TOWARDS A TYPOLOGY OF COORDINATED ECONOMIES [draft; don’t cite] ERIK NIJHOF BINT/UTRECHT UNIVERSITY I. INTRODUCTION The Varieties of Capitalism (VoC) approach, as elaborated by David Hall and Peter Soskice, has been very useful in understanding the differences between capitalist countries, especially in the era of post-communism and the painful process of European integration.1 As a consequence, most attention is paid to the actual differences in policy and performance of the capitalist business systems, especially as a function of the dichotomy between market-oriented and coordinated economies (LMEs and CMEs). This specific research trajectory, however, showed some biases. First, despite its claim of founding its approach on the analysis of path dependency, VoC literature tended to neglect research on the historical development of business systems. Second, by grouping together LMEs and CMEs in two opposing categories, their mutual differences are being downplayed. And third, underlying these biases, there is ‘culture’, defined by Hall and Soskice as ‘a set of shared understandings about what other actors are likely to do, often rooted in a sense of what it is appropriate to do in such circumstances’, and thus culture embeds the behavior of actors in (in)formal institutions: “One the one hand, they are created by actions, statutory or otherwise, that establish formal institutions and their operating procedures. On the other, repeated historical experience builds up a set of common expectations that allows the actors to coordinate effectively with each other.”2 But culture should not be treated as a static phenomenon: ‘… the institutions central of the operation of the political economy should not be seen as entities that are created at one point in time and then can be assumed to operate effectively afterwards (… but) must be reaffirmed periodically by appropriate historical experience (… and) be reinforced by the active endeavors of the participants.’3 This statement implies the necessity of constructing historical narratives of the entire development of the different capitalisms which pay due tribute to this cultural factor. In practice, however, there are only a few studies that have tackled this problem from that point of view. Kathleen Thelen4 is one notable exception, and the Dutch BINT Project (Business in the Netherlands in the 1 P. Hall and D. Soskice, ‘Introduction’, in P. Hall and D. Soskice, (eds.), Varieties of capitalism: The institutional foundation of comparative advantages (Oxford 2001), 168 2 Hall and Soskice, 13 3 Hall and Soskice, 13-14 4 K. Thelen, How institutions evolve: The political economy of skills in Germany, Britain, the United States and Japan (Cambridge 2004)

Twentieth Century) another one.5 This contribution has been written by an author who participated in two volumes of the series and also in the synthesis of the project. Using the evidence gathered by the BINT Project since 2005, it will analyze the institutional and political development of Dutch capitalism between 1870 and 2000, identifying three different forms of coordination, and will draw some conclusions on the continual culture of social-economic consultation so characteristic of the Dutch business system. These results will then serve as a hypothesis for similar questions to be raised for other European economies. II. THE CASE OF THE NETHERLANDS:6 A crucial role of the formative years of industrialization • Industrialization: rather late (1895/1920), but gradual process, without vehement struggles • No big geographic concentrations, no huge migration: industries moved to the workers, enabled by introduction of electromotor and the bike • Many workers catholic, socialism weak in new industries • Creation of State Mines to set the standards in the new mining region of South Limburg (1902) • Intense debates on ‘social question’, followed by a wave of social legislation enacted by radical liberal and progressive Christian ministers (1874, 1889, 1901, 1913) Transformation from LME to CME (1900-1935/40) • Netherlands always a free-trade nation: small country, open economy in strategic geopolitical position, with a long commercial tradition 5 From 2008 to 2015, the BINT Project published seven volumes on Dutch business history, in Dutch language, covering the following subjects: Entrepreneurs (J. van Gerwen and F. de Goeij); Dutch Multinational Corporations (K. Sluyterman and B. Wubs); Cartels and Mergers (B. Bouwens and J. Dankers); Human Capital (E. Nijhof and A. van den Berg); Innovation (M. Davids, H. Lintsen and A. van Rooij), Corporate Governance (G. Westerhuis and A. de Jong), and Economic Government Policy (J. Peet and E. Nijhof). In addition, a synthesis in English of the results of the entire project was published in 2015 (K. Sluyterman (ed.), Varieties of capitalism and business history: the Dutch case (New York 2015). 6 This section is based on: E. Nijhof, A. van den Berg, Het menselijk kapitaal. Sociaal ondernemersbeleid in Nederland (Amsterdam 2012); J. Peet, E. Nijhof, Een voortdurend experiment. Overheidsbeleid en het Nederlandse bedrijfsleven (Amsterdam 2015); E, Nijhof, A. van den Berg, ‘Variations of Coordination: Labour Relations in the Netherlands’, in K. Sluyterman (ed.), Variations of Capitalism and business history: the case of the Netherlands (New York 2015), 22-49

