstrated that individuals empowered by new technologies are undermining the fabric of the Westphalian state and the tools to check individuals”, signaled an outdated global governance.  Our goal is to focus on a new technology that can improve the governance of large institutions like the United Nations.

The “new technology” is Transaction Cost Economics or TCE.  Professor Emeritus of Economics, Law, and Business Administration at Berkeley, Oliver Williamson received the Nobel Prize for economics in 2009 for his determining work on the development of TCE.  (Full disclosure: Professor Williamson has been an advisor to me for the past seven years and recently endorsed my website ( on TCE training.  In case it is relevant, I have been invited by Perm State University in Perm, Russia to present a paper on institutional reform and performance per TCE in public private partnerships (PPP) in nine water utilities in the Philippines.)

The problem with the topic of UN reform is it is too elastic.  It allows anything to be proposed and rebuked by invoking supposed remedies after the fact.  Physical scientists avoid this tautology during efforts to identify and resolve problems by increasing the resolution of the object they are studying to enable seeing the tiniest detail.  Our approach to reforming the UN assumes similar rigor by moving the analysis from the vague generalities of the polity to the microanalytic particulars of transactions and governance, which is rooted in the twin behavioral assumptions of human nature where all men and governance systems are hampered by bounded rationality and guileful self-interest.  (Williamson, 1996:336; 2010)

Viewing the UN as a nexus of contractual agreements between core and specialized units that comprise the internal bureaucratic structure of the organization, facilitates understanding the incentives and the efficiency of the transactions between units.  In poorly performing organizations, almost certainly the case in the UN, there is a lack of effective transparency over specialized agency programs and projects, as well as with the administration of the organization as a whole.  This results in misaligned transactions leading to chronic maladaptations.  We propose the following two reform measures to address this problem:

1.          Globalize transparency to move beyond “insider groups” to a wider world.  We accomplish this by getting worldwide academia involved in evaluating UN programs by making it easy for academics to test performance hypotheses.  In economic jargon, we bring demand and supply together and remove the supply risk that inhibits academic involvement.  We adjust the hypotheses testing apparatus to suit international academia and we institutionalize the apparatus by having worldwide academics do random hypothesis testing vetted through a National Science Foundation like institution; and

if “pushes for more transparency and management reform from UN members are critical to establishing a more robust international institution”, then a suggested approach is

2.          Create internal demand for transparency and management reform by directly affecting the Secretariat’s and the General Assembly’s performance, language and culture of internal governance.  Focusing on the bureaucracy of the core and specialized units of the UN and the membership of the General Assembly is thereby called for.  Cutting across all units, regardless whether these units function as core units (e.g., program planning and budgeting), or specialized units (e.g., UNDPs technical assistance and financing for SMEs), the bureaucracy serves both functional types and is vital to the UN delivery system for performance, language, and culturally appropriate administrative governance.

Eight operational synopses that explain the TCE approach follow:

Governance reform conditions are already in-place.  Worldwide academia is familiar with and supports TCE, and the apparatus for hypothesis testing and the concepts of incomplete contracting and self-enforcement are realizable.  Economic organization, first-order economizing, credible commitment, appropriate stimulus to get agents back onto the contract curve when they fall off, cross cultural relevance, and the rule of analytic methodology are then obtainable.

Internalization of human nature constrains the tautological nature of the reform system mentioned previously.  Buyers and suppliers are individually constrained by the twin assumptions of human nature, namely bounded rationality and opportunism, the application of which permits more realistic understandings of bureaucratic anomalies and the functioning of the UN’s rules of the game, decision-making, and organizational structure.  Bounded rationality means that human cognitive capacities are limited, the result of which is that all complex contracts are incomplete.  The implication is profound in that super-rationality is no longer taken into account in contract management nor can the contract gloss over the frailties of humans; they are objectively accounted for.  Opportunism means that room is made for the strategic intent or guileful self-interest of humans.  The implication is individual and contractual promises are no longer self-enforceable due to opportunism.  This implication is also profound in that contractual and individual promises are premised on a demanding self-interest. 

