The state and coordinated capitalism

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Contributions of the Public Sector to Social Solidarity in Post-industrial Societies

By Cathie Jo Martin

Boston University


Kathleen Thelen

Northwestern University

Submitted to World Politics

(December 2007 forthcoming)


Does egalitarian capitalism have a future? In the face of massive changes sparked by globalization, technological change and the secular decline of manufacturing, students of the political economy of the advanced industrial democracies are posing this question with increased urgency (e.g., Pontusson 2005, Rueda 2005). In the past, cooperative arrangements in many so-called coordinated market economies seemed well-suited to reconciling high levels of economic efficiency with high levels of social solidarity (Streeck 1991). A large and growing literature has emerged to explain the origins and distinctive logic that separates these political economies from an alternative “liberal” model that, while equally viable in the market, is characterized by greater social and economic inequalities (Hall and Soskice 2001; Pontusson 2006).2 Today, however, many of the institutional arrangements characteristic of the coordinated market economies are under intense strain, due to new market pressures and the attendant ascendance of neoliberal ideology. But if the economic and ideological challenges are clear, the politics are more contested. Some scholars fear that these experiments in cozy coordination are doomed, while others bet on continuity over change (see, e.g., Swank 2002).

The empirical record is mixed, with an impressive persistence of coordination in some countries but not in others. Although there have been significant changes in collective bargaining systems cross-nationally, some countries have sustained higher levels of coordination in policymaking channels and have managed to maintain a higher layer of control in framework agreements, even while aspects of wage-setting have been decentralized to lower level units. Take Denmark and Germany -- two clear, non-controversial cases of coordinated market economies – that have evolved along two sharply divergent paths in the past two decades. Denmark, the new poster child of Europe, has been able to sustain rather strong institutions for coordinating politics at the national level in the face of disintegrating forces. Key reforms in the 1990s moved Denmark sharply toward “activation” policies normally associated with liberal market economies (Campbell, Hall and Pedersen 2006). Yet these initiatives emerged from consensual, tripartite bargaining and their effects, if anything, have strengthened the organizational power of the peak associations. In contrast, Germany has drifted toward a more “disorganized” version of capitalism (Höpner 2005). Legislative reforms in Germany have left most of the key institutions traditionally associated with “Model Germany” formally intact; however, stability at the formal-institutional level masks a very significant erosion of coordinating capacities both within the state and on both sides of the class divide. Membership in unions and employers associations has fallen significantly, and coverage of collective bargaining and other collective arrangements has shrunk though widespread defections (Hassel 1999, Schnabel 2005).

This paper investigates why some countries have been able to sustain national-level institutions for coordination, while others are becoming more disorganized in response to the changing economic context: thus, our key objective is to explain the direction and character of institutional change as it bears on coordination. We begin by acknowledging that the broad category of “coordinated market economies” subsumes quite different types of cooperative engagement. Macro-corporatist forms of engagement are national-level institutions for fostering cooperation among the peak employers’ associations and unions: these include both political forums for negotiating national public policy outcomes and collective bargaining channels that either deliver peak-level bargains or sectoral agreements negotiated within a national framework. Forms of coordination associated with enterprise cooperation, in comparison, occur at the level of sector or regional institutions and are often privately-controlled.3

While the Scandinavian countries historically had a rather higher level of bargaining than the Christian Democratic ones (at the peak rather than at the sectoral level), both groups had high levels of macro-coordination, as even the Christian Democratic countries featured considerable concertation across bargaining units and high levels of cooperation in policymaking channels. In addition, to the extent that Christian Democratic countries relied on “enterprise cooperation,” this form of engagement seemed to reinforce macro-coordination and functioned as a sort of structural equivalent, because manufacturing interests were able to play a leading role in both wage negotiations and in relations with the state (e.g., Thelen 1991).

