The varieties of capitalism (VofC) perspective has been the central framework to explain institutional differences between countries in the study of comparative political economy.
But it’s not viable if it cannot address and explain processes of institutional change. Let’s remind ourselves of the distinctive features of the VOfC approach:
- Complementary institutions
This leads to a typology of liberal and coordinated market economies (LMEs and CMEs), whereby employers are distinguished by the extent to which they pursue cooperative or competitive forms coordination. The institutions of a political economy are stable only as long as they are supported by certain segments of capital.
Institutional change occurs via the following mechanisms, which force MNCs and government to adapt/change:
- Exogenous shocks
- Endogenous drift (defection and re-interpretation)
The most cited example of drift and defection is how German employers managed to exit collective bargaining commitments, and their creative reinterpretation of German labour law (favorability principle). Flexibilisation occurred without rewriting the rules.
The form remained ‘stable’ but the ‘function’ changed.
Institutional reform in a market economy is always political because it sparks distributive conflict over who should bear the burden of adjustment.
Institutional arrangements in one sphere of the political economy condition the positions actors take in other spheres.
- The origins of pension reform in Sweden compared to the USA
- The origins of corporate governance reform in France and Germany
Despite all of this, VOfC is much better placed to explain stability than change. Further, there can be little doubt that all capitalist economies have experienced growing inequality. In the EU, there have been increased pressures for liberalisation.
How does VofC account for these changes? Does it imply all countries are converging toward a single neoliberal growth model? Does it mean that we should give up a comparative research agenda focused on explaining cross-national variation?
Kathleen Thelen suggests no. What we are observing are different trajectories of liberalization built around very different political coalitions.
Her core argument is that to explain institutional change in a political economy we need to analyze the underlying political coalitions upon which those institutions rest.
This requires untangling the difference between coordinated capitalism and egalitarian capitalism. VOfC is primality interested in the coordinated capacities of employers, and the productive capacities of firms. Whilst this may remain stable, over time, it does not imply these structures continue to be egalitarian.
Critics of VOfC are interested less in the efficiency-enhancing effects of economic institutions but their solidarity-enhancing effects. High levels of efficiency and high levels of equality only existed in the post-war golden age of European capitalism.
Over the past twenty years, different European countries have adapted to the pressures of exogenous and endogenous in different ways, and pursued different liberalizing moves. The figure below (figure 4 in Thelens article) illustrates the correlation, or not, between high/low equality and high/low coordination.
This leads to three ideal-typical trajectories of of economic liberalisation in Europe:
- De-regulation (Anglo-Saxon)
- Dualisation (Continental Europe)
- Embedded flexibility (Scandinavia)
All are based on an expansion of market relations, but occur under the auspices of very different social coalitions, with significant implications for distributive outcomes.
Deregulation occurs through displacement; explicit and direct attempts to impose the market. For example, the assault on the collective bargaining rights of public sector workers in Wisconsin. If employers lack collective coordinating capacities they will do everything to ensure that labour does not either.
Dualisation is based around a differential spread of market forces and occurs through institutional drift (i.e. not updating policies to reflect change). This can often occur through the intensification of cooperation between employers and unions in core sectors of the economy, leading to “insiders and outsiders”.
Flexicurity occurs through conversion whereby labour market and social programs are re-adapted to ensure individuals are reintegrated into the market. This often occurs through active labor market policies, whereby institutions are turned to new goals and built around new social coalitions.
Central to all of these trajectories of change are electoral politics.
Social democratic countries mobilized women and expanded the public sector, thereby turning women into a core constituency of Scandinavian politics. This did not occur in countries with social insurance, or occupation based models, i.e Germany.
In those countries where manufacturing dominated producer group politics, public policy continued to favour the manufacturing sector, and the trajectory was increased ‘dualism’ between high and low paid workers.
The implication of Thelen’s argument is that to build a new politics of social solidarity does not mean defending labour market institutions and public policies of the past. On the contrary, egalitarian varieties of capitalism remain robust when they are carried forward by new social coalitions and turned to significantly different ends.
What type of institutional change does the EU promote? Who are the core actors? How does this interact with domestic politics.