090165645

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What are the main distinctions in the Varieties of Capitalism approach? Do you feel these distinctions are correct? Discuss, with reference to some examples. Varieties of Capitalism, Hall and Soskices landmark thesis on political economy, provides a new framework for understanding the institutional similarities and differences among the developed economies (Hall and Soskice, 2001); assessing why the institutional differences within world economies has created and entrenched polarised economic approaches under the strata of capitalism. With a strong focus on the firm as a relational actor amongst 5 institutional spheres, Hall and Soskice argue that economies can be organised broadly into liberal market economies, where firms coordinate their activities primarily competitive market arrangement and coordinated market economies, characterized by firms depending more heavily on non market relationships to coordinate their endeavors with other actors (Hall and Soskice, 2001); economies are then categorised according to the levels in which their each institutional relationships show such tendencies. The distinctions are prescient; shining a light on institutional relationships and differences (and more importantly, their effects) within countries that are largely ignored elsewhere. That said, it is important to realise the problems and modern exceptions to the model. For example, the ascent of China from planned economy to quasi-capitalist superpower proves problematic for the model: such an economic and institutional structure cannot be easily categorised into a CME, nor LME, highlighting the growing datedness of such distinctions. It also faces the inherent problem of trying to apply a fixed framework onto growing and living economies: reactions to economic shocks or political will can move a countrys institutional framework (e.g. move from UK government to own 83% of RBS post financial crisis, after 20 years of removal of the state from corporate governance). It is important to lie out some of the main distinctions of Varieties of Capitalism (for ease of reading, it will be hereby referred to as VoC): from the ideas of the main framework to the assumptions that it entails. Firstly when focusing on a theory that is explicitly based on institutions, it is helpful to clearly understand what is meant. Douglas North provides a clear and suitable one: institutions are the humanly devised constraints that structure political economic and social interaction (North, 1991). As mentioned previously, the starting distinction is that the firm is viewed as a relational economic actor; thus its success depends substantially on its ability to coordinate effectively with a wide range of actors (Hall and Soskice, 2001). They are contextualized within their institutional relationships. This is a very important point to note. Modern neoclassical economics places a focus on the firms access to capital and labour as the boundaries of success. VoC implicitly states that the firm must coordinate with outside institutions in order to gain a competitive advantage; this firmly asserts the relational aspect of VoC and sets it apart from traditional economic assumptions. A second important distinction of VoC stipulates that there is a need for successful coordination with 5 institutional spheres in particular: industrial relations (wage bargaining, union representation), vocational training and education (skill investment, securing workers with appropriate skills, determining who trains workers), corporate governance (financing issues, investor confidence), inter-firm relations (relations with other enterprises, supply chain management, information sharing), and finally employees (extracting useful information and skills for work, motivation, developing competencies). Institutions also have institutional complementarities e.g. stock market capitalization is highly negatively correlated with employment protection. Such institutions can seem abstract when described in this way. However, VoC further develops (as perhaps its most important distinction) these institutional relationships by comparing the way in which firms resolve the coordination problems they face in these 5 spheres (Hall and Soskice, 2001). As mentioned previously, countries are categorised into CMEs and LMEs according to the levels of which their institutional relationships display either free market, or collaborative tendencies. An effective comparison is Germany and the US. An example (without going into tremendous detail) shows that Germany achieves financing through strong internal networks with banks, investors and cross-shareholders, sharing and discovering lucrative private information: thus, insider trading does not command the level of severity that it does in the UK. In stark comparison, the US model focuses heavily on business plans, valuations, and equity prices: finance is largely obtained by external investors, on which terms are largely dictated through their valuation in equity markets (Hall and Soskice, 2001). Being a limited example, this is not to state that all economic actors within America use market competition as opposed to collaboration (and vice versa for