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Great Depression: reluctant and moderate protection by conservative government, but temporary measures became lasting (cartels, collective labour agreements Catholic party in favor of (neo)corporatist regulation of economy, chooses for a coalition with social-democrats (1939) Social-democrats agreed: moderate, no revolutionary tradition, no strong proletarian roots; in favor of a statist regulation of economy

1st CME-variant: German occupation 1940-1945 • May 1940: Dutch economy subjected to German war efforts; certain sectors could still make contracts for specific products; distribution of foodstuffs by Dutch authorities; political parties and trade-unions dissolved • 1940-1942 wave of measures in the field of labor relations (wage control by ‘mediators’, corporatist business system), social security (costs of illness, children’s allowances) and taxes (on income, profits and wealth), which were all more or less preserved • 1942-1945: Total War, Dutch economy under strict control, systematic plunder and forced labor 2nd CME-variant: top-down wage control 1945-1963 • Compromise between Catholics and social- democrats: decentralized economic power under parliamentary control (neocorporatism) Extraordinary decree on Labor Relations: policy of wage control by state appointed ‘mediators’ in favor of (export) industry • Prominent role of new advisory bodies: Labor Foundation (employers and trade-unions, on working conditions) and Social-Economic Counsel (tripartite, on general socio-economic issues) played an important role in consultation and regulation of conflicts • Trade-unions agreed: promises of full employment, price control, comprehensive social security • Low wage policy ended in 1963 à‘wage-explosion’ 1963-1982: JANUS-FACED PERIOD OF LEARNING • Level of wages constantly rising • Completion of social security system • Constant betterment? • Trade-union militancy at its apex • Leftist Den Uyl government 1973-1977 • Closing of many labor-intensive industries • Rising unemployment • More social security costs than foreseen • Employers launched counter-offensive • Rightist Van Agt government 1977-1981



3rd CME-variant: ‘Polder Model’ (1982 … • Turning point Wassenaar Agreement in Labour Foundation (November 1982): no price-indexation of wages, part-time employment, measures against youth unemployment, trade-/sector-based vocational education schemes, … • Starting-point for revived tripartite consultation system with a prominent role for the Labour Foundation and the SEC as advisory bodies (influential when internally unanimous) • Dutch economy successful à Bertelsmann Preis (1995), coining of the term ‘Poldermodel’ (1996) 3. CONCLUSIONS: the NETHERLANDS 1. Containment of class struggle The retarded and gradual industrialization (from 1895 onwards) created time to create a coalition of groups concerned about the social consequences of this development; this concern derived from observations of troubles in neighboring countries. This coalition gained more and more momentum among progressive liberal and Christian politicians, and the 1917 compromise also included the socialists (the ‘Pacification’: universal suffrage and proportional representation, state subsidized denominational education, and the eight hour working-day). This dedication to avoid social tensions became very characteristic of the Dutch social and economic policy, and was shared by an overwhelming majority of the relevant actors. 2. Coordination of business relations: three variations of a CME Being a small, open and free trade economy, the government met the economic problems caused by the Depression with an ad-hoc policy of coordination, originally meant to be temporary, but since 1935, under influence of a rapprochement between (neo)corporatist catholics and reformist socialists, this policy gained permanency in the fields of industrial relations and social security. Since the German occupation in 1940, the Netherlands is an outright CME, but the way coordination was reached, differed considerably over time: 1940-1945: Befehle by the occupying power, to foster German war efforts; some measures, however, were not revoked after liberation. 1945-1963: Consensus on top-down wage-control, in order to restore exports and to guarantee full employment. First breakthrough of social welfare legislation (old age, unemployment 1963-1982: Era of confusion, confrontation and economic restructuration (service economy); trade-unions offensive and expansion of social welfare arrangements were followed by an employer’s counter-offensive after 1977; consultative institutions came under heavy pressure but did not break down.

