Varieties of Capitalism and Institutional Change: A ...

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The importance of the themes raised by the 'varieties of capitalism' literature is apparent in the range of commentaries it has inspired, represented here by the.


Comparative European Politics, 2003, 1, (241-250) 02001 Palgrave Macrn~llanLtd 1472-4790/01 $25.00 www




Varieties of Capitalism and Institutional Change: A Response to Three Critics Peter A. Hall and David Soskice Minda de Gunzburg Center for European Studies, Harvard University, 27 Kirkland Street, Cambridge MA, 02138 USA. E-mail: [email protected] Department of Political Science, Duke University, Durham NC, 27708 USA. E-mail: [email protected]

Conzpnrntive Ezrropenn Politics (2003) 1, 241-250. doi: 10.1057/palgraveecep.61 100I0

The importance of the themes raised by the 'varieties of capitalism' literature is apparent in the range of commentaries it has inspired, represented here by the diverse essays of Robert Goodin, Mark Blyth and Michael Watson. We take up three sets of issues addressed by these essays with a view both to clarifying the claims made in Hall and Soskice (2001) and to extending the analysis of such matters.

Unemployment and the Service Economy Blyth raises the important issue of whether the continental European countries that we label 'coordinated market economies' (CMEs) can match the employment performance of 'liberal market economies' (LMEs), such as those of Britain and the United States, especially in a post-industrial era when employment growth is likely to be concentrated in the service sector rather than manufacturing. With characteristic flair, he reads far more into our argument than is there, including a defense of social democracy, and several contentions that are not there. Accordingly, let us begin with a brief clarification. We do not accept, implicitly or otherwise, many of the tenets of the conventional view about the causes of European unemployment that seems to be the real target of Blyth's critique. As we observed on the basis of comparative unemployment figures, 'both liberal and coordinated market economies seem capable of providing satisfactory levels of long-run economic performance' (21-22)'. Moreover, against those who attribute high levels of unemployment in Europe to the 'wage rigidities and job search disincentives imposed by welfare state institutions,' the contributors to Hall and Soskice (2001, chapters I , 4, 5) develop an alternate perspective on the social policies of coordinated market economies that sees many of them as crucial adjuncts to the firm strategies on which high levels of employment and economic


Peter A. I lull and Di~vidSoskice Variclies or Vopitnlism ant1 Institutional Chtunge


German tredc unions to the dcvclopmc~~t of a low-wage sector is slowillg efforts to ini17rove tlie elnploylnent prospects of thc low-skilled, and the need to secure co~~scnsus in a political systeln will1 ~ n ~ l l l i l veto ~ l e points reduces the speed of econolnic adjusln~cnt it1 Gcrml~ny.However, recent illeasures to expand the use o f temporary cn~ploylnenlcontl*actsand cxelnpl low-wage jobs from social chnrgcs inilicate growing flexibility at the low-wage elid of he Germitn labor market. Tlic argiument that CMEs have poor unemployment records is belied by tlic success o f Inany CMEs, the Netl~erlandsis at 2.1% 011 the latest O I X I l staniiardi7cti unc~nployrnc~~t rates Ibr 2001 (OECD 2002), Denmark 4.3%. Austria 3.6%, Switzerland 2.5% (2000). Sweden 4.9% and Norwcuy 3.6%. Moreover, Gcniian unemployment is lowest in what are i~sually regarded as thc two nlosl cotrrdinatcd rcgior~sBavaria and Baden-Wiirttemberg. Dcvclo~7rncnls si~cli as these, howcver, have no1 altered the German econolny or ir~rlcerlthe olllcr coordinalcd market ecollolnies of Europe beyond recognilion. 131yth is righl that the Iield ticcds niorc work on how tiations adjust to thc rise ol' the post-induslrial ccono~ny,but we tliink that the varielies-ofcapitalis111 npl?ronch provides un imporlant platform for understanding such adji~stment.




