Crises cracking globalization along the varieties of capitalism 336.0

Varieties of capitalism is a line of inquiry in political science for describing capitalism’s broad brush based on the elements that make it work.

Professor July Teehankee of La Salle introduced the approach to me by recommending the Hall and Soskice book pictured below left.

Other than Cuba and North Korea, most of the world now implement one of the varieties of capitalism. Learning about the varieties minimize ad hoc tinkering, with the Filipino art of kumpuni, and from re-inventing the wheel in policy making.

Hall and Soskice, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (2001, Oxford). Click image for Amazon link.

While globalization remains the mainstream mantra, recent crises are forcing a splinter along the lines of the varieties of capitalism.

Even the IMF now allows capital controls given certain conditions. India and China have capital controls in place today.

I tend to think that the current events in Greece and the European leaders’ actions will ring fence the Eurozone by regulations and its unique financing relations including the possible nationalization of its biggest banks.

History of Varieties of Capitalism as analytical framework

Hall and Soskice traces the history of “varieties of capitalism” as analytical tool of political scientists from Andrew Shonfield’s 1965 treatise, Modern Capitalism, that proposed that government power, i.e. the continuum between a strong and weak state, was the prime determinant between varieties of capitalism.

The tool has been biased to developed countries maybe because confirmed data, documented case studies as well as written history facilitates the social analysis.

In the 1970s, when inflation was the major global problem, the dimension of collective action under the rubric of neo-corporatism on the ability of big unions to negotiate wage settlements augmented the analysis.

In the 1980s, social systems of production that included a reformulation of Friedrich List’s nationalism innovation system enriched the “varieties of capitalism” analytical tool.

Using a sociological approach that focused on trust and learning, as in the work of Bengt Ake Lundvall explaining Denmark’s dynamism, this approach highlighted the importance of technology trajectories and the role of firms and industrial clusters at the level of regions and sectors in explaining progress.

SYNTHESiST, as blog, started and studied this field of innovation systems from Schumpeter to [Freeman and] Lundvall and only later moved to institutional studies (of Douglass North and new institutional economics) and modern industrial policy (of Rodrik et al) when the limitations of a technical innovation focus on catch-up for emerging markets became too much to ignore.

Apparently, being behind the leading edge of technology, policy and social innovation on institutions can give more value-added for emerging markets like the Philippines.

Hall and Soskice, publishing in 2001, baseded their analysis of varieties of capitalism through the 1990s on developed countries.

Philippine edition of State and Society in the Philippines by Abinales and Amoroso (2005, Rowman & Littlefield). Click image for international edition in Amazon.

This blog post suggests, that with most countries practicing some form of capitalism, the matrix below shows that the analysis needs to be extended again to the 2000s to have better explanatory power given the rise ob the BRICS like India and China.

The context of the Philippines in the varieties of capitalism

I have often cited State and Society in the Philippines, pictured at right, in SYNTHESiST as a good analysis though the book of history did not synthesize suggestions as to how resolve the horns of the dilemma between its findings of a weak Philippine state and the Filipinos demands for better government services. The book seemed unfinished in this sense …

I also noted this in my recent post, Government productivity growth also needed for inclusive development on October 13, 2011.

In the Philippine context, Abinales’s framework probably reflects his background as Leftist in his youth, i.e. a strong state is necessary to better implement equitable growth. After the stint at Cornell and the mentoring of Benedict Anderson, the left-of-center perspective provides texture to his recent books. I like his later work like “Making Mindanao.”

North, Wallis and Feingast on Violence and Social Orders (2009 Cambridge). Click image for Amazon link.

North, Wallis and Feingast in their 2009 book at left provides a nuanced input to the analysis of capitalism from an American, new institutional economics perspective.

I blogged about their book, Violence and Social Orders, in the benignly-titled post, Development management and the latest in new institutional economics, on July 25, 2011.

