Paradoxically, however, the Walrasian ideal of full employment with approximately equal wages seems to have been best achieved in the social corporatist countries. Most of the enquiries into corporatism take the view that competition in the markets of real economies is not perfect. Rather, markets are dominated by the behaviour of rent seeking organisations with vast resources in influencing other agents’ decisions and try to distort allocations so as to generate outcomes with distributive effects favourable to themselves. Pohjola points out that real economies do not consist of atomistic agents but of a large number of small and influential interest groups whose uncoordinated non-co-operative behaviour can be responsible for poor economic performance. If this is the case, then there are two obvious policy recommendations concerning the efficient design of bargaining institutions: either to centralise to such an extent that broader macro economic interest come to be represented in bargaining or to decentralise even more to the extent that interest groups become uninfluential.
Henley and Tsakaltos point out that the industrialised market economies have experienced considerable diversity of economic performance in the period since 1945. In particular, it is possible to observe a substantial range of experience of adjustment to the economic shocks of the early 1970s, shocks which mark the end of what has been termed the post war ‘golden age’ of sustained growth and low unemployment’. The 1970s saw rising unemployment, lower rates of economic growth and considerably higher inflation. Some countries did seem to wither the crisis of the 1970 and 1980s more easily than others, in that they managed to prevent the rapid growth in unemployment that characterised the experience of the most of the world’s larger economies
The analysis of Pekkarinen and Guger find that as far as economic performance since the mid 1970s is concerned, the corporatist countries display considerable variety. There are countries like Sweden, which over the period as a whole are quite generally considered as success stories. Some countries, like Austria and, in some respects Norway, which often used to be praised as success stories have met difficulties in the course of the 1980s. As is shown by Rowthorn’s labour market analysis, Austria never did particularly well as far as employment, wage dispersion, and the relative pay between men and women are concerned. Moreover, Landesmann argued that the recent difficulties of Austria, as well as of the Norwegian economy partly reflect the fact that these countries did not manage very will in the restructuring of their economies after the oil crisis. On the other hand, Denmark, which is often regarded as a failure on the basis of its higher rate of open unemployment alone, actually displays strong labour market solidarity: her employment rate has been among the highest and wage dispersion among the lowest. Finally, the Finnish economy has succeeded quite well after the deep recession in the late 1970s, and her corporatist structures have become stronger at the same time.
However, since then the small European states have shown different patterns, especially in the 1990s. Examples are Finland and Sweden showing that the corporatist system is not immune against persistent and high unemployment rates, while other corporatist states as Austria and Norway have continued to perform relatively well and experienced low unemployment rates. An extension of the Burda (1997) model of corporatist and non-corporatist behavior, shows that corporatism could be a successful social organization in a stable economic environment, but in a volatile economic environment this need not be the case.
Much of the literature therefore goes about trying to find whether the more corporatist countries do indeed have a better economic performance than less corporatist ones. Bruno and Sachs (1985) and McCallum have estimated cross-country Phillips type price equations, introducing a measure of corporatism as one of the explanatory variable. In general corporatism turns out to be strongly significant. The effects are very pronounced: the difference between the most and least ‘corporatist’ economies is found to account ceteris paribus for as much as 5-7% difference in rates of inflation. The results can be taken to imply lower equilibrium rates of unemployment for more corporatist economies.
Newell and Symons (1987) study five countries Sweden, Germany, UK Japan and the US. They make cross country comparisons and also distinguish between ‘corporatist’ and ‘non corporatist’ episodes within some of the countries. In all cases they look for differences in wage responsiveness to unemployment. A basic conclusion is that corporatism leads to a more powerful moderating influence of unemployment on wages. Hence according to their interpretation, smaller increases of unemployment have been required under corporatism in order to achieve a given downward adjustment of real wages. These studies appear to give overwhelming support for a monotonic relation between corporatism and the real wage moderation. For example, Metcalf (1987) concludes that ‘there is strong evidence, both across countries and over time that corporatism, consensus and superior macroeconomic performance go hand in hand’.