Meas111.e~to il~lrobluce new fc)r~~ls or flcxibilily into coordinated lnarket ccona~liicsruisc issues iulsoul inslitiltional clit~ngcsunrl the ultimate fatc of the developecl politicel cconornies, r]ueslions that inlercst bolli Blytll and Goodin. Issues of it~stitutionnlchringc pravide tllc /r~ilt?ro/i/for Coodin's disccrlling contribution to this dcbatc. The I'rrst clilcstiol~ he raises is whether the insliti~lior~al slruclures of political economics tlial arc not the purest type of coordir~alcdor lihcral markel ecollulny will survivc the 'fiercely competitive internalio~~tll environ~~iecnl'of a globalizing era; ancl the scconcl ilsks where i~~slilutiolial chtrtsgc is likcly lo take tllcse economics. Based on the premise tl~at relatiolis of trust arc crucitrl to tI1e operution ul'a coordinatcd market economy and easier to ekrcqtn~ethan construct, he conclucles [ha1 'CMEs arc nalurally cloornecl to extinclion, and 1,M13s ~~ltinlt~tcly to prevail' - - ti striking and tieoDarwini~111conclusion. Goodin's emphesis on t l ~ evarie~y to be fi~uiiclwithin our varieties of capilelisns is salulory. For the sake 01' cxposition~~l clarily in the Introduclion to Plall kzr~d Soskice (2001), we outlined liberal and coardiniited market economies EIS iclet~ltypes uncl I+'oci~seci on tlie Anierican and German cases Lhat cxctnplify them, bill the point of he: ~~nnlysis was not sitnply lo describe two types of ccot~ot~~ies but Lo develop new formululions about lhe principal di~nensionsdistinguisl~ingone palitictil econotny froln another in more general


A n d valurr

Carpenlr [email protected] l Ciovcrnnr~uc Figllre I Courdinalion in Labor Relation8 r ~ n t t'arponlc

terms, with all empl~nsison tl~edimensirrns of clifTercncr: conscrluenlial far nationnl policy turd performance. We find ~Iioseclirner~dianain tlrc nsrure of the rclatio~lsthat firms and ull~cractors in the palitict~leconrrmy dcvclup in order lo cnordirzate their prilrcip~l,lendeklvorsi, An we h~tv(:I I Q L C ~ ( 3 3 . 3 6 ) , vszrinlion along these di~nensionscan be usecl to ulistinpuiah sub-tyyucti ernmrsg both liberal and coordinnted market ~conomiesand to identi0 snrnc hybrids tllul may no1 correspond closely to tlresc two caicgorias. Allhougl~the cllarncter or coordination s~msnglire aclnrsj in h e CCOIIOIIIY is dillicult to assess in aggregate ~erm,u,Oinparick and kft111 (2002) ttitve devised meiisurcs for tlie character of coordination in tho spl~eresof*labor rclalians and corporatc governance tlral can be used to a s w s wlsctirer tile ntrlio~lswe idenlify ns liber~tlor coart.linarled economies confami 10 that dcscriplion anel how national economic$ cuinpere It4 each other, Figure I i~se,"it h r ~ crn~astires to array the OECD nations in u two-clirnensisnal space.' it cri~awsthal these polilicul econamiasi lend 10 fall into the categopic8 a~sipneelto lhet11 by llie [email protected] capitalism u~alyrris(19--20) and hat 111ara is interasling v8ri~llioll wilhin cnch category, Among LME8, for instance, (I'unada, Australia, New Zenlnnd and Ireland display relatively high levels o[. nlarkat caordinalion but oncs that nra not us fully clsvelaped &alp in the CdS or UK, The CMEs sf northern Europa cli~slerin Iha northemt quaclrant of tlnc figure. Wuwavcr, the soulhert~E~rrapeaneconornie~of Franae, Spain arid Portugal display lower

