Japan is trapped in an economic morass. The Asian tiger economies are falling piecemeal into the arms of the IMF. Germany suffers from political stasis and record unemployment. Scandinavian welfarism has run into a financial road-block. Against this background the notion that there are different and equally viable forms of capitalism, reflecting divergent national preferences and institutional arrangements, is under unprecedented attack. Anglo-American neo-liberal orthodoxy, with its emphasis on contractual property rights, deregulation and flexible labour markets, is increasingly trumpeted as the pre-eminent model.
This is a dramatic change. Not so long ago, volumes of academic research were devoted to explaining how national institutional or cultural differences helped generate comparative advantage for many of the countries now deemed to be in trouble. (To take one example, the greater capacity of the Germans and Japanese to create a skilled and co-operative workforce was held to explain their competitiveness in making cars compared with the British.) There is also a growing economic literature showing that countries with higher levels of trust have less crime, a more efficient bureaucracy and higher educational achievement. Such studies also suggest that companies with a broad sense of trust perform better than those where trust is restricted to family.
Do these high-trust qualities-found in so-called stakeholder countries such as Japan, Germany, Switzerland, Sweden and Norway-no longer count for anything? Has the extraordinary might of the Japanese in consumer electronics or that of the Germans in mechanical engineering suddenly come to an end? Are these socially cohesive models of capitalism, which performed so successfully for most of the postwar period, now at the end of their useful lives?
Before trying to answer these questions it is worth noting a paradox in the triumphalist position of the American neo-liberals who boast of new productivity miracles-miracles, incidentally, which have yet to show up in official figures. Despite the self-confident proclamation of an industrial renaissance, protectionist rhetoric in the US is actually increasing. Many fear a yen depreciation against the dollar. Therein lies a clue to the real source of the enhanced competitive strength of US manufacturers against the Japanese: it owes as much to the collapse of the dollar in the ten years to 1995 as to the undoubted innovative capacity of US companies.
Nor should judgements about Japan be made out of historical context. True, it takes inspired economic mismanagement for the world's largest capital exporter to inflict on itself a liquidity crisis of the kind that has followed the recent collapse of Tokushoku Bank and Yamaichi Securities. Yet this is precisely what the US achieved after the 1929 crash. Japan's stock market crash since 1990, and the related debt deflation, have coincided with a profound change in the balance of international monetary relations. Just as the US found it difficult to take over global leadership in international finance when Britain's strength was waning between the wars, the Japanese have confronted difficulties in assuming a larger role on the global monetary stage, as the world's biggest creditor country. These are complex shifts in the balance of economic power which even experts do not fully understand. They should not be used as a basis for chauvinistic point-scoring.
As for the Asian tiger economies, their problems look acute today; but they remain a base for some of the world's most competitive companies-which will become even more so after the recent devaluations. It is worth recalling that the US and Europe were also afflicted by frequent financial crises at a comparable stage of development in the 19th century.
Meanwhile, the assumption that the continental Europeans are out for the count looks both premature and arrogant. It is true that they have lost the ability to create private sector jobs and that they suffer from over-rigid labour markets. But their growth performance-which should not be judged on the basis of a single cycle in which they are the backmarkers-compares favourably with the US and Britain over longer periods. Just as important, all the high-trust economies mentioned earlier are much richer, in terms of per capita GDP, than Britain. Hence the bemusement of continental politicians on being told first by the Tories, now by New Labour, of the superior nature of the British approach. Hence, too, the continentals' difficulty in generating the political impetus to address unemployment.
Among other things, this demonstrates the high degree of faddishness which enters into judgements about the strengths and weaknesses of individual countries and their particular market models. But it must be emphasised that it is not in Britain's or the US's interest for these economies to perform badly; painful though it can sometimes be, international economic exchange is a positive-sum game. So before rushing to the conclusion that such alternative models are defunct, it is important to be clear about the nature of the difficulties they now encounter.
consider first those countries in continental Europe with strong "institutional" characteristics, reflecting a commitment to social cohesion and heavy reliance on economic governance arrangements other than market exchange and managerial prerogative. In such economies, transaction costs are low. Solidarity between generations means that pensions are provided mainly by the state on a pay-as-you-go basis, which is administratively much cheaper than market alternatives. Large companies are more like communities than a mere corporate cloak for individual exchange. Within the company, market discipline may be suspended in order to encourage non-opportunistic behaviour, which promotes a sense of long-term commitment to the company. Both the state and the capital markets provide a supportive framework for long-termist commitment by management, employees and other stakeholders in the company, on the basis of what economists call implicit contracts. Income inequality is relatively low.