Calmfors and Driffill are sceptical about the interpretations. Calmfors and Driffill develop a model to analyse the influence of the degree of centralisation, which according to the authors is the main element of corporatism. They compute the level of real wages and employment for different degrees of centralisation in their model. They look at the two fundamentally different views which seem to be involved in the literature. According to the first view, centralisation is seen as a guarantee that wage setters will recognise broader interest. The opposing view holds instead that wage increases would be restrained if market forcers were allowed to play a larger role. This is the rationale behind the Thatcher government’s attempt to break union power. Similar ideas have inspired the employer side in the Nordic countries to try to break up central wage negotiations.
They argue that it is easy to be sympathetic to both views. Both the idea that competitive forces will restrain wages, and the idea that there are potential gains from internalisation of the external effects of wage increases within large encompassing organisations, have solid foundations. They find that the hump shaped pattern is related to Olson’s idea that organised interest may be most harmful when they are strong enough to cause major disruptions but not sufficiently encompassing to bear any significant fraction of the cost for society of their actions in their own interests. The message is that it is better to be highly centralised or highly decentralised than somewhere in between ie that extremes work best. Whether highly centralised systems with national bargaining such as in Austria and the Nordic countries, or highly decentralised systems with wage setting at the level of individual firms such as in Japan, Switzerland and the US seem to perform well. They argue the worst outcomes with respect to employment may well be found in systems with an intermediate degree of centralisation such as in Belgium and the Netherlands.
Pohojola’s survey ‘Corporatism and Wage Bargaining’ similarly shows that full employment may be best achieved by countries having either completely centralised or extremely decentralised bargaining structures, while the intermediate economies are likely to do much worse. That is if labour markets are dominated by a moderate number of medium sized organisations, each big enough to enjoy considerable market power but small enough to pass the costs of their actions on to others, then they all face a kind of prisoner’s dilemma. Although all employees would benefit from wage restrain in some circumstances, any individual group might be significantly worse off it were to accept wage moderation while other groups were able to obtain large pay increases. Aspects of the public goods problem are also present; benefits of nominal wage restraint do not flow only to the employees bearing its costs but also to the whole society in the form of a reduction in inflation and an increase in ouput and employment. There are two basic always to deal with these kinds of externalities and consequently to improve the employment performance; either internalise them by centralisation the bargaining structure or remove them altogether by decentralising wage fixing.
However, Pohjola shows that even the countries with intermediate bargaining structures are likely to achieve good employment performance under the normal circumstances of stable economic growth. This is because the unions and employer federations are ongoing organisations: they confront each other from year to year and thus induced to behave strategically. They can then achieve tacit or implicit agreement on wage formation without any formal arrangement if they understand that cheating and free riding will be punished by other others by not adhering to the implicit agreement in the future. The conclusion is the bargaining structures my matter only in turbulent circumstances.
Glyn and Rowthorn argue that it was the ‘durable compromise’ in Norway and Sweden which allowed the achievement of important social and economic targets. In other words, they seek to go beyond certain structural characteristics of corporatism to encompass the notion of consensus between interest organisations and the state. In their comparative study of unemployment in OECD countries, Glyn and Rowthorn emphasises ‘post tax’ wage restraint. Use of tax revenues has contributed in some countries to the financing of structural change through investment in the economy – slowing down the decline of traditional manufacturing sectors, retraining schemes, public employment and so on. By avoiding periods of prolonged crisis certain corporatist economies have avoided the problem associated with ‘hysterisis’ where real wage levels remain inflexible in the face of rising unemployment. Successful countries in this respect have some form of institutional corporatism and a great deal of societal consensus and solidarity (Glyn and Rowthorn).