Peler A. Hnll and David Soskicc Varieties of Capitnlis~iiand Ins(i(utional Change


levels of strategic (1101.1-niarkel) coordinalion in labor ~narketsthan their northern neighbors. AS Goodin notes, Gingerich and Hall (2002) also provide evidence that rates o f growlli will bc better i n political econo~nieswherc one type of coordination, whcther markct-orienlcd or strategic, is highly developed in both labor rclatio~~s and corporate governance. Despite tlicsc rcsnlls, liowevcr, wc do not think that economies in the '~iiiddlegrounci'wwhcre 111arkelor strategic coorclinatioli in these two spheres is imperfectly cievclopcd niusl niovc inexorably toward [lie poles represented by a 'pitre' C M E LME. TO bc sure, some economies may be less efIicient than those pure typcs. bill wc do not believe that ellicicncy considerations dictate pallcrns of inslilulional changc. 'To clil~iintlleecono~niceficic~lcyaltogether as EI factor in anulyscs o f inslilutional changc would be il mistake. Faced with inlernalional compclilion, lirnls niusl be attentive to the eRciency of their opcralions ancl rcsponsivc to prcssilres Lo improve il. Although the cotnpetilion govcrnmcnls fi~ccis loss intcnsc and not purely ecotiotiiic in nature, even politicians confront clccloral pressure lo cnhance tlic pcrfortnance of the cconomy (cf. Li~idblo~ii, 1977). 111such Inatters, however, there is Inany a slip twixt cup anil lip. Inlbrn~alionalissues alnict the search for more eficient ways to manege a firm or iln ccononiy. Moreover, political consent far institutional cliangc whcllicr in iI lirm or politjcal cconolny n i ~ ~be s l niobilizcd, and many fcaturcs of thc organ~z~lt~onal setting rcncler thal a challenging task. Govcrnmcnts rcspond to Inany considerations beyond those of economic cflicicncy (cl'. Mcycr ancl Rowan, 1977), In short, allhough efficiency consiclcr;~tions ol' the sort our anc~lys~s identifies are relevant to institutional change, llle lutter is nlti~iiatelya 1701itica1 process driven by rna11y factors and mnst be a~~elyzcd as s i ~ c (cf, l ~ 'Thclcn, 2001). These points apply will1 cqi~ulhrcc lo the issue of whether coordinated mstrket ccononiies can be expectcd to convcrge toward a liberal economic 11iodcI.Cjoocli11 is correct to observe that [he varielics-of-capitalism approach iclcntifics 2.1 fi~nclume~~lal asylnnlctry relevalit to institutional change and his ~~ntilysis 01' ~ ~ L I S i~rovidcs L nice n ~ i c r o f o ~ ~ ~ ~ dfor i ~ tit.i oSince l ~ s eRective strategic coorciinaliori rccluires llie clevelop~i-ientof appropriale institutional forms in society ancl thc conimon knowledge that only cxpericnce generates, it callnot retlclily be lcgislaled (cl', C~~lpcppw, 2002). Goverrtrnents are better able to intensify cornpetitio~l through cleregulnlion. In this respect, it is not i~nrcasonablcto posit u long-~crmhistorical bias leaning in the direction of liberalization, I-lowcver, one of O L I ~core contenti~nsis th~ztcoordinated rnarket economies arc not as frugilc EIS ~ntrnysuppose (cf. Strocck, 1997). On the one hand, cficicricy consiclerations militt~tein their fh~vor:we argue in Hall and Soskice (200 1) Lhai CMbis can Bellerate high levels of ecoilattlic perfor~nanceeven amidst inlensc intcrnalianal competition. On l11e other hand, politics is imporlant here. Comparative Eurrpcun Polities 2003 1