The long-term challenge to such systems comes not so much from unemployment but from the ageing of populations. Dependency ratios will deteriorate significantly early in the next century, leaving a dwindling band of workers supporting a growing number of elderly people. At current contribution and payment rates, the finances of pay-as-you-go state pensions cease to be viable. Pension provision is transformed into a pyramid scheme in which the early recipients do well, while the last in line risk being defrauded.
Public finances are stretched to the limit already. With most countries in continental Europe in structural budget deficit, it appears that the legitimacy of the links between public spending and taxation is impaired. The problems which European countries have experienced in meeting the Maastricht fiscal criteria for economic and monetary union are a measure of how difficult it has become to restore budgetary balance. To the extent that the cost of financing wider welfare expenditure falls on companies, the limits of what the European corporate sector can bear are already apparent. In Sweden, for example, the country's 50 largest companies have taken 75 per cent of their employment, production and sales abroad.
A similar pattern can be seen in Germany. The decision to export wholesale the West German economy's institutional structure and welfare system to the former East Germany has been immensely costly. As well as costing western Germany about $100 billion a year, the commitment to raise east German wages to western levels within half a decade means that less productive workers in the east have been priced out of the global labour market. West German employers have preferred to tap the pool of much cheaper labour in the Czech Republic, which is geographically close enough to play a part in just-in-time production techniques.
The postwar German compromise between labour and capital was conditional on limited mobility of factors of production across national borders, argues Wolfgang Streeck in the book Political Economy of Modern Capitalism (Sage 1997). This mutual accommodation was orchestrated by government intervention and self-regulation through employer networks and trade unions. Restricted mobility of capital meant low returns but long-termist relationships between banks and companies; it also encouraged a pattern of production and reward compatible with low inequality. In exchange, society provided a labour supply willing and able to satisfy the requirements of competitiveness in international product markets. Globalisation, says Streeck, allows the financial sector to retreat from its role as a national utility. In place of the negotiated national compromise comes global dominance of capital over labour.
This analysis serves to highlight the great trade-off in the institutional economies of continental Europe. In the compromise between capital and labour, capital was ostensibly the loser. Savers and investors subsidised the system. What made the losses tolerable was that the state redistributed financial resources to the rentiers of the system-pensioners-via the social insurance mechanisms initiated by Bismarck in the 19th century. But in today's more open economies, the assets of savers and investors are no longer at the disposal of the public sector to finance such flows. Both corporations and private investors can retreat off-shore.
This point applies equally, though with national variations, to the economies of Japan and the rest of Asia. For them, the burden of social costs is a less pressing issue. But in so far as long-termist behaviour has been supported by subsidies from capital to labour, the bargain is undermined once capital controls are lifted. Even in South Korea-which permitted only partial liberalisation-the use of the banking system to promote the government's industrial policy, regardless of profitability, became a recipe for capital flight and financial collapse from the moment the Korean won started to fall.
The speed with which global capital forces the institutional infrastructure of these economies to unravel depends on the degree of their financial vulnerability. In Japan, traditional relationships between businessmen, bureaucrats and politicians in economic management have already been substantially loosened. Politicians are having to take greater responsibility for handling the current economic crisis than they have done in the past. Keiretsu groupings in industry and commerce are also loosening. The crisis in the financial system is pushing banks into reducing their equity shareholdings in fellow keiretsu members; they, in turn, are ceasing to bail out banks despite long-standing relationships. In the rest of Asia, corporatism will unravel to a greater or lesser degree depending on the extent of the pressure from the IMF and the US. By contrast, in Europe the unwinding of co-operative forms of political and economic management will be much slower because the pressure is incremental rather than immediate.
the habits of social cohesion and the economic advantages of high trust will not suddenly disappear from these societies. The Japanese may be worried about a rise in their crime rate from incredibly low levels to marginally less low levels, but no one yet lives in fear of being mugged in the Ginza at night. Germans are not about to start flouting the signs at pedestrian crossings. And while German and Japanese managers may claim to adopt the Anglo-American principle of shareholder value, they will not drop outright the view of the company as a community with responsibilities which extend beyond the shareholders. Most will refrain from the mass sackings which have characterised Britain and the US in recent years, except when under extreme financial pressure.