Landesmann argues that in the long run it is the capability of the corporatist countries to structure their economies and to foster technical progress, which is decisive for their abilities to combine full employment and equality with increases in the standard of living. It is argued that due to a smooth process of ‘natural’ catching up and relatively fast economic growth, the awareness of the need for explicit industrial polices was weak in Austria until the early 1980s. But difficulties piled up gradually in the late 1970s, as restructuring was at the same time largely neglected. Landesmann regards this an important example of failure of corporatist arrangements. But more recently the awareness of the importance of industrial policy has greatly increased in Austria.
The papers by Landesmann and Vartianinen and Landesmann argue that like Austria, Norway was also characterised by a defensive industrial strategy in the late 1970s. But a crucial difference was that Norway was able to rely on North Sea oil. It was not until the mid 1980s that the fall in oil prices and a dramatic weakening of the trade balance led Norway to move towards a more offensive industrial policy to secure competitive foundations in its non-oil tradable sector. As in the Austrian case, this turn has recently been favoured by the international upswing but its final result remain to be seen. The open sector of the Swedish economy was very badly hit by the recessional period of the late 1970s but that there is a relatively successful survival of the Swedish models. They argue this for firstly historical reasons, Sweden had a highly concentrated and internationally orientated corporate sector, which was able to modernise its operations. Second, the state involvement in the restructuring process in the late 1970s, while defensive in character, facilitated the preconditions of restructuring through extensive labour market programmes. Various selective support schemes and labour market measures were promptly dismantled when the open sector started to recover in the early 1980s.
Much of these arguments thus offer reasons as to why concerted action and social corporatism may be rational for all parties. Yet corporatist arrangements have emerged in only a few countries and nowhere have they emerged by common consensus. Besides mutual interest in cooperation there is also a conflict of interest in capitalism, which poses a threat to and an obstacle for corporatist institutions. Potential problems with corporatism can be seen in that there may be uncertainty under corporatism. For example, the difficulties of corporatist collaboration in Finland and in Germany have both been related to the fact that an important range of decisions namely those of the central bank, are effectively out of the partners’ control. Similarly, the uncertainty about the future exchange rate in Finland has made it more difficult for the labour market partners to agree on wage increases.
In order to see what effect globalisation has on corporatism, I will first explain what is meant by the term. Globalization is the integration and democratization of the world's culture, economy, and infrastructure through transnational investment, rapid proliferation of communication and information technologies, and the impacts of free-market forces on local, regional and national economies. The barriers separating the corporatist countries from the rest of the capitalist world are breaking down, and their scope for economic autonomy is being reduced. In the present situation there is the rapid extension of integration into spheres, which were previously rather insulated from the outside world. For example, in most corporatist countries, capital markets were until recently highly regulated, but have been almost entirely deregulated. There will be virtually no restrictions on the movement of funds across the frontiers of these economies, and the owners of funds, whether domestic or foreign, will be free to transfer their money to whatever they can obtain the highest returns.
Compared with the 1960s, the world economy in the 1990s is much more highly integrated. In the 1990s trade flows are much larger and, whereas at the height of the post-war 'golden age' the majority of international capital movements were trade-related, they are now absolutely and proportionately much larger and dominated by speculative currency flows. International capital movements now have a much-enhanced ability to undermine the macroeconomic autonomy of national governments. With the introduction of the Euro, the need for a tight monetary stance in one country may limit the scope of another to overcome an external deflationary bias, which imposes sub optimal domestic economic performance. The ability to 'go it alone' for growth is limited and will in any case require sustained currency depreciation with concomitant consequences for the preservation of domestic price stability.
Growth in trade between countries leads to increased spillover effects and therefore to a greater degree of interdependence. One implication of such interdependence is that there may be a bias towards fiscal conservatism in a more integrated European Community (Goodhart 1990). This is because any attempt by one country at uncoordinated expansion of government spending generates benefits for a trading partner and therefore domestic income does not increase as much and is therefore unlikely to generate significant additional tax revenues. It will be very difficult for corporatist economies to successfully pursue a more expansionary fiscal policy to maintain low rates of unemployment and counter this fiscal conservatism.