Indeed, in the 1970s and 1980s, enterprise-coordination was widely viewed as superior for achieving macroeconomic performance, since countries in which the state loomed especially large (e.g., Denmark and Sweden) seemed to be listing under the weight of high public consumption (Iversen and Pontusson 2000). Yet with the advent of a service sector economy, private arrangements for coordination in manufacturing can no longer substitute for public coordinating mechanisms, as exposed sectors are shrinking in employment and the needs of core industrial workers are becoming increasingly distinct from the rest of society; consequently, the subcategories of coordination -- macro- corporatism and enterprise cooperation – seem to be associated with different patterns of politics offering different capacities for self-adjustment. Thus, we wish to understand what allows some countries, but not others, to cope with the essential problematic of sustaining national-level coordination while adjusting for economic change.

We argue that differences in the role and the size of the state are at the heart of the divergence among European coordinated countries, because state policy is key to forging and sustaining broad national coalitions that link -- rather than separate -- diverse interests (such as manufacturing versus services and labor market insiders versus outsiders). A large public sector (1) has impacts on the strategic interests of government bureaucrats, by expanding their interests in improving the skills of the long-term unemployed, (2) expands the capacities of bureaucrats to construct political coalitions of private sector groups to support state policies, and (3) alters the strategic interests of private actors. In short, we claim that the relative power and distinctive interests of the state are crucial factors in sustaining particular varieties of coordination across time within countries.

Our argument directly challenges the received wisdom in three important ways. First, against a central tenet of neoliberal theorizing that the state is a constraint on adjustment, we suggest that the state is more important than ever in facilitating continued coordination. A large public sector (typically written off as an inevitable drag on the economy) can actually provide state actors with a crucial political tool for shoring up coordination in a post-industrial economy.

Second, while we agree with a large varieties-of-capitalism literature that sees employer coordination as crucial to defining “coordinated market economies,” we question the widespread tendency in that literature to view such coordination as a self-sustaining equilibrium. Just as state policy was crucial historically in forging coordination in virtually all arenas of the political economy (e.g., Thelen 2004), state support is essential in maintaining coordination today in the face of new pressures. Thus, countries that have traditionally relied on state policy to shore up coordination between the social partners have a distinct edge in renegotiating cooperative arrangements over countries that have relegated coordination to private interest associations.

Third, our emphasis on the critical and positive role played by the public sector calls into question a longstanding political truism in comparative political economy – that export-sector leadership will produce the best collective outcomes (see Crouch, 1993; Garrett and Way 2000). In a context in which employment in manufacturing is declining, a competitive export sector (even with wage restraint) is no longer even remotely sufficient to generate the jobs needed to sustain full employment. Moreover, to the extent that the interests of the (often still highly successful) exposed sectors come to diverge from those of other sectors, strong and well organized manufacturing interests can pose a serious obstacle to reform efforts that can only be overcome through strong and proactive intervention under the auspices of the state (see also Streeck 2005).

The paper is organized as follows. We begin by unpacking the notion of “coordination” and explore the role of the state in sustaining different “varieties” of coordination. We use the cases of Denmark and Germany to illustrate how the state, in its capacity as provider of social and collective goods and as employer/service provider, matters to institutional outcomes. We conclude with implications for the study of institutional change in advanced political economies.


At the heart of the CME ideal type is the observation that employers coordinate in order to achieve mutually beneficial goals, most importantly though not exclusively to secure a highly skilled workforce. Yet coordination can be achieved in a number of distinctive ways: while these may be functionally equivalent from the perspective of individual firms, they have very different implications for macro-political dynamics and distributional outcomes. A somewhat more differentiated framework is necessary, therefore, that retains the core distinction between “liberal” and “coordinated” market economies, while also capturing the distinctive trajectories of change within CMEs. In this mode, Martin Höpner situates coordinated capitalism on a scale ranging from “organized” to “disorganized” capitalism and recognizes that coordination can transpire at various levels.1 In a similar vein Hicks and Kenworthy (1998 and see also Martin and Swank, 2004, 599) distinguish between state-led macro corporatist processes and what they call enterprise cooperation or microcorporatism. Recognition of these multiple avenues of coordination allows us both to assess the real impact of putatively “liberal” policy reforms within coordinated market economies, as well as to “pick up” more subtle changes in the scope and character of coordination that would otherwise not register in the classic varieties-of-capitalism framework.

