I

I
Comparative European Politics, 2003, 1, (241-250)
02001 Palgrave Macrn~llanLtd 1472-4790/01 $25.00
www paIgrave-journals.com/cep
%
Response

Varieties of Capitalism and Institutional Change:

A Response to Three Critics
Peter A. Hall and David Soskice
Minda de Gunzburg Center for European Studies, Harvard University,
27 Kirkland Street, Cambridge MA, 02138 USA.
E-mail: phaIl@fas.harvard.edu
Department of Political Science, Duke University, Durham NC, 27708 USA.
E-mail: soskice@duke.edu

Conzpnrntive Ezrropenn Politics (2003) 1, 241-250. doi: 10.1057/palgraveecep.61

100I0

The importance of the themes raised by the 'varieties of capitalism' literature is

apparent in the range of commentaries it has inspired, represented here by the
diverse essays of Robert Goodin, Mark Blyth and Michael Watson. We take
up three sets of issues addressed by these essays with a view both to clarifying
the claims made in Hall and Soskice (2001) and to extending the analysis of
such matters.

Unemployment and the Service Economy

I
Blyth raises the important issue of whether the continental European countries
that we label 'coordinated market economies' (CMEs) can match the
employment performance of 'liberal market economies' (LMEs), such as those
of Britain and the United States, especially in a post-industrial era when
employment growth is likely to be concentrated in the service sector rather than
manufacturing. With characteristic flair, he reads far more into our argument
than is there, including a defense of social democracy, and several contentions
that are not there. Accordingly, let us begin with a brief clarification.
We do not accept, implicitly or otherwise, many of the tenets of the
conventional view about the causes of European unemployment that seems to
be the real target of Blyth's critique. As we observed on the basis of
comparative unemployment figures, 'both liberal and coordinated market
economies seem capable of providing satisfactory levels of long-run economic
performance' (21-22)'. Moreover, against those who attribute high levels of
unemployment in Europe to the 'wage rigidities and job search disincentives
imposed by welfare state institutions,' the contributors to Hall and Soskice
(2001, chapters I , 4, 5) develop an alternate perspective on the social policies of
coordinated market economies that sees many of them as crucial adjuncts to
the firm strategies on which high levels of employment and economic
 Peter A. I lull and Di~vidSoskice
Variclies or Vopitnlism ant1 Institutional Chtunge
243

German tredc unions to the dcvclopmc~~t of a low-wage sector is slowillg

efforts to ini17rove tlie elnploylnent prospects of thc low-skilled, and the need to
secure co~~scnsus in a political systeln will1 ~ n ~ l l l i l veto
~ l e points reduces the
speed of econolnic adjusln~cnt it1 Gcrml~ny.However, recent illeasures to
expand the use o f temporary cn~ploylnenlcontl*actsand cxelnpl low-wage jobs
from social chnrgcs inilicate growing flexibility at the low-wage elid of he
Germitn labor market. Tlic argiument that CMEs have poor unemployment
records is belied by tlic success o f Inany CMEs, the Netl~erlandsis at 2.1% 011
the latest O I X I l staniiardi7cti unc~nployrnc~~t rates Ibr 2001 (OECD 2002),
Denmark 4.3%. Austria 3.6%, Switzerland 2.5% (2000). Sweden 4.9% and
Norwcuy 3.6%. Moreover, Gcniian unemployment is lowest in what are i~sually
regarded as thc two nlosl cotrrdinatcd rcgior~sBavaria and Baden-Wiirttem-
berg.
Dcvclo~7rncnls si~cli as these, howcver, have no1 altered the German
econolny or ir~rlcerlthe olllcr coordinalcd market ecollolnies of Europe beyond
recognilion. 131yth is righl that the Iield ticcds niorc work on how tiations adjust
to thc rise ol' the post-induslrial ccono~ny,but we tliink that the varielies-of-
capitalis111 npl?ronch provides un imporlant platform for understanding such
adji~stment.