Free capital movement may undermine the full employment goal. Firstly, an economy which chooses a looser monetary stance than elsewhere in order to encourage investment will find that policy unsustainable since capital will flow out. Interest rates will need to be high and will therefore cease to operate as an effective policy instrument for - stimulating investment. Secondly, capital flows may undermine the egalitarianism of corporatist economies. A commitment to egalitarianism may be a precondition for workers acceptance of a corporatist compromise. However, the high marginal tax rates and compressed wage differentials that this may entail may be perceived as detrimental to wealth-holders who in turn may move capital offshore. Finally, an increased ability by companies to access international capital markets may undermine their commitment to more long-term and intimate national-based systems of credit allocation, reducing the ability of the corporatist concentration process to influence the direction and scope of investment (Teague and Grahl 1992).
The growing internationalization of capital therefore has been suggested by a number of authors as a detrimental influence on the scope of corporatist arrangements. Transnational companies are less reliant on the well-being of a particular domestic economy and may therefore be less willing to participate in any form of corporatist compromise. The organization of employers is an important aspect of the structural preconditions for successful corporatist compromise. Any division between the interests of national and transnational companies will weaken a centralized employers' organization. Furthermore if corporatism entails establishing long-term trust relationships then these are weakened by the internationalization of capital. These relationships rely on shared national and cultural values and it is not easy to see how these can be replicated at the international level (Teague and Grahl 1992).
Korkman points out that free capital movements will make it very difficult to pursue the kind of low interest rate policy often used in the past to promote industrial investment in the corporatist countries. Any attempt to reduce real interest rate substantially below those available elsewhere will lead to an outflow of funds and to an eventual collapse in the exchange rate. Moreover, the freeing of capital movements greatly increases the danger of speculative panics, making economic polices a hostage to the options of international finances. Since capital of all kinds can now move across frontiers with relative ease, the individual corporatist economies will be forced to provide conditions for investors, which are competitive with that elsewhere. At the margin and allowing for exchange rate and other kinds of risk, expected returns on both financial and real investment will have to be similar to that obtainable elsewhere.
The third channel of interdependence is the exchange rate regime. All the corporatist economies have attempted to pursue fixed exchange rate policies. Indeed, a fixed exchange rate was seen as a cornerstone to the corporatist model since it was required in order to rule out the route of currency depreciation to accommodate inflationary wage pressure. Since the mid-1980s Norway, Sweden and Finland have all pursued policies of trying to maintain a fixed parity against the ECU. Sweden and Finland in particular had to abandon this policy in the face of huge adverse speculative pressure and currency market turmoil in the autumn of 1992. The deflationary bias in economic policy during the late 1980s and 1990s presents serious problems for the stated social corporatist aim of the maintenance of full-employment. Any desire to maintain rates of unemployment far below those of the rest of Europe, as was achieved in the 1970s and early 1980s, requires a monetary and fiscal stance, which is more accommodating than in the countries to which the corporatist currencies are pegged. This suggests a growing inconsistency between the full employment goal and exchange rate policy, which brings home very clearly the difficulties of a 'go-it-alone' strategy. It is widely thought that flexible exchange rates may offer some degree of economic insulation. However, abandonment of the currency peg may in turn require a tightening in domestic policy in order to contain the inflationary pressure of devaluation, particularly if the centralized system of wage restraint is also under strong internal pressures. The choice of appropriate exchange rate policy is therefore a difficult one - it is certainly not clear that opting for more flexible exchange rates would help the continued achievement of corporatist compromise.
Further pressure on corporatism has arisen through longer-term changes in the nature of the production process. A number of authors (Pontusson 1992b, Teague and Grahl 1992, Streeck and Schmitter 1991) argue that corporatism is under threat from the retreat from Fordist mass-production technologies towards forms of 'flexible specialization'. This change has come about because of increased competition between high-wage-cost OECD producers. In order to compete in terms of unit labour cost, in the face of little scope for driving wage costs down to the levels of the newly industrialized economies of the Far East and elsewhere, producers have been forced to develop strategies to improve product quality and customize production to individual customer requirements. This has necessitated developments in the organization of production. This has increased the tension between the need for centralization in pursuit of macroeconomic goals and the need for decentralization in order to implement the degree of labour flexibility required by new production methods. Flexible specialization may, as some argue, provide a fertile ground in which to cultivate more micro-corporatist forms of worker participation, but it is open to question whether corporatism can continue to succeed at the macroeconomic level if it is to be based on a bottom-up form of worker involvement..