Following these analyses, we distinguish two varieties of coordination: macrocorporatism and enterprise coordination. "Macrocorporatism" utilizes national associational forms of institutional cooperation that imply high levels of coordination in the representation of the interests of labor market actors, in collective bargaining processes and in employers’ and unions’ participation in national tripartite policy-making forums. In keeping with other analyses, our components of macrocorporatism conceptually include three types of national coordinating measures. First, measures of centralization and density capture the degree to which the national associations representing employers and labor are centralized and the scope of their coverage; thus, these measures constitute an evaluation of peak federation power over members. The proportion of the potential membership that actually belongs to the association is indicative of the association’s capacity to make credible claims to speak for the entire social group it purports to represent. The centralization and density of the peak associations are important both to the negotiation of collective bargains and to the political representation of interests.

Second, a measure of sectoral coordination captures the integration of industry-level collective bargaining agreements across the economy. Collective bargains are clearly highly coordinated when negotiated by a single peak association representing each of the social partners; but in addition, national coordination occurs when industry-level settlements are linked across sectors either through strong pattern bargaining or through framework agreements. For example, Denmark and Sweden have recently decentralized bargaining down to the industrial level but have preserved national coordination through framework agreements. Thus our second measure of macrocorporatism examines coordination in wage bargaining across the economy, either at the peak association level or at the industry level in which sectoral bargains are coordinated with each other through a broad framework agreement.

Third, policy process integration represents the integration of employers and unions in national policy-making processes (Streeck, 1992; Crouch, 1993; Traxler, 2000; Hicks and Kenworthy, 1998; and Martin and Swank, 2004). Here the emphasis is on the political representation of the labor market partners and their capacities to make highly-organized, collective demands for public policy and, in turn, to help with the implementation of policy outcomes.

Ideally, we would like to gather data for both employers and unions in each of these measures of macrocorporatism; yet, good cross-national data on membership in employer associations are notoriously difficult to obtain. Therefore, we use Hicks and Kenworthy’s empirical measures of these three aspects of macro-corporatist organization among employers (centralization, sectoral coordination, and policy process integration), that has been developed into an index by Martin and Swank. We have added to this index a measure of the density of labor unions to augment our measure of the persistence of national-level coordinating institutions (Martin and Swank, 2004). We should note that the limited extant data on employers’ association membership are consistent with the broad movements in union density; for example, Danish employers’ association membership has been increasing slightly in recent decades while comparable German membership has been declining (Behrens and Traxler 2004).

Our other type of coordination, referred to by Martin and Swank (2004) as “enterprise cooperation,” entails coordination among firms or between firms and workers at a more intermediate level; this cooperation is less national in focus and may evolve without direct ongoing state participation. The forms of coordination that are captured in the concept of “enterprise cooperation” are varied. They include, for example, tightly-coordinated connections among purchasers and suppliers, often involving joint or shared efforts in areas like research and development and training. Another facet of enterprise cooperation would be coordination among competing firms within the same industrial sector, in technology development or skills, or in some cases in marketing; often such forms of coordination are organized in the context of trade associations or chambers of commerce. Long-term relations between firms and investors -- for example, between companies and their “house banks” (associated in the literature with “patient capital”) -- would also belong in this category. And finally, the kind of cooperation that such relations engender often provide the underpinnings for other dimensions of enterprise cooperation, including teamwork-based production at the firm level or intra-firm departments working in multi- divisional project teams. Hicks and Kenworthy (1998) provide empirical measures of this form of coordination.