1982-…. : Redefinition of the consultative economy, resulting in a more equal tripartite structure, with an important role for the joint consultations of the umbrella organizations of employees and employers in the Labour Foundation; reform of the extended social security system was a constant issue and rather successful. New challenges, such as globalization, IT revolution, lower trade-union membership, and more flexible employment are still discussed within this consultative framework. 3. Mental and cultural patterns When we try to identify the underlying mental and cultural patterns, which mirror ‘repeated historical experience’, the following ones stand out. First and foremost, we must mention a tradition of settling conflicting interests, in the longer run resulting in lasting institutions of consultation in which stakeholders regularly meet to exchange their views and to make compromises. Consultative bodies like the Labour Foundation and the SER are the most obvious examples on macro level, besides numerous bi- and tripartite organizations on branch (meso) level. These bodies reflect a socio-political situation of a decentralized power structure and strategic alliances of groups or ‘stakeholders’ that were able and willing to cooperate in order to gain optimal long-term results. This CME-variety should have had its predecessor in the institutional framework of the Dutch Republic, and even in the relatively autonomous medieval towns. The common denominator was the age-long existence of a civil society, carried by middle classes with a predilection of trustworthy institutions.7 Second, one of the strongholds of the Dutch CME were social security arrangements: public opinion has constantly shown a robust support in favor of arrangements reducing the risks of life. When these turned to be too generous, the whole consultative system was mobilized to reach a consensus of reduced arrangements that were still covering the essential risks. This resilience was also strengthened by the private character of the arrangements, funded by insurance schemes (pensions, sickness, disability, unemployment). Also in this field there were strong historical experiences: the Netherlands have a long-standing tradition and expertise of creating financial arrangements to alleviate the risks of life (old age, disability, death of a bread-winner), be it by means of charity or as self-help.8 IV. METHODOLOGICAL CONCLUSION (with remarks on some other counties) 1. Industrialization: creation of specific patterns 7 M. Prak, J.L. van Zanden, Nederland en het poldermodel (Amsterdam 2013), 7-24 8 J. van Gerwen, M. van Leeuwen, Studies over zekerheidsarrangementen (Amsterdam/Den Haag 1998); E. Nijhof, ‘Pensions and Providence: Dutch Employers and the Creation of Funded Pension Schemes’, Enterprise and Society, vol. 10, no. 2 (June 2009), 265-303

In short, the era of industrialization could play a crucial role in creating the specific patterns that characterized a country during several decennia, or even longer (path dependency); decisive was not so much the ‘objective’ character of this process, as the responses that were given by specific coalitions of actors on the arising social and political problems. We can identify the following clustering of factors. a. Timing and momentum: The timing and momentum of industrialization were likely to influence the choice for a LME or CME option in two ways. First, early industrializers had a comparative advantage over retarded ones; so they had a clear interest in advocating free trade, and being keen on exporting their manufactured goods to lesser-industrialized countries, they wanted to keep their production costs as low as possible and to maintain their full autonomy as an entrepreneur. To be sure, industrialization was not a national but a regional phenomenon (Lancashire, Borinage, Ruhrgebiet, etc.), and these regional groups of entrepreneurs had to push through their interests within strongly different national contexts. Thus, where industrialization came later, leading entrepreneurs were strongly inclined to advocate protective measures against foreign competition by the government (see Gerschenkron) and to forge coalitions with other interest groups, such as the landed interest in Prussia (the Juncker) and anti-slavery groups in the USA. Second, early or rash industrialization gave full sway to the disruptive social effects of industrialization, such as huge migration of labour and unbridled urbanization with bad housing and sanitary/hygienic conditions; in short, such sharp social polarization was likely to cause social entrenchment for a long time, as was the case in Lancashire and the Borinage. b. Size and openness of the domestic market Later industrializing countries with big domestic markets tended to be in favor of market regulation, as a rule by imposing tariffs on manufactured goods from more advanced economies (as did Germany, USA, Japan). Behind these protective walls, they set out to build their own industry, for which purpose banking facilities were of vital interest (as in Germany). For smaller economies, tariff protection was not a viable road, and these economies adopted a policy of internal cooperative, even corporatist structures to cope with foreign competition (cf. Katzenstein9) which they tried to combine with being highly competitive in some favorable sectors in the world market (Swiss watches and clocks, Danish and Dutch agricultural products). In regions where small agricultural property dominated, several kinds of peasants’ 9 P. Katzenstein, Small states in world markets. Industrial policy in Europe (Ithaca/London 1985).