Co~npurntiveI~islitutlonalChange
Meas111.e~to il~lrobluce new fc)r~~ls or flcxibilily into coordinated lnarket
ccona~liicsruisc issues iulsoul inslitiltional clit~ngcsunrl the ultimate fatc of the
developecl politicel cconornies, r]ueslions that inlercst bolli Blytll and Goodin.
Issues of it~stitutionnlchringc pravide tllc /r~ilt?ro/i/for Coodin's disccrlling
contribution to this dcbatc. The I'rrst clilcstiol~ he raises is whether the
insliti~lior~alslruclures of political economics tlial arc not the purest type of
coordir~alcdor lihcral markel ecollulny will survivc the 'fiercely competitive
internalio~~tll environ~~iecnl'of a globalizing era; ancl the scconcl ilsks where
i~~slilutiolialchtrtsgc is likcly lo take tllcse economics. Based on the premise tl~at
relatiolis of trust arc crucitrl to tI1e operution ul'a coordinatcd market economy
and easier to ekrcqtn~ethan construct, he conclucles [ha1 'CMEs arc nalurally
cloornecl to extinclion, and 1,M13s ~~ltinlt~tcly to prevail' - - ti striking and tieo-
Darwini~111conclusion.
I
Goodin's emphesis on t l ~ evarie~y to be fi~uiiclwithin our varieties of
I
capilelisns is salulory. For the sake 01' cxposition~~l clarily in the Introduclion
to Plall kzr~d Soskice (2001), we outlined liberal and coardiniited market
I
economies EIS iclet~ltypes uncl I+'oci~seci on tlie Anierican and German cases Lhat
cxctnplify them, bill the point of he: ~~nnlysis was not sitnply lo describe two
types of ccot~ot~~ies but Lo develop new formululions about lhe principal
di~nensionsdistinguisl~ingone palitictil econotny froln another in more general
 -
, A n d valurr