These divergent types of coordination entail fundamentally different roles for state intervention to facilitate societal cooperation. Enterprise cooperation may require virtually no state intervention, while macrocorporatism needs governments to organize tripartite forums and national collective bargaining processes. Thus while enterprise cooperation often transpires far from the center of national government, macrocorporatism is very much a political artifact. These categories are by no means logically inconsistent alternatives to one another, as countries may score high on both dimensions; yet, in the past, some nations have featured high levels of coordination based on private enterprise cooperation to achieve collective goals.

The graph below demonstrates that countries form clusters depending on their modes of coordination. The "y" axis records an assessment of the strength of national coordinating associations: the measure evaluates union density and corporatist organization in employer associations. The "x" axis reports the level of enterprise cooperation. As is readily apparent in the graph, advanced industrialized countries fall into three clusters. Scandinavian countries demonstrate high levels of both national-level coordination (or macro-corporatism) and enterprise cooperation, while some Christian Democratic countries have slightly higher levels of enterprise cooperation but medium to low levels of macro-corporatism. Liberal countries have low scores for both types of cooperation.

-- Graph #1 about here --

With the decline of industrial capitalism and shift to service sector capitalism, the coordinating institutions developed in the industrial Golden Age may be under siege, and many scholars have pointed to the problems of sustaining the institutions of macro-corporatism in particular. The core industrial sector is shrinking as a proportion of the entire economy, industrial production has moved to developing countries with globalization, and behemoth manufacturing firms are breaking down into component parts (OECD Observer, 2005). Service sector workers and firms are notoriously poorly organized; thus, the institutions for collective action constructed in a previous era for manufacturing interests may not fit the needs of the emerging service economy. As an example, Germany’s acclaimed national system of apprenticeship training continues to perform vital functions for manufacturing companies but has yet to “take off” in the service sector (Culpepper and Thelen, 2007).

Moreover, the rise of non-accommodating monetary policy has made it difficult to sustain institutions for macro-level coordination. As Iversen (1999) has argued, advanced industrial countries can secure non-inflationary economic growth either through centralized collective bargaining combined with expansionary fiscal and monetary policies or through industry- or even firm-level wage bargaining combined with a non-accommodating monetary policy. When leftist governments pursued Keynesian accommodationist strategies during the industrial golden age, export sectors were persuaded to ally themselves with low-wage workers to maintain centralized bargaining (and to hold in check the inflationary demands of militant sheltered sector workers). But with the development of a non-accommodating monetary regime, Rightist governments and producers in exposed, high-skill sectors were at liberty to support a shift to industry-level bargaining. The choice of equilibrium positions in this argument is very much a matter of politics, and as countries came to favor a non-accommodating monetary regime over Keynesian strategies, macro-corporatism and social solidarity were also threatened (Iversen 1999: chapter 4 passim).

In fact, in evaluating the relative resilience of different modes of coordination, a large literature in the 1990s saw the more centralized cases of macrocorporatism as more fragile than enterprise-based coordination, and anticipated a convergence of the institutional arrangements in the Nordic countries on the more decentralized German model. The prediction was that with the adoption of non-accommodationist monetary policies, governments would increasingly move away from macrocorporatist institutions for coordination. Trends in Scandinavia –including the decentralization of wage bargaining and the embrace of non-accommodating monetary policies -- seemed to point to a shift toward the alternative equilibrium and a convergence on the German model (Iversen, 1999: 199; Pontusson 1997, 2000). Denmark, with its decentralization in bargaining institutions, seemed to be a clear case of change, while Germany seemed to demonstrate institutional stability.

