International Business and Public Policy:

Varieties of Capitalism and European Union

Meelis Kitsing
Estonian Business School

IMT, November 13, 2023

Session Topic Required reading before class
1-2 Conceptual approaches (Online on October 31 and November 1 at 17.45-19.15) Coen et al chapters 1&2

3-4 Conceptual approaches (Online on November 2-3 at 17.45-19.15) Coen et al chapters 3&4

5-6 Comparative perspectives (Ghaziabad campus on November 13 at 16.00-19.15) Kitsing chapters 3-4, Coen et al chapter 5

7-8 Comparative perspectives (Ghaziabad campus on November 14 at 16.00-19.15) Coen et al 11-12

9-10 Comparative perspectives (Ghaziabad campus on November 15 at 16.00-19.15) Coen et al 14-15

11-12 Contemporary issues (Ghaziabad campus on November 16 at 16.00-19.15) Coen et al chapters 18 & 22

13-14 Contemporary issues (Ghaziabad campus on November 17 at 16.00-19.15) Coen et al chapter 30-31, Kitsing chapter 2

15-16 Scenario planning workshop (Ghaziabad campus on November 18 at 10.00- Kitsing chapters 5-9
13.15)

17-18 Final Presentations (Ghaziabad campus on November 20 at 16.00-19.15) Presentations by other groups

19-20 Final Presentations (Ghaziabad campus on November 21 at 10.00-13.15) Presentations by other groups 2
Outline
• Varieties of Capitalism
• Why?
• What is it?
• European Union
• What is it?
• Case: Germany
Why varieties of capitalism?
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Lecture 1: Overview
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Lecture 1: Overview
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Lecture 1: Overview
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 European Commission
Drivers of Europe's Future: A Changing Place in An Evolving
World
What is varieties of capitalism?
 Why compare different models?

• Not just theoretical exercise but it has policy relevance.

• Debates around the world about “best” model.
• Internal debates within the EU.
• Solution is to look at Nordic countries as an example- not to the US.
• The American dream is well and alive in Denmark?
• The Nordic social model has achieved greater equality and greater efficiency than any
other European Social Model.
• “The British model is efficient but lags in equality.
• Conversely, the continental model scores well in equality but lags in efficiency.
• The Mediterranean social model lags in both equality and efficiency.”
 Different models

• The international competitiveness rankings compiled by the World Economic Forum and IMD
has placed the Nordic countries high in the list.
• But US is doing really well.
• “The Information Society and the Welfare State: The Finnish Model” (Oxford University
Press, 2002), Manuel Castells and Pekka Himanen argue that the welfare state has not
hindered the process of increasing Finland’s competitiveness.
• Sweden’s former minister of trade, Leif Pagrotsky:
• Sweden is an example of how the welfare state creates preconditions for a successful
knowledge economy.
“Sweden’s success suggests there are two main ways that public spending enhances
the performance of a modern market economy: first, by providing a broad-based education to
increase the employability of the entire workforce; and second, by a welfare system that
makes citizens less fearful of change.”
 Models: flexsecurity and health care

• The concept of flexsecurity has become popular among policy-makers.

• Denmark is usually given as a prime example.
• It implies that it is easy to fire workers but unemployed have generous benefits provided by
the state.
• Different from France and Germany where it is difficult to fire workers.
• The debate concerning the US health care and reforms.
• US public sector spending is per capita same as in UK.
• However, US system is primarily private, while UK’s is public.
• How to keep these costs under control?
• Important to recognize that there is no single European Model that US or others can
borrow from.
• Many different models.
 Olson on Nordic model

• Mancur Olson who, in his book “How Bright are the Northern Lights?” (Institute of
Economic Research, Lund University, Sweden, 1990), stated that the Nordic countries
had relatively good economic performance in comparison to other European
countries – despite their being welfare states.
• This observation contradicts standard economics, which assumes that welfare
states stunt initiative and that powerful unions would have negative externalities
for economic performance.
• Olson saw the Nordic countries as an exception to neoclassical economic theory
and made the case that the negative externalities of labor unions’ power could be
mitigated in cases where labor market institutions are “encompassing.”
 Olson on Nordic Model (cont.)

