Comparative Political Economy

Literature Review: Comparative Political Economy

The texts from this week concern the changing nature of domestic economies and production regimes in the advanced capitalist countries amid the spread of international financial markets along with the political processes that enable globalization. Soskice’s article argues that the different production regimes (the institutional framework of capitalist systems) explain the differences in micro behavior and seeks to explain how and why industrial relations have changed from the 1960s to the present in advanced industrialized economies. Two production regimes are identified in advanced industrialized economies: business-coordinated market economies and uncoordinated market economies. Coordinated market economies (CME) give considerable nonmarket coordination between companies, under an institutional framework set by governments that incorporate labor unions and collective bargaining (Soskice 1999; 106). In contrast, uncoordinated economies (liberal market economies; LME) have little to no institutional framework governing the coordination of industrial relations. LMEs typically have a lower level of training for workers, unions are avoided, and bank-industrial ties are weak, leading industries to rely on competitive markets rather than collective action. In CMEs, “training and technology transfer take place primarily within industry-based organizations” whereas LMEs do not possess monitoring systems over corporate governance.

It is then argued that the most important determinate of the form of a country’s production regime is in the nature of coordination between companies, unions, and government: “Business coordinating capacity has influenced the feasibility of different production regimes and has molded the power and interests of business as a political actor in the shaping and reshaping of regimes in the 1980s and 1990s” (Soskice 1999; 104). In CMEs, the interests of business are shaped to favor long-term cooperative institutional frameworks rather than in LMEs where no industry coordination existed and hence businesses were shaped to embrace deregulation (Soskice 1999; 130). Finally, it is argued that both the CME and LME frameworks were conducive to international competitiveness but in different types of markets and in differently organized companies. CMEs prevailed because business as a collective actor are able to resist governments attempts to deregulate because such changes are not in their interests, as vocational training and technology transfer would function under markets if deregulated. Essentially, economic institutional frameworks have been reshaped in the era of globalization, and businesses under CMEs have reregulated rather than deregulated to preserve their institutional frameworks for long-term cooperation and industry exchange (Soskice 1999; 134)

Huber and Stephens demonstrate how the welfare state regime is linked to production regimes (the varieties of capitalism in advanced industrialized countries) and domestic financial controls. Using a quantitative comparative approach, the authors categorize the advanced industrial countries by the type of welfare state regime in place: the four types include the Social Democratic welfare states of Scandinavia, the Christian Democratic welfare states of Western Europe, the Liberal Welfare states of the UK, Ireland, Canada, and the U.S., and the “Wage Earner” welfare states of Australia and New Zealand. Policy and institutional designs are then compared and contrasted between the varieties of welfare states, and Soskice’s conceptualization of production regimes is used to further distinguish the states based on the coordination of labor unions, business, and government (coordinated market economies) or the lack thereof (uncoordinated market economies). Coordinated economies rely on a long-term growth/employment policy predicated on domestic financial controls, enabling both Christian democratic and social democratic welfare states the ability to provide generous social services to citizens, bargaining centralization, wage setting, union contract coverage, and overall more egalitarian outcomes for citizens (Huber and Stephens 2001; 126).

To explain the ensuing welfare retrenchment in European countries, the authors point to two different dynamics: ideologically driven cuts due to the “rising hegemony of neoliberal doctrines” and unemployment driven cuts. It is then argued that contrary to popular belief, other factors influenced the growing unemployment and slow growth of the welfare states in the era of globalization rather than the nature of their systems. Some of these factors included the rising working age population (explaining rising unemployment), the sectoral changes in production regimes (shift from manufacturing to service production), the decontrol of domestic financial markets and the influence of international financial markets, and the shocks from the collapse of the Soviet Union and budget deficits caused by German reunification. Essentially, changes in the financial economy and deregulation of international and domestic financial markets fundamentally changed European production regimes, depriving the European countries of “stimulative fiscal and monetary countercyclical tools” they once had in their control (Huber and Stephens 2001; 134).

Hamann and Kelly’s work looks at the political nature of welfare retrenchment and the enactment of social pacts in Western Europe. The authors claim that contrary to conventional accounts of social pacts as a governmental reaction to economic pressures, electoral pressures induce the adoption of social pacts by political parties as well. Social pacts, national-level agreements between governments, labor unions and sometimes employer legislation that negotiate wage and non-wage issues, can play an important role in parties’ election campaign strategies as consensus solutions to economic adjustment policies that they may undermine if pacts do not produce the desired outcomes (Hamann and Kelly 2007; 976). Social pacts are also politically advantageous because they minimize potential electoral costs related to economic adjustment while enabling dominant political parties to keep traditional voting blocks and incorporate new voters (Hamann and Kelly 2007; 975). Using three case studies of the Netherlands, Ireland, and Austria, the authors argue that variations in the adoptions and extent of social pacts across Europe present anomalies to the economic pressures thesis. Regression analysis findings show pacts to be far more common than legislation in response to economic adjustments. The analysis also shows that the ideological spectrum of political parties does determine to some extent the different responses to electoral setbacks and strategies used by political parties dealing with economic adjustment (Hamann and Kelly 2007; 34).

Yet the political processes shaping the differing institutional frameworks are predicated on the value priorities of government. Clearly, coordination between businesses and between labor unions is a valued process within the CMEs of European states, and cooperation between industries along with welfare services fashioned the institutional framework to form a specific outcome—desired goal or end—through policy. Likewise, the reregulation of CMEs and the deregulation of LMEs depend upon political processes, but beneath these processes underlie certain values and priorities, one favoring business coordination and extensive welfare services and the other favoring free market economics and privatization initiatives that reduce domestic management of the economy and the coordination of industry. There has to be a reason LMEs developed and did not incorporate coordination between industries. Although it is true that CMEs set up an institutional framework that allowed coordinated business to prevail even in the midst of the internationalization of markets while LMEs simply could not respond to globalization in the same way because it did not possess the institutional framework that defends against deregulation. Yet it is true that CMEs and their production regimes are undergoing a crisis caused by globalization (the deregulation of international and domestic markets), and although CMEs have not converted to the neoliberal framework of deregulation wholly, they have certainly had to reregulate to preserve their system of capitalism. Hamann and Kelly’s contribution helps to show the political nature of such reregulation, but the literature also shows the political problems involved in CME maintenance. In sum, the texts help to show that economics is not independent of political culture, parties, or the state.

Works Cited

Hamann, Kerstin and John Kelly. 2007. “Social Pacts in Western Europe: The Impact of Electoral Competition and Blame Avoidance.” Work in progress.

Hamann, Kerstin and John Kelly. 2007. “Party Politics and the Reemergence of Social Pacts in Western Europe.” Comparative Political Studies. 40(8): 971-94.

Huber, Evelyn and John D. Stephens. 2001. “Welfare State Production Regimes in the Era of Retrenchment.” In Paul Pierson (ed.). The New Politics of the Welfare State. Oxford: Oxford University Press. 107-45.

Soskice, David. 1999. “Divergent Production Regimes: Coordinated and Uncoordinated Market Economies in the 1980s and 1990s.” Continuity and Change in Contemporary Capitalism. New York: Cambridge University Press. 101-34.