Economic organization is an economic and richer version of organization. Ordinarily organization is interpreted as a hierarchical form of authority and sequential decision-making based on the science of administration.  Economic organization is a nexus of contracts that connects the various transactions within the organization. Market, hybrid aka long-term contract, or hierarchy aka the firm govern these contracts (i.e., transactions).  Market forms of governance structure are autonomous where individuals are unilateral in their decision-making.  For example, UN commercial relations with suppliers of goods and services are market transactions.  Hybrid forms of governance structure (aka long-term contracts) are a mix between the autonomous-unilateral form of markets and the autonomous-cooperative form of hierarchy.  For example, UN peacekeeping operations are hybrid transactions that necessitate respect for private ordering and autonomous bilateral trading when goods and services are specialized, as they would be for peacekeeping.  Hierarchy forms of governance structure are a more deliberate and cautioned approach to mediation because cooperation, i.e., coordination is preferred.

The “rules of the game” (the institutional environment that spells out contract law, property rights, and cultural codes of conduct) and the transactions that are governed by the three generic governance structures mentioned above vary with the degree of specialization of special purpose exchange assets.  Alignments among all four, the “rules of the game”, the transactions between units, their governance structures, and the specificity of the exchange goods or services are crucial to the reliable institutional functioning of the UN.

First-order economizing has to do with effective adaptation and in particular the elimination of organizational waste.  Heretofore, economic analysis focused on price-quantity refinements at the margin and ignored the role organization plays in the allocation of resources and related efficiency losses.  In this section, concern is with the identification of bureaucratic waste and the means of mitigating it.  Consider an industry in partial equilibrium produces qo at    Po = Co + b where Co is the average cost of production and b is administrative bloat due to misalignments of transactions.  The industry decides to reduce its price to P1 = Co and produces q1 = qo + ∆q an increase in production of ∆q.  While traditional economic analysis accounts for the deadweight L, it ignores the administrative waste W = bqo.  Consider the ratio of W:L where:

W = bqo (a rectangle);

L = ∆qb/2 (a triangle); and

W >>> (2qo/∆q)L; where the factor in parentheses is typically in the range of 10 times.  The means of mitigation is to negotiate the triple (explained below in the section on Credible commitment) and provision contracts with appropriate safeguards.  (Williamson, 1996:310-11)

Credible commitment examples are “qualified technocrats that run the bureaucracy and the suppression of lobbying”, “investments in peacekeeping”, unilateral provision of a performance bond, and negotiating the contract triple.  Long-run efficiency reasoning does not come easily to politicians who are more comfortable with power reasoning.  Those who have invested are placed at risk, and those who contemplate investment are put on notice.  But politics is different and credible commitment is not likely to materialize for three reasons: ignorance, front-loading, or looting.  So what should we do?  “The action resides in the mechanisms of governance, specifically, find mechanisms that communicate credible commitments”.  Williamson, 1996:336; and Soskice, Bates, and Epstein, 1992) Negotiating the contract triple is explained by breaking contract into its component parts of price (p), asset specificity (k), and special purpose safeguards (s) and negotiating the triple such that safeguards are leveraged to accomplish a change in assignment of institutional property rights by holding some degree of asset specificity, and the price of the contract hostage.

Appropriate stimulus has to do with contract management.  TCE focuses on the incentives that make for successful transactions.  But actors routinely fall off of the contract curve due to the complexity of organizations because they have lives of their own and actors are constrained by bounded rationality.  The result is misalignments occur and actors fall off the contract curve.  When they do, opportunism occurs, and maladaptation sets in.  Appropriate stimulus refers to the necessary actions that are required to re-motivate actors to get them back onto the curve.  Provision of appropriate stimulus is feasible.  It has been done in the field in the USAID AGILE Project in the Philippines between 2001 and 2005 and it was found by third party evaluation to work.

Cross cultural relevance relates to the development of TCE almost entirely in Western capitalist countries.  Cultural relevance is a problem of embededness and the question of how deeply ingrained are the shift parameters of market, hierarchy and hybrid organization along with their respective contract laws embedded in the institutional environment (aka “the rules of the game”) of a country and in its society, generally. (Williamson, 1996:94)  A farsighted organization recognizes that organization matters by taking actions that inspire confidence in contracting and investment respects because harmonious transaction interfaces are the major source of mutual gain.  The way to deal with cross cultural issues is through discrete structural analysis.  Williamson, 1985:30)

The rule of analytic methodology is that comparative economic organization never examines organizational forms separately but always in relation to alternatives.  Comparisons of transaction costs separate the “wheat from the chaff”, which are the “costs of running the economic system”.  (Arrow, 1969:48 in Williamson, 1996:93)

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