Coordi~laledlilarket eco~lomicsgenerate dislributivc outcotllcs li~ghlyvalucrl by electorales. In Inany cases, they are built on powerful tmde un~onsulid employers associatiolis tliat have acquired dcep intercuts i n strt~tcplccac~~~tlination, cannot readily be dissolved by legislative lil.11, ~tticlIlnvc lcndcrl to ally to protect tl~cregulatory arrangeiilcrlts thnr sustain coorrlint\tio~~. In nr~tionsli~rcll a s Auslria, Sweden and Germany, the rnobiliztltion~llpower of pn)sluccr yrclups sets lit~litson what dcrcgulation can acllievc in ecot~amicterms and on how much dercgulatioli can be acliicvetl in political terms. Althougli our analysis focuses otl ricvelopcd cconcan~ies,much worh on tlic developing cconoli~ies,especially in Rasl and Soi~tlzEast Asia note.; tllc close and continuing relatioliship bclwcc~~governmcnl irncl busirrcs.; 111 some econonlies that have pcrfornicd wcll there. South Korea nntl 'Ti~lwan arc well-known exainples, but Malaysia and Indonesia also o&r aolnc s ~ ~ p l ? ofor rl the contention illat tl~eretlrc econon~icLbrms beyond tlzc nto-llbcn~ln~cldel that can si~rviveanri prosper. This is not to say that we expect no institutional chelnpc i n C'biks untl no changes in a libcral dircctinn, On the contrary, our coricel?lic-,nof insl~lu[ronstis factors that ~ilcdiatcthe rclalions among the care LIC~OSSc)S ~ I Z Cccotltrlny tnlplics that tliey iue constantly subject to negotiation. We explicitly rqec( an olt1c.1. vicw of the i11stilillions of the political economy tli~11saw lhenr us i\ rlpicl ynd of sanctions atid i~~ccntivcs in fiivor oS a conception thar understtlnds tlrcn~us n tilore ~nallcablcset of rules and informal utiderstanctil~gsu~zdcrpirrriingmodes of coordination (5, 9 - 12), Thus, the institutions CIS coortlinrrtctl 111tlrkc1 economies shoultl be responsive lo experie~icc,sul~jectto retlegotit~l~orr, E I I ~ ~ flexible enough to survive periodic cht~llengcs.Tlicy Elre crealad scnd sustainccl through iterated interaclinn, niiiclz of it conllictual, nl; the: l~isioryuS Ciermtln ind~lstrialrelations indicates (cf. 1-Itill, 1 9 4 ; Streack, 1994). TIlclcn (2000,200I 1 identifies the political character of the processes t~nclerpinnirgginaiitutinns 21s well as solnc of thc challeliges coordinntccl rnnrkct cconomia~confront. In this context, i l is not surprising to see some cletncrrts ol' libcrnlizr~lion within coordinalcd market economies, i~icludingmure extensive: pnrl-[imc cmploymcnt, le~nporclryconlracls, @Ili,rts to secure greclter trunspilrcncy in financial markets, and tlic gradual d c r e y i ~ l ~ ~ tof i asame l ~ proleclod sectors suul~ as tclecollzlnunicillions, Table I assetnbles a rarlgc of indictitors for institutional clienge during the 19880 s and 1990 s amotjg the developecl politictll cconolnies classified as liberal, coordinatecl or ,nixed mgbrkel ccollOn~~cs.+' 11 shows some movcillent in a 'liberal' clirac~ianwitllin &'ME* as well ~~1:s. but whill is most striking aboul these results is that, o n many indicators, lhc cliEerences between CMEs and LMEs have widenecl rather t h a l ~trktrrowed in rccelll years. The overall puttern is one. of change but inslitulionnl convergence (57 -66).

Peter A. I-lall tlnd Duvicl Soskicc Varieties or Capilnlism and Instiiuticlniil C'hilnge

Table 1 Pt~llernsor institutional ~ t l j u s l m e n li n tlie tlcveloped political economies










lrltlustriul relalions Trnde 111iio11tlc~lsily Biug61inir1gcoverugc B a r p i n i n g level

55 76 1.7

53 76 1.8

-4 0 6

46 58 2.3

31 38 2.5

-34 9

Social ~)roleclioll Employnlcnl prolcctioll 1'3cnelit enki\lenlcnls Sociul spcndirlg I C i l I P