Even those who profess ardent admiration for US capitalism, such as J?rgen Schrempp of Daimler-Benz, usually have a bark worse than their bite. Under Schrempp's management, Daimler-Benz's target rate of return on equity capital is a mere 12 per cent-far below the tolerance levels of Anglo-American business leaders. When managers in the institutional economies talk about adopting a philosophy of shareholder value, it usually turns out that they mean something quite different-namely, the achievement of a better balance between the interests of the various stakeholders-including shareholders. So while shareholders have come in from the cold, they are not promoted to the central position accorded to them in neo-liberal theory.
That said, even in Germany where a relatively consensual political process militates against rapid change, it is hard to believe that the economic dividends of social cohesion and co-operative working practice will escape some erosion in the long run. At the poli-tical level, a fraught discussion between the social partners over reducing the cost of state pensions has so far delivered very modest results. (The same is true in less consensual France and Italy.) Whatever weight we attach to globalisation and technological change in explaining the huge upheavals in the corporate infrastructure of the developed world, it is clear that the compact between capital and labour is breaking down. While official figures for the rate at which people change jobs suggest a more stable labour market than is commonly perceived, few managers would disagree that lifetime employment is waning and that employees will in future work for a larger number of employers over the course of a career. Furthermore, historically high levels of unemployment are not compatible with the degree of employee commitment seen in the past.
Strong companies will no doubt persist in longstanding co-operative managerial habits and will continue to trade guarantees of long-term employment for more flexible labour market practice. But for many, the discipline of the capital markets will make it harder to maintain employment and investment through an economic downturn. This removes a central plank in the long-termist edifice which encourages non-opportunistic behaviour.
But this does not mean that the industrial might of Germany or Japan is fading away, nor that the cultural advantage of these countries in certain industries has evaporated. It does imply that we may now see a growing dichotomy between the performance of the national economies of such countries and the larger companies they have spawned. Despite the supposed inflexibilities of their governance arrangements, German companies have been transplanting their operations abroad with remarkable speed. So, too, has Japanese industry.
If such countries do have new disadvantages in international markets, they may be transitional ones, caused by changing the system of corporate governance. As their corporate clients diversify their sources of finance in global markets, Japanese and German banks are losing their incentive to monitor client companies and correct managerial failure. This could mean a higher corporate accident rate in future-until new governance arrangements are found to cope with a more transactional basis of borrowing, lending and investing.
For Wolfgang Streeck (and his co-author Colin Crouch) the choice for the institutional economies is stark. Either they must recapture governance of the private economy at some international level, now that the national one has become obsolete. Or, at best, they will be left with a form of capitalism in which economically productive, co-operative behaviour is confined to the "institutional" company which internalises social cohesion. The risk (so the argument runs) is that such companies will emulate the many successful US companies in the 1990s which became villages of social cohesion in an environment of growing social inequality and accelerating destruction of the social fabric.
This verdict combines an unrealistic aspiration with too bleak a vision of the US. Even if regional co-operation can be enhanced-as it will be within Europe as a result of Emu-it is hard to see how the members of the union can revert to labour and capital market arrangements which support long-termist behaviour of the old kind. So long as globalisation and technology continue to inflict significant liberalising shocks, the basis of existing compacts between labour and capital will be under severe strain. This is why even those European countries which value social cohesion have cooled on the EU's social chapter. Indeed, the differences of view within the EU on labour market issues are so fundamental that it is hard to see how Europe-wide institutional structures-already threatened at national level-could ever emerge. The structures vary widely, anyway, between one institutional economy and another.