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Germany) more so that firms will gravitate toward the mode of coordination for which there is institutional support (Hall and Soskice, 2001). Whilst having to cover the main distinctions in a condensed format (thus not giving full credit to its nuances and details) I argue that there are clear points within the thesis that are open to criticism. Firstly, I believe that the distinction of CME/LME categorisation is not nuanced enough to account for the ascent of China to global superpower. Whilst it is true that VoC does allow for deviations from the CME/LME grouping, the economies represented in the Mediterranean group (France, Spain, Portugal, etc) have not seen growth or success in anywhere near Chinas level, and do not resemble China at all. Chinas institutional relationships are genuinely unique: composed of a quasi-federalist structure with high levels of government ownership, and extremely concentrated corporate governance. Mitt has attempted to analyse China under the headings of VoC, concluding that it has the formal trappings of a CME paired with actual practices that are more reminiscent of an LME (Mitt, 2010). It should be noted that it is not as easy to compartmentalise. It can be argued that as China is so individual, it would not do it justice to cover amongst other homogenous countries. However, the accepted notion is that China is far more capitalistic in its economic execution than communist, (whilst still retaining elements of planning a term defined as authoritative capitalism). Such an omission from the literature leaves the thesis feeling dated (even though it was written in 2001) and incomplete. Secondly, I feel it is also helpful to appreciate that VOC is just an approach to analysing the growth of the political economy, of which there is many. Assessing the distinction of institutional relationships, I feel more aligned to Hanckes more nuanced view that there are various incongruences within national economies, differing between collaborative and market approaches, at different levels, and that to distinguish a country on a national level serves to ignore these internal differences (Hancke, 2009). Whilst appreciating that VoC works on a national level, I believe that it can pass over differences within countries; for example, M&A deregulation has increased activity in Germany, a characteristic more associated with LMEs. Finally, there has been critical debate regarding VoCs distinction of skills; only distinguishing between general and specific skills. Busenmeyer argues that due to the level of complexity and differentiation between economies, there should be four distinct skill regimes, differentiated by firm involvement in skill formation processes, and specificity of education: general skill system (USA), firm-based skill system (Japan), school-based occupational skill system (Switzerland) and workplace-based occupational skill system (Germany) (Busemeyer, 2009). Batt, Nohara and Kwons work also shows that there are large anomalies in the call centre industry when attempting to view it through VoCs institutional perspective, noting that only Denmark conforms to the expected result (Batt, Nohara et al, 2007). I argue that VoC is not suitable for a deep analysis of specific countries; however, this is not to say that the distinctions made in the piece are not accurate. VoC is a strong starting point, and a good torchlight for highlighting institutional differences on an international level, being easy to be ignorant or oversee such differences. Although I do not fully agree with the blanket categorisation of CME/LMEs, I feel the basic distinction of institutional relationships is largely correct: they have picked out institutions that are relevant, interrelated and key to modern society. I believe that this distinction is strengthened by Hall and Soskices idea of institutional complementarities: examples being stock market capitalization and employment protection, or market trading returns and increased regulation on corporate reporting (Hall and Soskice, 2001). We must be careful not to confuse causation with correlation; though I argue that the use of empirical evidence showing a clear negative relationship backs up my belief of the basic institutions being correct. Though having critiqued Hall and Soskice for their lack of overall nuance, there are certain situations in which they provide precise amounts of detail. For example, this is evident in their Comparing Coordination subsection, where they go into precise detail about the reasoning for French workers to feel a close tie to the state whilst British and German workers do not. In summary, I believe that VoC is a relevant and useful overview of how institutions interact with one another, and their corresponding effects on the countrys economy. I believe that the main distinctions of VoC are largely accurate; firms are based in an evermore internationally integrated and relational economy, thus it seems sensible to view them in this light. Worker rights, unions, wage levels, education systems, legal systems

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are all issues that economic actors must consider when trying to succeed, and it would be hard to dispute this fact. I feel that the strength of VoC is also its weakness. The theory is intentionally broad, spanning most developed economies. Referring to Hancke, I feel that this silences the firm level or cultural level differences (e.g. the manufacturing focus of Hull is much different to the financial focus of London), providing a black (LME), white (CME) or grey (Mediterranean) outcome, rather than a more delicate approach to economies e.g. China, quite unique in its growth and institutions, does not easily fit in any category. I believe the distinctions are largely correct, but more nuance and detail is desired.

References Batt, R. et al. (2010) Employer Strategies and Wages in New Service Activities: A Comparison of Co-ordinated and Liberal Market Economies. British Journal of Industrial Relations, 48 (2), p.423-424. Busemeyer, M. (2009) Asset specificity, institutional complementarities and the variety of skill regimes in coordinated market economies. Socio-Economic Review, 7 (1), p.387. Hall, D. and Soskice, A. (2001) Varieties of Capitalism. Oxford: Oxford University Press, p.22-48. Hancke, B. (2009) Debating Varieties of capitalism: A Reader. Oxford: Oxford University Press, p7. Mitt, M. (2010) China: What variety of Capitalism? Affiliate Professor of Asian Business and Comparative Management, INSEAD Singapore. North, D. (1991) Institutions. Journal Of Economic Perspectives, 5 (1), p.97.