• The highly centralized labor unions of the Nordic countries are able to internalize the
externalities that occur in the countries with fragmented labor unions (e.g. the UK).
• In other words, these relatively homogenous countries were run like business
partnerships.
• Nevertheless, even Olson argued that Sweden, for instance, could perform even
better without the expansive welfare state and that Sweden’s outward-looking
economy has compensated for high public sector spending.
 Varieties of capitalism

• Liberal and coordinated market economies.

• Liberal is used here in the classical meaning of the concept.
• Not how it is used in the US political debates (liberals v. conservatives).
• Organized labor, business associations, role of stock markets, bank-industry ties.
• Liberal, statist and corporatist market economies.
• Difference between France and Germany.
• Social democratic corporatism and their superb performance (Jeff Garrett 1998 –
Partisan Politics in the Global Economy).
• Not only in comparison with continental corporatist countries but with liberal
market economies.
 Liberal and social market economies

• Pontusson (2005) follows old classification of liberal market economies.

• Usual suspects: UK, US et al.
• However, his classification of social market economies differs from previous
approaches.
• Why not Japan?
• Why not France?
• Perhaps even why not Italy?
• Do Nordic and continental European countries really fit under the same model?
• Or are there major differences?
• Pontusson distinguishes between the two.
 Key differences

• Social market economies are different from liberal market economies by looking at
the following features.
• Organized business.
• Corporate finance and governance.
• Business associations.
• Solves collective action problems in dealing with government and unions.
• Unions are engaged in economy-wide collective bargaining with employers.
• Social welfare and employment protection.
• Nordic countries different from continental by having higher union membership,
more universal welfare state and bigger role of public sector in providing welfare.
 Business coordination

• Shareholder capitalism v. stakeholder capitalism.

• Markets in corporate equity in the Anglo-Saxon version.
• Bank credit in continental Europe and Japan was more important for financing
industrialization.
• Concentrated ownership in SME v. diffused ownership in LMEs.
• E.g. laws in Germany allow universal banks to take equity stakes.
• Long-term v. short-term approach.
• Insiders v. outsiders.
• Index of shareholder rights.
 Labor markets

• Unionization.
• Collective bargaining coverage.
• Social protection
• Difference between Nordic and continental SMEs.
• Not the amount of funds but how funds are spent.
• Contributory occupational schemes v. universalistic entitlement to all.
• Social services provided by public authorities.
• Educational system.
• No German-style vocational training schools.
• More flexibility in the Nordic countries.
• Gender equality in the labor force.
• Ronald Inglehart and Christian Welzel identified correlations among welfare state,
gender equality, and knowledge economy in their book “Modernization, Cultural Change
and Political Institutions” (Cambridge University Press, 2005).
 Growth and equality

• Market creates efficiency and inequality.

• The cost of equality is inefficiency.
• Pontusson (2005) not necessarily.
• Europe v. America debate.
• Academic and ideological dimensions.
• Measurement issues.
• Gini coefficients.
• How do you measure “Europe”?
• EU as whole in unemployment?
• Should we disaggregate?
• GDP as imperfect measure?
• Per capita GDP or GDP per hour worked?
• Should we count how inflation affects different baskets of goods?
• Positive impact of Wal-Mart and China on the purchasing power of the poor in the
United States.
 Income inequality

• Rising income inequality in the 1980s, 1990s, 2000s, 2010s.

• Is it just America?
• Observed in all OECD countries.
• Except Netherlands.
• What explains income inequality?
• Distribution of wealth
• Regressive tax reforms
• Cutting welfare benefits
• Financial market dynamics
• Booming stock markets.
• Labor market dynamics.
• Not just distribution of wages
• Distribution of employment across households.
• In the US wage inequality effects are offset by some extent by increased
employment in low income households.
Income inequality:Gini coefficients in OECD
Income inequality:Gini coefficients in OECD
 United States

• The postwar growth (1947-1973) doubled income of average family.

