Varieties of capitalism

1. Varietiesofcapitalism 7 May 2014

2. Today • Convergence or divergence? • Characterizing political economies • Expanding to the rest of the world • Where are we heading?

3. Convergence or divergence?

4. Are we all heading in same direction? • Globalization and free trade create competition between states • Race to the bottom • Low regulation, low tax jurisdictions should attract capital and labor • High regulation, high tax jurisdictions should lose capital and labor • Economic stagnation, budget deficits • Need to cut back in order to solve budgetary problems, restore economic growth • Convergence to neo-liberal model

5. But do all states look alike? • Convergence in incomes and living standards among rich • Recall “The Great Divergence” • But institutional and policy differences • Education and training • Welfare states • Stock markets and banks • Corporate governance • Labor relations

6. Characterizing political economies

7. Early attempts at describing variety • Etatism – state plays key role in modernizing economy • Planning for industry and allocation of funds • Strong (France, Japan) versus weak states (England) • Also recall developmental states • Neo-corporatism • State negotiates long-term bargains with labor and capital – tripartite organizations • Encompassing unions internalize benefits of wage moderation • Success stories are small, open states in Europe (Austria, Netherlands, Denmark)

8. Varieties of capitalism • Another attempt to show that there are alternatives to neo-liberalism • Public choice critique – strategic thinking makes state dangerous and collective action impossible • Show that a strategic logic to alternative form of organization • It is an equilibrium strategy • It can thus survive

9. Firm-centered political economy • Key actors are companies and firms, not nations or individuals • Recall Lindblom on privileged position of business: economy depends on their investment • Is this a theoretical statement – always true? • Or a historical one – at this moment in time?

10. What problem does economic system solve? • Lack of coordination • Industrial relations: tendency to compete for workers => wage-price spirals • Vocational training and education: why invest if other firms will just poach • Corporate governance: how to ensure that finance goes to right places • Inter-firm relations: risk of exploitation in R&D, technology transfers, standard setting • Employees: how to get them to cooperate

11. Two (or more) ways to solve • Liberal market economies • Use markets and price signals for coordination • Firms hierarchical, interact with others through open-market • Coordinated market economies • Coordination through negotiation, bargaining, and collaboration • Firms share information and investment

12. Comparison

13. Institutional complementarity • All of these institutions go together and support each other • Bundling => two distinct equilibria • Can’t isolate individual element – need to look at whole • Institutional comparative advantage – each type is good at something different

14. Problems of a coordinated market economy • Firms depend on highly skilled labor force and long-term plans • But this creates dangers: • Other firms can poach workers after trained • Workers can hold management hostage because hard to replace • Workers will only invest in specific skills if guaranteed a job • Other firms can steal projects while being developed • Investors get cold feet

15. Solutions in CMEs • Patient capital: cross-shareholding, long-term relations with banks • Firms don’t have to change path with daily changes in stock market – can retain skilled workers even in downturn • Financers have access to inside information, not just public reports • Long-term job contracts, publicly subsidized training, industry-wide wage settlements & work councils • Little incentive to poach workers – wages same • Workers willing to invest in skills – guaranteed jobs

17. Liberal market economy • Fundamental principle: Market relations between firms and between workers and firms • Raising investments: international and domestic capital markets • Corporate governance: outsider control, shareholders • Industrial relations: pluralist, few collective agreements • Education and training: general skills, high spending on R&D • Transfer of innovation: markets & contracts, movement of workers

19. Logic of LMEs • Privilege creative destruction, innovation, and flexibility • General skills means that workers can be quickly redeployed • Weak unions and pluralist labor relations restrains wages and maintains flexibility • Stock market and takeovers discipline firms

20. Consequences

21. Different sort of production • LMEs • Radical innovation in technology and services • Medical engineering, biotechnology, telecommunications • CMEs • Incremental innovation in capital goods • Mechanical engineering, consumer durables, machine tools, transport