cooperatives sprang up; in the industrial sectors, initiatives were launched to build up the human capital needed to cope with foreign competition (such measures in Germany were originally launched to protect artisanal skills but were transformed by market oriented, small family firms into a highly efficient apprentice system, see Thelen10). c. New social coalitions, new political agendas Where massive and rash industrialization was left free rein, this often resulted in uprooted and desperate workers; sharp social divisions and spontaneous actions from below, later in the rise of trade-unions and socialism. Sharp class antagonisms resulting from such polarized conditions could exert a long-lasting influence on a business system. Reversely, where industrialization came later, or in a more gradual way, just these examples of antagonism aroused a sense of urgency for concerned persons from political, economic and ecclesiastical circles to advocate a proactive social policy. The leading circles hotly debated on the means to avoid these social tensions, and the outcome differed from county to country, according to the structural characteristics of industrialization as mentioned above at one hand, and the specific definition of the problems and hence, the political agenda of reform on the other hand. Some examples may clarify these different definitions and agendas. In Belgium, an early and rash industrialization transformed the Borinage region and the surroundings of Liege into an archetypical zone of class struggle, with radical workers, who had lost their faith in the catholic church and embraced socialism at one side, and a leading class of hard-core liberal entrepreneurs, backed by catholic officials at the other side. In the Flemish-speaking parts of the country, with the exception of some manufacturing cities as Ghent and Alost and the port town of Antwerp, industrialization came later and more gradually, mostly in a kind of symbiosis with small agricultural activities; the influence of the catholic church was certainly not affected by this development. The papal encyclical letter De rerum novarum met with suspicion in the Walloon part of the country, but was warmly welcomed in the Flemish countryside as a means to escape the class antagonisms that might tear whole society. Ultimately, this led to compromises between these conflicting parties by the creation of a social security system of a corporatist stamp. But the complicated amalgam of political, social, religious and linguistic loyalties could never create a stable equilibrium, and until now these interests are in a state of permanent conflict, to the degree of undermining the foundations of the Belgian state. In Germany, the government set out to strengthen the internal cohesion of the newly founded empire that was composed of many different formerly independent states and a great variety of political and economic interest groups. The traditional Juncker class in the east had to be reconciled with big industry in the Ruhr region 10 K. Thelen, How institutions evolve: The political economy of skills in Germany, Britain, the United States and Japan (Cambridge 2004).

and small and medium sized family firms in the south producing high quality products. The apprentice system forged ties between these different industrial interests. Bismarck governed with changing coalitions, according to the goals he wanted to reach; and after settling the Kulturkampf also the catholics became a potential ally. The fear of revolution and the rising influence of the socialist party SPD and its mighty trade-unions gave the decisive impetus to launch the social security insurance schemes, and although the socialists were considered as enemy of the empire, many of their leaders acquired positions in the administrative bodies of the social security funds, thus becoming part of the German business system. To conclude, the formative years of industrial society strongly determined the specific paths followed by national business systems. Besides the structural characteristics of the process of industrialization, socio-political and mental/ideological factors played a role. 2. Critical junctures, path dependency and new directions The patterns resulting from these formative years remained not unchallenged, however. External shocks and incremental internal changes have created challenges to business systems to adapt themselves to new circumstances (‘critical junctures’). At least four of these periods can be distinguished. The First World War certainly functioned as an external shock. The belligerent parties had to adopt drastic measures in order to optimize their war efforts and to safeguard a bare existence level to the soldiers and the home front. On the labour market, women were encouraged to replace the men at war; policies of import and export restriction, price setting and distribution of vital foodstuffs were improvised. Since modern warfare required huge amounts of conscripts, their loyalty had to be ensured: not only by imposing rigid military discipline, but also by promises of extending the suffrage and social security once the war was over. The revolutionary tide after the Russian Revolution created momentum for the ambitions of the labour movement, but after 1920 there was a reverse current. In a lot of countries, substantial changes were agreed upon, like universal suffrage, an eight-hour day and social security measures (such as in the Netherlands, a neutral power, to be sure). The most important legacy of these years was the experience of effective economic and social intervention. The Depression of the 1930s was deeper and lasted longer than any economic downturn seen before. Whereas during the first years economists and politicians debated on the most effective way to revive the economy within the framework of laissez-faire policy, from 1933 on ever more voices were raised in favour of state intervention to protect the domestic market. But apart from the drastic experiences of the war economy during the Great War, there was not an established repertoire of measures. Each government seemed to experiment with its own schemes, ranging from currency devaluation in a liberal economy (UK) to a program of outright autarky under state dictatorship (Nazi Germany). Tariff barriers were only possible