• Relative position of low income families improved vis-à-vis high income folks.
• From 1973 to 2000 average income increased by 29 percent.
• Relative position of high income people vis-à-vis low income improved.
• 10.3 % in the 1st quintile v. 61.6 % in the 5th.
• Most improvements in the bottom are taking place in the second half of
1990s.
The European Union
Outline
• Economic development and governance in the European Union
• Monetary polic
• Current developments
• Economic and energy challenges
• Financial, humanitarian and military aid
• Case: Germany
• Future trajectories
EU economic development and governance
EU economy in the broader context of regional integration and
globalization

• Proliferation of regional integration agreements in the 1990s and 2000s.

• Particularly in the area of economic and trade cooperation.
• However, not all such preferential agreements are truly regional.
• Contribution of regionalism to the international system.
• Regional integration and globalization: consistency?
• Fortress Europe?
• Distortion v. strenghtening the cooperation on the multilateral level?
• Stumbling blocks or building blocks (Bhagwati 1991)?
• Trade creation or trade diversion (Viner 1950)?
• The regional integration agreements differ greatly.
• The 1992 NAFTA/USCMA is about free trade in goods and services.
• Includes provisions on investment and environment.
• ASEAN represents ‘tiger’ and other economies of East Asia.
• MERCOSUR has been ineffective.
The European Union

• Starts as economic cooperation with political aims.

• The 1952 European Coal and Steel Community (ECSC).
• The 1958 European Economic Community (EEC).
• The 1965 European Community (EC), in 1992 named EU.
• The membership has grown from six member states to 27.
• The tasks of European Union have been expanded greatly.
• Common market and customs union, not just free trade area.
• Free movement of goods, services, persons and capital.
• Economic and monetary union (introduction of currency: euro).
• Political Union: justice and home affairs included.
• The role of supranational institutions has increased.
• The European Commission, European Parliament, European Central Bank, European Court of
Justice and the Council of Ministers.
The EU Institutions

• European Parliament
• elected by the peoples of the Member States.
• The relative power of parliament has been increased recently.
• Court of Justice.
• Ensuring compliance with the law.
• Council of the European Union
• representing the governments of the Member States;
• European Commission
• driving force and executive body
• But much more than that – lawmaking features.
• European Central Bank
• responsible for monetary policy and managing the euro.
• Realization of central bankers’ dream as a result of the Maastricht Treaty.
The EU Institutions (cont)

• Court of Auditors
• controlling sound and lawful management of the EU budget.
• European Economic and Social Committee
• expresses the opinions of organized civil society on economic and social issues.
• Committee of the Regions
• expresses the opinions of regional and local authorities.
• European Ombudsman
• deals with citizens' complaints about maladministration by any EU institution or body.
• European Investment Bank
• helps achieve EU objectives by financing investment projects.
• Numerous of other agencies complete the system
• Europol, Eurojust, EU Satellite Center, EEA, etc.
The EU Treaties

The ground rules of the European Union are set out in series of treaties:
• the Treaty of Paris, which set up the European Coal and Steel Community (ECSC) in 1951
• the Treaties of Rome, which set up the European Economic Community (EEC) and the
European Atomic Energy Community (Euratom) in 1957
These founding treaties were subsequently amended by
• the Single European Act (1986)
• the Treaty on European Union (Maastricht, 1992)
• the Treaty of Amsterdam (1997)
• the Treaty of Nice (2001)
• European Union Constitution failed (2005).
• New Treaty that will fulfill many constitution’s tasks.
• Irish referendum rejected it.
• Nevertheless, integration has continued.
Enlargements