2.3 20 23

2.3 36 28

0 24 22

1.0 24 IS

1.0 23 10

22 1033

16 1810 0.28

28 89

-- 15

(1 --4 27

3.5 15 17

3 31 24

--I4 107 41

20.2 IH31 0.33

26 1 16

8 1812 0.31

II 1728 31


7.4 801

1 9.3

11.0 382

10.0 570

-.-4 72

XX 38

I4 2.7

31 2.1


4 IK

24.2 100 55

27.9 166 56

15 66 2


22 .S 4

F i r m slvucturc 0.7 Avert~gcjob tcnurc C'EO c n n i p c ~ l s i ~ t i ~ ) ~ ~ 343

10.1 5Ub

4 48

7.3 414

C*orporutc g o v c r ~ ~ i ~ l l c c Stk m k t c k ~ p i l e l i ~ o l i o n Debl/equily r i ~ l i o

01 2.0

69 17





26 115

I8 15

22 100



22 U r ~ i Inbor t cc.)sta Totnl employmen1



33 79

Labor market flexibility I%irl-titile e ~ ~ l p l o y ~ n c ~ r l I X Avg. hours woskctl 1713 Inco111c incrli~ulily 0.24


lY80.~ IYY0.y






Suurccx: liuiorl in I-lr~lliuid (iingcrich (2001).

Comprrrrrtive Insti tullonnl Advantage In somc respects, it may be ~pproprialefor Watson to describe our a~ialysisas 'Ricarrlian'. Like Ilicrrrclo, we argue that aconomic openness and tile more subslanliul flows of inlernc~tional Lrade associated will1 it ncecl not force nalional economies to converge 11~11can I-einforcentitianal diversity iasleacl, by encoureging e ~ ~ ccl oi ~ l l ~ t rtoy specialize in what it does best. While ilcknowledging that arrangements at [he: sectoral or regional tcvcl can be important, we also concentrate on the nt~tjonal level where legal systetns and regulalory regi111cs wit11 substantial i ~ ~ ~ p l i c a t ifor o l ~the s economy are delern~ined. Othcrwisc, however, our analysis is rather diRefere111 from the one Watson criticizes. Wc observe, precisely tzs Ile does, thal tho Ricardian theory of



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3 0


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g -5



3= 8 8


t s.

.Z' a


2 3






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8 , u 2 2





e = E




5 X a--,

.g - --e ---


* - 0

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= t = r.

Peter A. Hall and David Soskice Varieties of Capitalism and Institutional Change

# 249

However, as all three of these essays indicate, the varieties-of-capitalism approach raises issues of institutional change that deserve a prominent place on the research agendas of comparative political economy. Many of the contributors to Hall and Soskice (2001) explore concrete cases of institutioilal change illuminating, in particular, the role of employers in econoinic adjustment. One of the objects of the volume was to highlight the importance of organized capital, as well as organized labor, to the political economy. However, we also suggested that political coalitions are central to processes of institutional change and that there may be systematic differences in their complexion across liberal and coordinated market economies (58-60). The challenge now is to move beyond these initial insiglits to develop more complete models of the coalitional dynamics that underpin institutional stability and change, using contemporary and historical cases to trace the complex interplay between action in the economic and political arenas (cf. Iversen and Soskice 2001, 2002). We believe that the varieties-of-capitalism approach provides a good basis for understanding what is at stake in contemporary processes of institutional change and many of the interests those processes engage. Notes I Unless a further citation is given, here and elsewhere in this response, the page numbers given in brackets refer to Hall and Soskice (2001). 2 The figure is the rate of change of employment in job classes ISIC 6, 7 , 8 and 9 a s a proportion of the adult population from Schludi et al. (1998: Table L 1.3). 3 National scores are derived from the factor scores for the principal component of a factor analysis on measures for shareholder power, the dispersion of control in equity markets, and Lhe size of the stock market in the sphere of corporate governance, and on measures for the level of wage coordination, the degree of wage coordination, and labor turnover in the sphere of labor relations. Higher scores indicate higher levels of strategic coordination relative to market coordination. For details of how these measures were constructed see Gingerich and Hall (2002). 4 The 'mixed market economies' include Spain, Portugal, Italy and France that fall below the regression line in Figure 1. For details of the measures, see Mall and Gingerich (2001).