Yet recent structural changes in the economy – in particular the decline of industrialism -- have also posed problems for countries that have relied more extensively on enterprise cooperation. Under industrial capitalism, the private cooperative arrangements between business and labor in manufacturing functioned as a structural equivalent for state-led corporatism, by setting labor-management conditions for the entire economy despite the more limited role for government (Katzenstein 1985; Thelen 1991). Under service sector capitalism, however, mechanisms for translating enterprise cooperation into overarching solidarity are receding. In countries such as Germany relying heavily on enterprise cooperation, large companies and workers in the industrial “core” who used to act on behalf of the entire economy now have greater difficulty meeting this task and compensating for the limited (and declining) membership in unions and employers’ associations. The concerns and interests of the ever-shrinking core workforce are increasingly divergent from those of other workers, especially workers outside manufacturing, and the state has limited capacity to overcome the interests of monopoly capital in order to represent the 75 percent of the total workforce in other sectors (see also Streeck 2005).

Thus, although distinct varieties of coordinated capitalism have always existed, the differences have become more pronounced with the decline of manufacturing, and the clusters of CMEs have become more separate over time. Contrary to expectations in the 1990s, the Scandinavian cluster has proved more successful in sustaining institutions for macro-coordination. In Denmark and Sweden, for example, while bargaining has been decentralized to the industrial sector level as predicted by Pontusson and Iversen, a system of negotiating broad climate agreements has reinforced coordination among sectors. Perhaps even more significantly, however, the state has helped the peak associations to continue to play a role in organizing the political representation of the social partners, and this has helped the associations to stay vibrant in the face of fragmenting change. The temporal divergence within subgroups of coordinated market economies is apparent in measures of union density, an indicator for which excellent cross-national data are available. To this end, Graphs #2 and #3 chart countries' union density by level of enterprise cooperation for 1978 and 2001 and demonstrate significant movement for the period. The clusters that clearly congeal by 2001 were overall much less recognizable in 1978.

-- Graph #2 about here --

-- Graph #3 about here --

As Chart #1 below demonstrates, union density fell for all but the social democratic countries (where density rates actually increased on average). This decline made the greatest contribution to the emergence of clearly recognizable clusters among the coordinated market economies and the spatial distribution of countries would be even more pronounced were the data to extend to 2006. Germany, for example, retains high levels of enterprise cooperation (on issues like research and development, purchaser-supplier relations and especially plant-based cooperation between local labor representatives and employers); yet its drop in union density is noteworthy.4

Chart #1 about here

Also striking is the movement in enterprise cooperation (presented in Chart #2); yet here, rather than becoming more liberal, all countries are becoming more coordinated. Japan (of course), Italy, Germany and Finland lead in enterprise cooperation although most countries gained in this measure between 1978 and 1998. Contrary to the VOC predictions, liberal countries expanded their rates of cooperation the most, although their absolute levels remained lower than those of the coordinated market economies. We view this phenomenon as entirely consistent with the enthusiasm for Japanese-style innovations that transformed shop floors across the western world in the 1980s, such as quality circles and closer relations between purchasers and suppliers.

Chart #2 about here

It appears, therefore, that different countries have very different capacities for sustaining macro-coordination and social solidarity. Well into the first decade of the Twenty-First Century, the convergence among these coordinated market economies on the German model has failed to materialize and, despite changes in the economic context and massive policy shifts, Denmark still features high levels of macro-level coordination that coexist even with the development of a non-accommodating monetary regime and some decentralization in collective bargaining. Moreover, the apparent stability of many of the formal institutional arrangements of the German system is misleading to the extent that it masks significant erosion of coordinating capacities among both employers and unions and the accompanying hollowing out these institutions. Liberalization can affect political economies along either the dimension of coordination or of organization, to use Höpner's terms; and in fact, much of the movement we observe in some CMEs today consists less in a wholesale dismantling of coordinating capacities than in a reconfiguration of coordination along more flexible – less broadly solidaristic—lines (Thelen and Kume 2006).

Our puzzle, then, is to explain why the different types of coordination demonstrate varied levels of resiliency to the new “disorganizing” tendencies associated with contemporary political and economic trends. In other words, beyond demonstrating that different approaches to coordination exist, we must explain why some countries are better able to preserve high levels of macro-coordination than others. The next section presents our argument that a strong state and, indeed, a large public sector are the keys to understanding these outcomes.

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