24. Employment protection & stock markets

25. Employment & inequality

26. Varieties of capitalism and politics • Each type connected with different political institutions • LMEs and majoritarianism • Majoritarianism => right-wing governments • Two parties, median voter decides to side with rich because joining poor threatens expropriation • CMEs and proportional • PR => left-wing governments • 3+ parties, median voter can side with poor because has more power to make sure expropriation limited • Exit option to coalition with rich • Middle-class party and working class party both get a say

27. Weaknesses of approach • Many countries don’t fit, even in Europe • France, Italy, Spain – Mediterranean type? • Changes over time – VoC assumes stability • Is Germany’s system weakening? • Is UK always liberal? Until 1970s strong unions and universal welfare state • Where is politics and conflict? • No partisan or ideological conflict • Labor unions not militant or autonomous • State lacks autonomy

28. Functionalism • Idea that if institution plays a certain role, that is the reason for its existence • Everything has its function and fits together • No conflict or discordant elements • But need to show mechanisms and cause & effect – which actors did it and how • Is VoC functionalist?

29. Which is better? • Be careful of generalizing current trends • 1950s-1970s: Germany and France strong, US and UK sluggish • 1980s-1990s: US and UK grow quickly, France and Germany sluggish • Does this mean liberal model is better? • Or coordinated model?

30. Can it apply to other regions?

31. Where does the Czech Republic fit? • Free markets? General skill education? Stock market ownership? • Interfirm networks and associations? Funds generated internally and from banks? Company or industry-specific skills? • Doesn’t seem to fit either

32. Dependent market economies • Decisive factor is external dependency • High level of foreign direct investment (FDI) • Coordination through intrafirm hierarchies within transnational enterprises • Needs of large foreign firms determine decisions and ensure coordination

33. Elements of DME • Investment: mainly from FDI and foreign-owned banks • Corporate governance: controlled by headquarters of transnational • Industrial relations: company-level collective agreements, weak unions • Foreign firms don’t accept strong labor • Strikes costly because of global competition • Education: limited spending on advanced skills • Public vocational training but not linked to firms • But not enough money for strong general skills • Transfer of innovation: intrafirm transfer of knowledge

34. Comparative advantage of DME • Reasonably skilled but cheap labor makes countries attractive for FDI • Familiarity with medium level of industrial technology • Serve as assembly platforms for semi-standardized industrial goods • Eg, automobile plants, electronics • But little innovation or investment in R&D

35. Less developed countries • Hierarchical market economies (HMEs) • Instead of coordination or markets, hierarchy • Workers subject to hierarchical control • Education and training decided hierarchically • Top-down regulations from governments • Businesses governed from top • Common in Latin America

36. Elements of HMEs • Diversified business groups– large family-owned conglomerates with few interrelations • Multinational corporations – mostly US controlled • Atomistic employee and labor relations • Fluid, short-term links to firms • Weak unions • Low levels of education and vocational skills

37. How do elements of HME fit together • MNCs and business groups can respond flexibly and quickly to market signals because of hierarchy • Low investment in education and skills • High turnover of workers, poaching of skilled workers easy, workers have few incentives to invest • Atomistic labor relations • Short time horizons limit incentive to forming unions and developing firm-specific skills • High levels of inequality • Large gap between actual and desired skills

38. Where are we headed?

39. Will national models survive? • Survival with adaptation • Germany maintains CME for some, but liberal model for others – two tracks, insider/outsider • But America looks more American • Backlash – Occupy, 99%?

40. What should the Czech Republic do? • Need to beat competition from East & South for FDI • Keep costs low • Keep labor flexible • Lower regulation • Reduce corruption • But backlash against dependent status (populism, Orban) • Try to move up global value chain • More education • More investment in innovation and R&D • Reduce corruption

41. Final exam • Same as midterm • Final question: The second half of the course has focused mainly on the advanced industrial economies. Is it right to separate the political economy of these countries from the political economy of development? Is there a different logic to how political economy functions in these countries? Or should is there a single logic that explains both development and the advanced industrial states? What are the main similarities and the main differences between the two? What explains these similarities and/or differences?