Another area where integration has potentially major implications for national autonomy is the multinational corporation. In some corporatist countries, such as Finland and above all Sweden, national firms are rapidly extending their overseas operations and many of them will soon produce merely a fraction of their global output at home. Meanwhile, outside firms are investing g in these countries. As a result, the importance of purely national firms is diminishing, and production and foreign trade are becoming increasingly dominated by multinational corporations. A multinational corporation may raise its global output or sales abroad by increasing production overseas where neither of which is of immediate benefit to the domestic economy. Multinational corporations can always ‘exit’ from a situation they do not like, whereas national firms are trapped and have no alternative but to seek a ‘voice’ in domestic affairs. The rise of multinational corporations may also weaken corporatist structures by creating a greater diversify of interest on the employers’ side, thereby increasing the difficulty of forming stable coalitions amongst employers and undermining the authority of their central organisations.
Where it occurs, disintegration on the employers’ side will make it increasingly difficult to maintain the kind of long term working relationships between capital and labour which have typified the corporatist economies. Moreover, these difficulties may be compounded by a paralleled level in integration on the workers side. In most corporatist countries, economic developments are undermining the authority of the old centralised workers federation, either because these organisations are fragmenting or else because their coverage of the work force is declining.
In conclusion we have seen that economic performance varied in the corporatist countries. Bruno and Sachs and Newell and Symons however point to a monotonic relation whereby increased corporatism would increase economic performance. Calmfors and Driffill challenged this by suggesting that it was highly centralised or highly decentralised degrees of wage bargaining which had better economic performances and those with intermediate centralisation had the worst economic performance. However, Pohjola shows that even the countries with intermediate bargaining structures are likely to achieve good employment performance under the normal circumstances of stable economic growth. It may be therefore that the bargaining structures my matter only in turbulent circumstances. Landesmann suggested that most of the literature only focuses on short term criteria and in terms of long term policies countries such as Austria failed to develop necessary industrial policies.
But even if there is correlation between economic performance and corporatism it may not be that enhanced economic performance is due to favourable structural background factors or to corporatism. Pekkarinen suggested that the strengthening of corporatism in Finland might well have been a consequence of a strong economy rather than the other way round. Also I have pointed out that there are also potential downsides to corporatism for example in increased uncertainty.
It will be very difficult for corporatist economies to maintain its policies with the increasing external factors. The problems in the corporatist states started in the 1970s with a combination of the oil crisis and the collapse of the exchange rate system as well as a stagnation or decline on the demand side and increased competition in important industries from e.g. newly industrialized countries, which accelerated in the 1980s. Add to this the technological development and use of information technology, and the deregulation of the financial markets around 1990. The increased interdependency between states together with the deregulations of important financial markets gives that the autonomous economy does not exist on national level any more. Then the international economic environment for the European corporatist states has completely changed. Thus this could be one reason why the corporatist states have problems because contracts on the national level do not have the same importance as earlier. It can even be that the corporatist structure is a problem in the domestic economy, because special interest groups are given strong power. Hence corporatism seems not a successful way to organize society in the globalised economy of today.
References
‘Social Corporatism’ Pekkarinen, Pohjola, Rowthorn
‘Corporatism and economic performance’ Henley and Tsakalotos
‘Bargaining structure, corporatism and macroeconomic performance’ Calmfors and Driffill
‘Industrial Policies and social coproatism’ Landesmann
Burda, M.C., 1997, Wither Corporatism? Corporatism, labor unions and the safety net, European Economic Review 41