References Culpepper, P. (2002) Creatblg Cooperation: How Slates Develop Htunail Capilnl ill Brrope, Ithaca: Cornell University Press. Esping-Andersen, G. (1990) Tl?ree Worlds of Weware Capifcrlism, Princeton: Princeton University Press. Fioretos, 0. (2001) 'The Domestic Sources of Multilateral Preferences: Varieties of Capitalism in the European Conlmunity' in P A . Hall and D. Soskice (eds.) Verities of Capitalisnz, Oxford: Oxford University Press, pp. 213-246. Comparative European Politics 2003 1

Peter A. Hall and David Soskice varieties of Capitalism and Institutional Change

250 Gingerich, D.W. and Hall, P.A. (2002) 'Varieties of capitalism and institutional complementarities in the political economy: an empirical analysis' Paper prcsented to Workshop on Comparative PoliticaL Economy, Cornell University. October. Hall, P.A. (1994) 'Central bank independence and coordinated wage bargaining: their interaction in Germany and Europe', Gernzrrn Politics and Society, 31: 1-23. Hall, P.A. and Gingerich, D.W. (2001) 'Varieties of capitalism and institutional complementarities in the macroeconomy: an empirical analysis' Paper presented to the American Political Science Association, San Francisco, August. Fourzo'ations of Hall, P.A. and Soskice, D. (eds.) (2001) Varieties of Capitalism: The I~zstirutio~~al Comparative Advantage, Oxford: Oxford University Press. Iversen, T. and Soskice, D. (2001) 'An asset theory of social preferences', Anzericml Politics( Scie!rcc Review, December, 95: 875-893. Iversen, T. and Soskice, D. (2002) 'Electoral systems and the politics of coalitions: Why some democracies redistribute more than others, Ms, Haward University. Iversen, T. and Wren, A. (1998) 'Equality, employment and budgetary restraint: the trilemma of the service economy', World Politics 50: 507-546. Lehrer, M. (2001) 'Macro-varieties of Capitalism and Micro-varieties of Strategic Managemenl in European Airlines" in P.A. Hall and D. Soskice (eds.) Varieties of Capitalisni, Oxford: Oxford University Press, pp. 361-386. Mackie, D. and Pepino, S. (2003) 'Germany's stagnation is beyond its control', Financial Titnes, February 27. Meyer, J.W. and Rowan, B. (1977) 'Institutionalized organizations: formal structure as myth and ceremony', A~tericnizJournal of Sociology 83: 340-363. North, D. and Thomas, R. (1972) Rise of the West, New York: Norton. Scharpf, F.W. and Schmidt, V.A. (eds.) (2000) Welfare and Work in the Open Economjr, 2 ~01s Oxford: Oxford University Press. Schludi, M., Seils, E. and Ganghof, S. (1998) Acljtlcstrnent Data Base, Cologne: Max-PIanckInstitute For the Study of Societies. Streeck, W. (1994) 'Pay Restraint without Incomes Policy: Institutionalized Montearism and Industrial Unionism in Germany' in R. Dore, R. Boyer and Z. Mars (eds.) The Rettrrrt of Incotnes Policy, London: Pinter, pp. 118-140. Streeck, W. (1997) 'The German Econon~icModel: Does it Exist? Can it Survive?' in C. Crouch and W. Streeck (eds.) Political Economy of Modern Capitalism: Mapping Convergence and Diversil~~, London: Sage, pp. 33-54. Thelen, K. (2000) 'Why German Employers Cannot Bring Themselves to Abandon the German Model' in T. Iversen, J. Pontusson and D. Soskice (eds.) Unions Employers and Cenlml Banks, New York: Cambridge University Press, pp. 138-169. Thelen, K. (2001) 'Varieties of Labor Politics in the Developed Democracies' in P.A. Hall and D. Soskice (eds.) Varieties of Capitalism, Oxford: Oxford University Press, pp. 71-104.

Comparative European Politics 2003 1

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