in countries with a big domestic market (USA) or colonial empires (UK). Smaller countries, especially with open markets, had to operate carefully: the reciprocity principle impeded tariff measures against bigger countries, therefore other devices had to be found. Where already initiatives were taken to mitigate social polarization, the economic problems caused by the Depression were met by arrangements like export subsidies, (moderate) import restrictions, propaganda to buy domestic products, allowance of price cartels, financial support of trade-union unemployed funds, and unemployment relief works. Some measures were temporary by nature, to cope with the situation on the world market, and could easily be lifted, but other ones implied a degree of cooperation and exchange of sensitive information between the actors involved. For instance, restricting import was not a generic measure but was specific to certain branches under threat; so the employers in a branch of industry were to give this specific information; they had to cooperate in a branch organization. Cartels could only emerge between firms, which were willing to cooperate and to coordinate their decisions on prices, production, etc. This kind of arrangements tended to be more permanent and could contribute to the overall coordinated character of a country, especially in combination with bargaining relations between employers and workers. The Second World War meant for many countries the transition to a form of coordinated market economy. The Allied Powers had promised to create welfare arrangements in all countries at war; the USA with its 1933 New Deal and 1935 Wagner Act had already set an example. The UK followed in 1942 with the Beveridge Report with its programmatic title ‘Freedom from Want’. These promises of a welfare state without unemployment had to enhance the morale of the soldiers and the occupied countries, but served as a buffer against the more radical demands of the radicalized resistance forces in the occupied zones as well. However, the actual implementation of these promises in the post-war era showed remarkable variations. In countries with a strong LME profile, where overarching institutions or ideologies did not mitigate class antagonisms, the state was the only body that could implement this social welfare program, by means of a pay-as-you-go system based on taxation. In the USA and the UK, it were leftist governments that launched the project of the new welfare state (FDR in 1933, Attlee in 1945), and the response among the population was so massive that more rightist governments coming into power afterwards did not consider rolling back these changes. At the other end of the spectrum were countries that had already opted for an insurance system (sickness, disability, pensions): this was based on the formation of funds, which required a long-term perspective. Especially in CMEs, law protected their juridical and financial autonomy. The kind of coordination differed strongly from country to country.11 France nationalized key industries and adopted a system of indicative economic planning. Germany started as a liberal economy, compensated by some workers’ influence on top level, but evolved into a ‘social market economy’ in the 1960s, with the 11 H. van der Wee, De gebroken welvaartscirkel (Leiden 1983), 207-230; see also B. Eichengreen, The European Economy since 1945 (Princeton 2007), 31-47.

