Changes in developed countries’ economic systems since the 1980s: implications for developing countries

Abstract

This article reviews changes in institutional arrangements among developed countries over the past twenty-five years, and assesses how far these can be explained in terms of recent theories of different models of capitalism. It argues that globalization has acted to undermine central features of the key models and weaken the position of labour. The account in this article points to limitations in the current varieties of capitalism approaches in explaining recent patterns of institutional changes and sketches possible bases for enhancing the approach. Comparisons are made with economic systems in developing countries, particularly in Latin America.

Keywords:

• varieties of capitalism
• globalization
• international comparisons
• economic development

Acknowledgements

An earlier version of this article was presented at the Social Policy, Economic Development and Income Inequality: Latin America in Comparative Perspective Conference, Institute for the Study of the Americas, School of Advanced Studies, University of London, June 2007. I am grateful to the organizers and participants for their comments but responsibility for the contents remains mine alone. It draws upon work in Perraton and Clift (2004) and Perraton (2007).

Notes

1. Among the ‘issues on which the Washington consensus does not imply a particular view is … the model of the market economy to be sought (Anglo-Saxon laissez-faire, the European social market economy or Japanese-style responsibility of the corporation to multiple stakeholders)’ (Williamson, 1993, p. 1334).

2. As an extreme example, but one that exemplifies how far institutional analysis is now accepted by mainstream economics, a recent World Bank analysis of slow-growing mineral exporters (and no doubt in the shadow of attempts to impose new institutional arrangements in Iraq) effectively concludes that, given their institutional inheritance, there is little that could be done to improve their performance significantly (Isham et al., 2005).

3. Pryor acknowledges that his analysis is static and only goes up to 1990; missing data limits the possibilities for tracking changes over time, noting that ‘many of the institutional characteristics defining types of economic systems have been changing over time’.

4. This attempt has been severely criticized by different authors. Watson (2001), among others, argues that simply removing market regulations will be insufficient to transform the EU economy towards the 1990s new economy performance of the US in the absence of other supporting institutional arrangements. Meanwhile, Kitson (2005) criticizes the short-run comparisons here: core continental European countries, but not the UK, Australia or New Zealand, have similar productivity levels to the US and recent employment trends are less favourable to the US. Moreover, he highlights that US firms’ innovation effort reflects not just market-based arrangements but also longstanding relations with publicly-funded institutions.

5. In the key Dutch case, unions negotiated wage and employment flexibility to restore competitiveness, with variable employment outcomes, sharply increased wage inequality, a shift in the burden of adjustment expenditure from employer contributions to general taxation and a restoration of profitability that has not led to a commensurate rise in investment (Becker, 2001; Jones, 1999).

6. In European telecommunications and electricity deregulation national institutional differences appear ultimately to have made little difference to the outcome of the deregulation (Bartle, 2002; Serot, 2002).

7. By raising required rates of return on capital investment, changing incentives facing corporations and providing alternative opportunities for funds, financialization appears to be significantly related to lower rates of investment and from this lower employment growth among leading OECD economies (Schaberg, 1999; Stockhammer, 2004) as well as greater financial insecurity (Palley, 2007).

8. It is also important to acknowledge that reform offers some potential opportunities. Comparative political economy literature has seen the co-evolution of employment protection legislation and restrictions on openness and capital labour market development; Schrank (2009) shows an expected negative relationship between openness and employment protection for Latin American countries. Palley (2005) finds that democracies tend to institute legal rights and standards for labour which help promote independent labour organization and bargaining, but these are also associated with greater security in economic transactions, lower corruption and generally better governance.

9. There are several grounds for doubting that a shift towards a capital-market-based system would aid development in the light of widespread and irreducible market failures associated with information asymmetries and imperfections (e.g. Singh et al., 2005; Grabel, 1995).