Carpenlr Gov@manw

Figllre I Courdinalion in Labor Relation8 r ~ n t t'arponlc

l Ciovcrnnr~uc

terms, with all empl~nsison tl~edimensirrns of clifTercncr: conscrluenlial far

nationnl policy turd performance. We find ~Iioseclirner~dianain tlrc nsrure of the
rclatio~lsthat firms and ull~cractors in the palitict~leconrrmy dcvclup in order
lo cnordirzate their prilrcip~l,lendeklvorsi, An we h~tv(:I I Q L C ~ ( 3 3 . 3 6 ) , vszrinlion
along these di~nensionscan be usecl to ulistinpuiah sub-tyyucti ernmrsg both liberal
and coordinnted market ~conomiesand to identi0 snrnc hybrids tllul may no1
correspond closely to tlresc two caicgorias.
Allhougl~the cllarncter or coordination s~msnglire aclnrsj in h e CCOIIOIIIY is
dillicult to assess in aggregate ~erm,u,Oinparick and kft111 (2002) ttitve devised
meiisurcs for tlie character of coordination in tho spl~eresof*labor rclalians and
corporatc governance tlral can be used to a s w s wlsctirer tile ntrlio~lswe
idenlify ns liber~tlor coart.linarled economies confami 10 that dcscriplion anel
how national economic$ cuinpere It4 each other, Figure I i~se,"it h r ~ crn~astires
to array the OECD nations in u two-clirnensisnal space.' it cri~awsthal these
polilicul econamiasi lend 10 fall into the categopic8 a~sipneelto lhet11 by llie
viiri@liesof capitalism u~alyrris(19--20) and hat 111ara is interasling v8ri~llioll
wilhin cnch category, Among LME8, for instance, (I'unada, Australia, New
Zenlnnd and Ireland display relatively high levels o[. nlarkat caordinalion but
oncs that nra not us fully clsvelaped &alp in the CdS or UK, The CMEs sf
northern Europa cli~slerin Iha northemt quaclrant of tlnc figure. Wuwavcr, the
soulhert~E~rrapeaneconornie~of Franae, Spain arid Portugal display lower
 Peler A. Hnll and David Soskicc
Varieties of Capitnlis~iiand Ins(i(utional Change
245
levels of strategic (1101.1-niarkel) coordinalion in labor ~narketsthan their
northern neighbors. AS Goodin notes, Gingerich and Hall (2002) also provide
evidence that rates o f growlli will bc better i n political econo~nieswherc one
type of coordination, whcther markct-orienlcd or strategic, is highly developed
in both labor rclatio~~s and corporate governance.
Despite tlicsc rcsnlls, liowevcr, wc do not think that economies in the
'~iiiddlegrounci'wwhcre 111arkelor strategic coorclinatioli in these two spheres is
imperfectly cievclopcd niusl niovc inexorably toward [lie poles represented by a
'pitre' C M E LME. TO bc sure, some economies may be less efIicient than
those pure typcs. bill wc do not believe that ellicicncy considerations dictate
pallcrns of inslilulional changc. 'To clil~iintlleecono~niceficic~lcyaltogether as
EI factor in anulyscs o f inslilutional changc would be il mistake. Faced with
inlernalional compclilion, lirnls niusl be attentive to the eRciency of their
opcralions ancl rcsponsivc to prcssilres Lo improve il. Although the cotnpetilion
govcrnmcnls fi~ccis loss intcnsc and not purely ecotiotiiic in nature, even
politicians confront clccloral pressure lo cnhance tlic pcrfortnance of the
cconomy (cf. Li~idblo~ii, 1977). 111such Inatters, however, there is Inany a slip
twixt cup anil lip. Inlbrn~alionalissues alnict the search for more eficient ways
to manege a firm or iln ccononiy. Moreover, political consent far institutional
cliangc whcllicr in iI lirm or politjcal cconolny n i ~ ~be s l niobilizcd, and many
fcaturcs of thc organ~z~lt~onal setting rcncler thal a challenging task.
Govcrnmcnts rcspond to Inany considerations beyond those of economic
cflicicncy (cl'. Mcycr ancl Rowan, 1977), In short, allhough efficiency
consiclcr;~tions ol' the sort our anc~lys~s identifies are relevant to institutional
change, llle lutter is nlti~iiatelya 1701itica1 process driven by rna11y factors and
mnst be a~~elyzcd as s i ~ c (cf,
l ~ 'Thclcn, 2001).
These points apply will1 cqi~ulhrcc lo the issue of whether coordinated
mstrket ccononiies can be expectcd to convcrge toward a liberal economic
11iodcI.Cjoocli11 is correct to observe that [he varielics-of-capitalism approach
iclcntifics 2.1 fi~nclume~~lal asylnnlctry relevalit to institutional change and his
~~ntilysis 01' ~ ~ L I S i~rovidcs