apprentice system as a most characteristic feature. Smaller countries like Sweden, the Netherlands, Austria and Belgium developed varieties of a consultative economy between the state and umbrella organizations of employers and employees, with the intention to involve all important interest groups in a common policy to find a balance between economic growth, full employment and social welfare. Sweden had a system of bipartite and tripartite consultation on matters of social and economic policy: wages, labour market, social security, and followed the principles of active (neo) Keynesianism, income leveling and innovation. The case of the UK is very interesting. After 1945, it acquired some CME features: nationalization of key industries, introduction of free health care (NHS) and implementation of the Beveridge program of social welfare (based on taxation and distributed by the state). Esping-Andersen (Three Worlds of Welfare Capitalism) classified post-war Britain as tending to the social democratic variant of capitalist welfare states (the other ones being the liberal and the corporatist variants).12 However, in the field of industrial relations, another picture emerged.13 Bargaining between employers and workers on labour conditions never produced lasting consultative institutions; sometimes it was organized on trade level, between umbrella organizations on both sides, often on instigation of a Labour government14; sometimes the firm level prevailed, with the shop steward as the pivotal figure on the workers’ side. But the key feature was always the voluntary, non-binding character: the employers as well as the trade unions were keen on preserving their autonomy: towards each other, out of a deeply felt class antagonism, but also within their own ranks, because of their narrowly defined professional interests. Whereas in the Netherlands the small professionally based unions had merged into broader organizations on branch of industry level, which had to bargain internally on their common demands toward the employers (who had to do the same within their own ranks), in the UK the trade unions remained split up in small professional groups, often guarding their own territory against infringements of rivaling unions with the same zeal as they opposed the employers.15 Here we may be able to identify a crucial mindset on both sides that characterizes the British business system. The period 1980-1990 is generally considered as a decade of profound change: a policy shift from welfare and employment to market deregulation and repair of budget deficits. The signal was given in 1979 with the election of Thatcher in the UK and Reagan in the USA, and also the fall of the Berlin Wall is presented as the 12 G. Esping-Andersen, Three Worlds of Welfare Capitalism (Cambridge 1990), 23-25, 53-54. 13 C. Howell, Trade Unions and the State: the construction of industrial relations institutions in Britain, 1890-2000 (Princeton 2005), ch. 4 and 5; see also H. Gospel, Market, Firms and the Management of Labour in modern Britain (Cambridge 1992). 14 see for instance: Government White Paper, In place of strife: a Policy for Industrial Relations (London 1969, HMSO CMND 3888). 15 D. Oude Nijhuis, Labor Divided. Union Structure in the Netherlands and the United Kingdom (Leiden 2013).

starting point of a new era; but underlying changes were the deeper causes of this reorientation. The neo-Keneysian policy did not work as before: the positive responses of deficit spending had lost their stimulating effects, partly by swollen budgetary deficits, partly by the growth of international trade (the leaking-away effect of national deficit spending), but most of all by the structural character of the economic problems: anti-cyclic policy could not prevent the decline of traditional industries. The worldwide opening of new markets (globalization) put heavy pressure on the competitive power of national economies. The turn towards neoliberal policies was felt everywhere, but the reactions were different. In AngloSaxon countries the drift towards this new policy was most clear (deregulation of financial markets, outsourcing, privatization of public services and industries, more stress on shareholder value, more flexible labour contracts, …), but as a matter of fact, these tendencies were also at work in other, CME oriented countries. Their responses varied widely; in general it can be said that they made use of the coordination mechanisms that had proven their value in the past like collective labour agreements and consultative institutions. ‘Europe’ acquired a specific role in this development.16 At one hand, it strengthened free trade by liberalizing the internal market (tariff barriers between member states were lifted, cartel agreements forbidden), but at the other hand it created new regulations, mainly In the fields of environment, safe and healthy working conditions, public safety, quality and standardization of agricultural and industrial products, and regional development. Social security arrangements remained a matter of national governments; these differed strongly from country to country and were, in all their divergence, the outcome of specific national path dependencies. The same holds true for the institutional setting of industrial relations. We may conclude, therefore, that the domains of social security arrangements and industrial relations must be considered as central to our understanding of national business systems in a European context. 3. How to go on? To sum up, if we want to analyze the differences between capitalist economies, we must start with the formative phase of industrialization, to see what kind of institutional framework was created to embed the deep societal changes it brought about. Social security and industrial relations are then key domains to investigate: here the debates were waged that shaped the crucial institutions of the emerging industrial societies. In these debates fundamental issues were raised, which shaped ad strengthened underlying mentalities (solidarity between and within social groups, proneness of bargaining, ideas of social justice, trust in institutions). The resulting patterns were tested and modified at ‘critical junctures’, where ‘repeated historical 16 G. Falkner, EU Social Policy in the 1990s. Towards a corporatist policy community

(London 1998)

experiences’ helped to create path dependencies or changes of direction. More comprehensive studies of national business systems within the European context could help us to understand better the underlying cultural factors. These would be of a qualitative kind, and enable us to formulate some hypotheses on the cultural factors underlying the path dependencies and the choices made at critical junctures, hypotheses that may then be tested in a more quantitative way.