As for capital markets, companies will continue to cut out the middleman-the supportive, long-termist, relationship banker-and go directly to the markets for funds. That will not change. Moreover, the technology behind derivative instruments-swaps, futures, options and so on-is such that the risk profile of banks and companies now changes minute by minute. Central bankers have suffered an irrevocable loss of supervisory capability as a result. This was acknowledged in the latest revision of the capital ratios imposed under the Bank for International Settlements' Basle agreement (which came into effect in January this year). In a historic development, the central bankers have been forced to accept large commercial banks' own models for evaluating risk instead of imposing rules of their own.
Is there a solution? Is there another route to the "third way" of socially cohesive capitalism? The answer is a qualified yes. But first we should remember that not everything in the institutional economies is worth preserving. Indeed, an important weakness of many of these economies has been an excess of paternalism-in both political and economic management. Income inequality was low, but lifetime employment was confined to a docile elite. Long-term commitment in an essentially male workplace was conditional on female support in the home. Women provided unquantified subsidies to companies while forgoing their own opportunities for career development. And despite the advantages of regarding the company as a community, many employees-at least in the west-welcome the decline of corporate paternalism because they prefer to pursue a wider social life away from work.
It is no longer possible to give people much of a sense of a stake in national prosperity through the workplace. In a world where people expect to make several job changes in the course of a career, ownership offers a more potent, non-paternalistic means of giving people a stake and encouraging commitment. The obvious way to do this is through defined contribution pension schemes in which the individual worker has an identifiable personal collection of assets. In northern Europe, where per capita incomes are among the highest in the world, greater individual exposure to capital market risk should be perfectly acceptable-if accompanied by an adequate regulatory structure.
Much of continental Europe has difficulty in funding future state pension obligations, so a switch to private funding is probably inevitable. This may not reduce the cost of provision; but in a period of demographic strain, it will provide a mechanism to help legitimise the division of resources between the working and the retired population. The snag is that the act of switching requires some workers to pay twice for their pensions, although the complexity of pensions means that the losers from the switch are unlikely to be aware of the additional costs incurred. This is inequitable, but the wider benefits outweigh the costs. It is a route already being pursued by the Blair government in Britain, with its proposal for funded stakeholder pensions.
One advantage of promoting equity ownership in this way is that employees can more readily be given a direct stake. It will also help overcome an imbalance in continental Europe's capital markets. Because of the absence of funded pensions, many leading French and German companies, including recently privatised ones, are now 40-50 per cent foreign owned. While inward portfolio investment spares continental European companies a needlessly high cost of capital, it causes political friction, especially as hostile cross-border takeovers are increasing.
Admittedly this amounts to a weaker form of stakeholding than the institutional economies enjoyed in the past. Yet ownership can be an incentive to commit to a given company, if the investment is large enough to matter to the employee and the arrangements for the employee shares reflect long- termist priorities. It gives a transferable market value to the labour-capital compromise.
Introducing a greater ownership bias into the institutional economies will not provide immunity from the turbulence of a global market which has settled on an Anglo-American standard of individualistic capitalism. The financial instability inherent in that model will, incidentally, be exacerbated by the IMF bail-outs in Asia-a form of international co-operation which rewards banks for their imprudent lending and trading policies, thus adding to the degree of moral hazard in the system. But equity ownership is not inflexible. If there is to be a new middle way in continental Europe which provides some softening of le capitalisme dur, it could take the form of differential voting on equity shares to reflect the economic contribution of different stakeholders. Some French companies, for example, already attach a disproportionate number of votes to employee shares. Over time, more responsible and informed institutional ownership could contribute to more stable capital markets and provide an alternative to bank-based means of addressing managerial failure. The co-operative culture of the institutional economies could lend itself to a more productive relationship between investment institutions and company management than the one prevailing in Britain and the US.
The institutional, or stakeholder, economies unquestionably exist in a more hostile global environment today. The competitive advantages of a more co-operative approach have not evaporated-but they will increasingly be confined to the level of the company. It remains a moot point whether a company-based compromise between capital and labour can lend political legitimacy to the otherwise rough-and-tumble form of capitalism which increasingly dominates the international economy. But an extension of employee ownership, combined with labour market policies geared towards employability, is the most fruitful avenue for the future.