L nice n ~ i c r o f o ~ ~ ~ ~ dfor
i ~ tit.i oSince
l ~ s eRective strategic
coorciinaliori rccluires llie clevelop~i-ientof appropriale institutional forms in
society ancl thc conimon knowledge that only cxpericnce generates, it callnot
retlclily be lcgislaled (cl', C~~lpcppw, 2002). Goverrtrnents are better able to
intensify cornpetitio~l through cleregulnlion. In this respect, it is not
i~nrcasonablcto posit u long-~crmhistorical bias leaning in the direction of
liberalization,
I-lowcver, one of O L I ~core contenti~nsis th~ztcoordinated rnarket economies
arc not as frugilc EIS ~ntrnysuppose (cf. Strocck, 1997). On the one hand,
cficicricy consiclerations militt~tein their fh~vor:we argue in Hall and Soskice
(200 1) Lhai CMbis can Bellerate high levels of ecoilattlic perfor~nanceeven amidst
inlensc intcrnalianal competition. On l11e other hand, politics is imporlant here.
Comparative Eurrpcun Polities 2003 1
 Coordi~laledlilarket eco~lomicsgenerate dislributivc outcotllcs li~ghlyvalucrl by
electorales. In Inany cases, they are built on powerful tmde un~onsulid
employers associatiolis tliat have acquired dcep intercuts i n strt~tcplccac~~~tlina-
tion, cannot readily be dissolved by legislative lil.11, ~tticlIlnvc lcndcrl to ally to
protect tl~cregulatory arrangeiilcrlts thnr sustain coorrlint\tio~~. In nr~tionsli~rcll
a s Auslria, Sweden and Germany, the rnobiliztltion~llpower of pn)sluccr yrclups
sets lit~litson what dcrcgulation can acllievc in ecot~amicterms and on how
much dercgulatioli can be acliicvetl in political terms.
Althougli our analysis focuses otl ricvelopcd cconcan~ies,much worh on tlic
developing cconoli~ies,especially in Rasl and Soi~tlzEast Asia note.; tllc close
and continuing relatioliship bclwcc~~governmcnl irncl busirrcs.; 111 some
econonlies that have pcrfornicd wcll there. South Korea nntl 'Ti~lwan arc
well-known exainples, but Malaysia and Indonesia also o&r aolnc s ~ ~ p l ? ofor rl
the contention illat tl~eretlrc econon~icLbrms beyond tlzc nto-llbcn~ln~cldel
that can si~rviveanri prosper.
This is not to say that we expect no institutional chelnpc i n C'biks untl no
changes in a libcral dircctinn, On the contrary, our coricel?lic-,nof insl~lu[ronstis
factors that ~ilcdiatcthe rclalions among the care LIC~OSSc)S ~ I Z Cccotltrlny tnlplics
that tliey iue constantly subject to negotiation. We explicitly rqec( an olt1c.1.
vicw of the i11stilillions of the political economy tli~11saw lhenr us i\ rlpicl ynd of
sanctions atid i~~ccntivcs in fiivor oS a conception thar understtlnds tlrcn~us n
tilore ~nallcablcset of rules and informal utiderstanctil~gsu~zdcrpirrriingmodes
of coordination (5, 9 - 12), Thus, the institutions CIS coortlinrrtctl 111tlrkc1
economies shoultl be responsive lo experie~icc,sul~jectto retlegotit~l~orr, E I I ~ ~
flexible enough to survive periodic cht~llengcs.Tlicy Elre crealad scnd sustainccl
through iterated interaclinn, niiiclz of it conllictual, nl; the: l~isioryuS Ciermtln
ind~lstrialrelations indicates (cf. 1-Itill, 1 9 4 ; Streack, 1994). TIlclcn (2000,200I 1
identifies the political character of the processes t~nclerpinnirgginaiitutinns 21s
well as solnc of thc challeliges coordinntccl rnnrkct cconomia~confront.
In this context, i l is not surprising to see some cletncrrts ol' libcrnlizr~lion
within coordinalcd market economies, i~icludingmure extensive: pnrl-[imc
cmploymcnt, le~nporclryconlracls, @Ili,rts to secure greclter trunspilrcncy in
financial markets, and tlic gradual d c r e y i ~ l ~ ~ tof
i asame
l ~ proleclod sectors suul~
as tclecollzlnunicillions, Table I assetnbles a rarlgc of indictitors for
institutional clienge during the 19880 s and 1990 s amotjg the developecl politictll
cconolnies classified as liberal, coordinatecl or ,nixed mgbrkel ccollOn~~cs.+' 11
shows some movcillent in a 'liberal' clirac~ianwitllin &'ME* as well ~~1:s.
but whill is most striking aboul these results is that, o n many indicators, lhc
cliEerences between CMEs and LMEs have widenecl rather t h a l ~trktrrowed in
rccelll years. The overall puttern is one. of change but inslitulionnl
convergence (57 -66).
 Peter A. I-lall tlnd Duvicl Soskicc
Varieties or Capilnlism and Instiiuticlniil C'hilnge