• 1951: Belgium, Germany, France, Italy, Luxembourg and the Netherlands (6 founding countries)
• 1973: Denmark, Ireland and the United Kingdom
• 1981: Greece
• 1986: Spain and Portugal
• 1990: East German provinces (states)
• 1995: Austria, Finland and Sweden
• 2004: the biggest ever enlargement in the history of the EU took place with 10 new countries
joining
• 2007: Bulgaria and Romania
• 2013: Croatia,
• The negotiations with Macedonia? –
• Postponed constantly because of Greek objection to Macedonia’s current name – even when changes to North
Macedonia surrounded by uncertainty.
• Ukraine?
The EU enlargement conditions

• Before a candidate country can join the EU:

• It must have a stable system of democratic government, and institutions that ensure
the rule of law and respect for human rights;
• It must have a functioning and competitive market economy;
• It must adopt the entire body of EU law – known as the “acquis communautaire” or
“acquis.”
• “Democratic consolidation: political, legal and economic.
• Rule of law; institutional engineering
• Constitutional reform, new electoral law
• Reform of fundamental institutions in public/administrative law (local governments);
civil/private/financial law; criminal law; procedural law
• Creating a market economy.
The EU enlargement: example of Hungary

• 1991 – Association Agreement between Hungary and the EU

• 1994 – First EU applicant country from the region
• 1998 – Direct EU accession negotiations begin
• 1999 – NATO Membership along with Poland and the Czech Republic
• 2002 – EU decision to admit 10 candidate countries including Hungary
• 2003 – Referendum – 84% supporting EU membership; Accession Treaty
• 2004 – Full membership as of May 1, 2004; EP Election on June 13, 2004
• 11th largest Member Country of the European Union with a population of 10,2 million in the
Central Europe
• Another 3-4 million ethnic Hungarians in neighboring countries – EU Enlargement reunites
Hungarians in a “borderless” environment
• Economic indicators at the time of joining the EU in 2004: Unemployment: 5.7%; Inflation: 4,7%;
GDP Growth: 3%; Export to EU: 75%; Imports: 56% -- completely integrated economy with EU;
rising living standards (~50% of EU average)
• But no guarantee as the challenges between EU and Hungary have shown in the last decade.
The European Union in the world

• The EU represents all members in international trade arena.

• Both in the bilateral and the multilateral negotiations (WTO).
• Even if member states have different interests, they manage to present a common position
because of supranational nature of decision-making.
• The EU does not speak with one voice in foreign and security policy.
• The decision-making is intergovernmental in the area of common foreign and security policy.
• Focus is on cooperation and coordination, rather than reaching a common position.
• Decision-making in this area is not effective (Kissinger, Bosnia).
• Supranational approach versus intergovernmental approach.
• High politics vs. low politics and state sovereignty.
• Integration as protection against or expression of globalization.
The nature of European Union

• What is the EU?

• Family of democratic European countries.
• Advancing social progress and fair competition
• The European Union is based on rule of law
• EU citizenship, freedoms, rights and obligations
• Shared values, unity in diversity
• Free trade area, customs union, monetary union, single market
• Much more than an international organization or highly legalized international organization
but falls short of being a Westphalian federal state.
• IR scholars tend to have “thin” view of the EU.
• Sovereign countries pooling their sovereignty
• United States of Europe: linear development leading to supranational federal state?
• Lijphart argues that EU is similar to consensus democracy model and a federal state.
• Jacques Delors once called the EU “unidentified political object
 European Commission
White Paper Process: Five Scenarios for EU@27
Case study: German economy
Discussion
You are economic advisers to German Chancellor Olaf Schulz
who asks you to give a brief presentation on the following
questions:
1) What are the most important economic challenges faced by
Germany?
2) What are policy options for Germany to tackle these
challenges?
3) What are your policy suggestions for short and long term?
 Thank you!
meelis.kitsing@ebs.ee

www.ebs.ee/en
Estonian Business School
EBSestonia
EBS_estonia