For them, rather than a strong state, all that is necessary is an appropriate size that is able to guarantee the basic institutions of capitalism like sanctity of contracts, property rights and the like.

Contrasted against the small government proposed by libertarians, their statistical analysis indicates that the appropriate size of the state grows bigger according to the underlying complexity of the political economy being governed.

On a more recent blog post on October 13 on government spending as indication of the appropriate size of the State, Government productivity growth also needed for inclusive development, I cited from the book and noted that at the Philippines current stage of development, the indicated size of government is 20% of GDP versus the actual of 17.3%.

The blog gives a numerical analysis of government spending and state size in a Table.

The actual level of American spending of 38.7% is not out of line from similar developed countries and lower than those of social market economies in Europe.

The primary determinants of spending are GDP size and level of taxation.

Institutional comparative advantage and varieties of capitalism

Hall and Soskice wrote an academic book. I modern times, beyond classical Ricardian comparative advantage, they argue that the right institutional mix differentiate the varieties of capitalism though they do not recommend a particular institutional set.

On the three measures of growth, GDP per capita, and unemployment the institutional mix of the economies researched delivered in a narrow band for their constituencies.

They identity two archetypes of mix: liberal market economies (LME) typified by America that relies on market and hierarchies to organize their economies and coordinated market economies (CME) exemplified by Germany that use non-market institutions for information exchange, monitoring and sanctions for non-cooperative firm behavior (from Elinor Ostrom) and for deliberation to achieve comparable performance.

The citizens’ choice of the actual location between the LME and CME continuum seems to be dictated by history, political traditions and other legacy conditions.

Recent crises will splinter globalization along the varieties of capitalism

To reiterate, while globalization remains the mainstream mantra because of the generic benefits of increase trade, recent crises are forcing a splinter along the lines of the varieties of capitalism even as countries of different institutional arrangement seek to redress imbalances and crises.

I tend to think that the current events in Greece and the European leaders’ actions will ring fence the Eurozone by regulations and its unique financing relations including the possible nationalization of its biggest banks. China and India are still ring fenced by legacy capital controls as they implement a catch-up regime.

A 21st-century schema of varieties of capitalism

Between the older strong and weak state dimension that established legacy regimes, and Hall and Soskice’s institutional comparative advantage net LME and CME, I tried o develop a basic 2 x 2 schema but found to many contradictions.

Instead, a 3 x 3 schema turned out to be more congenial as below. Analyzing the schema is instructive though the middle cross seems intellectually wimpy and lazy.

SYNTHESiST synthesizes a matrix of institutional comparative advantage (a la Hall and Soskice, 2005) x state power (a la Shonfield, 1965) to map a space of countries representing varieties of capitalism. Click image to enlarge.

The basic analysis can be confirmed by collapsing the countries into either of the two axes.

Emerging market with a legacy of a strong states, at the topmost horizontal row, with functioning coordination and deliberative institutions, seems to have performed better in the past two decades than soft states.

Soft states, at the lowest horizontal row, develop entrepreneurial conglomerates like Tata of India, Gokongwei and Ayala of the Philippines, CP of Thailand, and etc, that coordinate within verticals in the manner described by Ronald Coase of the new institutional economics (NIE) school, to compensate.

Guiding and incentivizing such conglomerates, while avoiding capture, seems the quickest way for soft states to transition and catch-up while building the choice of market and hierarchies or institutions of information exchange, monitoring sanction and deliberation need for sustained development.

Final words on the Philippines and varieties of capitalism

I have set up the schema to have the Philippines, as liberal soft state, to be at the origin box on the lower left.

Following the definitions, this seems to indicate that China’s coordinated and strong state seems the best direction. An analysis using metrics like growth, GDP per capita, unemployment and Gini will indicate that this is not so.

The direction for the Philippines will be determining by starting point and the end goal that people desire – a middle of the box move to emulate Denmark, Norway or New Zealand may be a reasonable goal.