Table 1 Pt~llernsor institutional ~ t l j u s l m e n li n tlie tlcveloped political economies

C'MLS IdMET A.lh4Eh

I ( IYYOS I IYNOS IY90h %A lY80.~ IYY0.y O/o

lrltlustriul relalions
Trnde 111iio11tlc~lsily 55 53 -4 46 31 --33 33 28 -- 15
Biug61inir1gcoverugc 76 76 0 58 38 -34 79 89 13
B a r p i n i n g level 1.7 1.8 6 2.3 2.5 9

Social ~)roleclioll
Employnlcnl prolcctioll 2.3 2.3 0 1.0 1.0 (1 3.5 3 --I4
1'3cnelit enki\lenlcnls 20 36 24 24 23 --4 15 31 107
Sociul spcndirlg I C i l I P 23 28 22 IS 10 27 17 24 41

Labor market flexibility

I%irl-titile e ~ ~ l p l o y ~ n c ~ r l I X 22 22 16 20.2 26 8 II 38
Avg. hours woskctl 1713 1033 .S 1810 IH31 1 1812 1728 -5
Inco111c incrli~ulily 0.24 0.25 4 0.28 0.33 16 0.31 31

F i r m slvucturc
Avert~gcjob tcnurc 0.7 10.1 4 7.3 7.4 1 11.0 10.0 -.-4
C'EO c n n i p c ~ l s i ~ t i ~ ) ~ ~ 343 5Ub 48 414 801 9.3 382 570 72

C*orporutc g o v c r ~ ~ i ~ l l c c
Stk m k t c k ~ p i l e l i ~ o l i o n 36 01 69 51 6 XX I4 31 121
Debl/equily r i ~ l i o 2.4 2.0 17 0.66 0.91 38 2.7 2.1 -22

22 26 I8 22 23 4 24.2 27.9 15
U r ~ i Inbor
t cc.)sta 100 115 15 100 IIX IK 100 166 66
Totnl employmen1 55 56 2

Suurccx: liuiorl in I-lr~lliuid (iingcrich (2001).

Comprrrrrtive Insti tullonnl Advantage

In somc respects, it may be ~pproprialefor Watson to describe our a~ialysisas
'Ricarrlian'. Like Ilicrrrclo, we argue that aconomic openness and tile more
subslanliul flows of inlernc~tional Lrade associated will1 it ncecl not force
nalional economies to converge 11~11can I-einforcentitianal diversity iasleacl, by
encoureging e ~ ~ ccl oi ~ l l ~ t rtoy specialize in what it does best. While ilcknowl-
edging that arrangements at [he: sectoral or regional tcvcl can be important, we
also concentrate on the nt~tjonal level where legal systetns and regulalory
regi111cs wit11 substantial i ~ ~ ~ p l i c a t ifor
o l ~the
s economy are delern~ined.
Othcrwisc, however, our analysis is rather diRefere111 from the one Watson
criticizes. Wc observe, precisely tzs Ile does, thal tho Ricardian theory of

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 Peter A. Hall and David Soskice
Varieties of Capitalism and Institutional Change #
249

However, as all three of these essays indicate, the varieties-of-capitalism

approach raises issues of institutional change that deserve a prominent place on
the research agendas of comparative political economy. Many of the
contributors to Hall and Soskice (2001) explore concrete cases of institutioilal
change illuminating, in particular, the role of employers in econoinic
adjustment. One of the objects of the volume was to highlight the importance
of organized capital, as well as organized labor, to the political economy.
However, we also suggested that political coalitions are central to processes of
institutional change and that there may be systematic differences in their
complexion across liberal and coordinated market economies (58-60). The
challenge now is to move beyond these initial insiglits to develop more
complete models of the coalitional dynamics that underpin institutional
stability and change, using contemporary and historical cases to trace the
complex interplay between action in the economic and political arenas (cf.
Iversen and Soskice 2001, 2002). We believe that the varieties-of-capitalism
approach provides a good basis for understanding what is at stake in
contemporary processes of institutional change and many of the interests those
processes engage.

Notes
I Unless a further citation is given, here and elsewhere in this response, the page numbers given in
brackets refer to Hall and Soskice (2001).
2 The figure is the rate of change of employment in job classes ISIC 6, 7 , 8 and 9 a s a proportion of
the adult population from Schludi et al. (1998: Table L 1.3).
3 National scores are derived from the factor scores for the principal component of a factor
analysis on measures for shareholder power, the dispersion of control in equity markets, and Lhe
size of the stock market in the sphere of corporate governance, and on measures for the level of
wage coordination, the degree of wage coordination, and labor turnover in the sphere of labor
relations. Higher scores indicate higher levels of strategic coordination relative to market
coordination. For details of how these measures were constructed see Gingerich and Hall (2002).
4 The 'mixed market economies' include Spain, Portugal, Italy and France that fall below the
regression line in Figure 1. For details of the measures, see Mall and Gingerich (2001).

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 Peter A. Hall and David Soskice
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250

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Comparative European Politics 2003 1