Non-market cooperation and the variety of finance capitalism in advanced democracies

ABSTRACT

In this article I explore empirically the determinants of the persistent cross-national variation in finance capitalism in advanced democracies. I find that the degree of strategic coordination through extra-market institutions – which protect the economic system from class and sectoral pressures and promote collaboration among state agencies, financiers, managers, and labor organizations – contributes to a country's domestic banking and financial intermediary-based development but is less conducive to the development of its securities markets. The financial liberalization reforms of the 1990s meant the emergence of an asymmetric corporatist system, whereby banks and other financial institutions played a crucial role in defining the new rules of financial governance. Conducting a panel data analysis encompassing 18 advanced democracies over the period of 1960–2005, I find evidence of the impact of strategic coordination on financial development, while controlling for alternative explanations and ensuring that my estimates capture the influence of the exogenous component of coordination. The paper shows that convergence to the Anglo-Saxon model of finance has not occurred.

KEYWORDS:

• Financial convergence
• strategic coordination
• bank-based system
• market-based system
• law and finance
• corporate governance

ACKNOWLEDGMENTS

This paper was written when the author was a visiting scholar at the Johns Hopkins University SAIS Center for Transatlantic Relations and at the Georgetown University's Mortara Center for International Studies. I would like to thank Robert Keohane, Sofia Perez, Herman Schwartz, four anonymous reviewers, and conference participants at Cornell University and the annual meeting of the American Political Science Association for insightful comments. This research was supported by the Austrian Marshall Plan Foundation. Brendan Bordelon provided excellent research assistance.

Notes

¹For a summary of the critique of Gerschenkron, see Fohlin (2007).

²Researchers working within this tradition have related financial development to property rights, enforcement of financial contracts, and investor protection.

³Other scholars have criticized historical inaccuracies in the law and finance literature. Dam (2006: 45, 48) contends that the Latin American countries amalgamate elements not just of Spanish, but also of Italian, classical Roman, and German law, while their securities law is heavily influenced by the American model.

⁴For an excellent review of recent literature on finance, growth and its determinants, see Malmendier (2009).

⁵VOC perspective, introduced in a volume edited by Hall and Soskice (2001), suggests that capitalist economies cluster into two types of coordination: liberal market economies, where a firm coordinates with other actors through market relations and coordinated market economies where firms rely on strategic coordination.

⁶For theories and practices of neo-corporatism, see Katzenstein (1985), Streeck and Kenworthy (2005).

⁷The Hall and Gingerich (2009) coordination index incorporates data from the 1990–1995 period on corporate governance (shareholder power, dispersion of control, size of stock market) and labor relations (level of wage coordination, degree of wage coordination, labor turnover).

⁸See also Kenworthy (2001).

⁹See also Hicks and Kenworthy (1998), Kenworthy (2003) and Huber et al. (2004).

¹⁰The empirical strategy employed in this paper differs from some existing studies of financial development (see Chinn and Ito, 2006), which average data over five- or ten-year horizons to capture the steady state relationship between the variables. Nonetheless, the smoothing out of time series data removes useful variation, which could help to estimate the parameters of interest with greater precision. The use of yearly data also increases the number of observations that allow the inclusion of a larger number of control variables in regressions.

¹¹These classifications overlap but they are theoretically distinct. For instance, while relationship-based finance is more typical for bank-based systems, venture capital financing, typical for market-based systems, is also relationship based but not provided by banks (Rajan and Zingales, 2003b: 13).

¹²Assuming that political coalitions reflect historical agreements that are institutionalized in neocorporatist structures, my argument is related to Amable (2003). I do not, however, theorize institutional complementarities between financial systems and other institutional spheres of macro- economy.

¹³For example, the Codetermination Law adopted in Germany in 1976 allows German employees to select half of the supervisory boards of large companies. This arrangement also protects managers by entrusting employees with the power to resist mergers or takeovers (Pagano and Volpin, 2001: 502).

¹⁴For instance, in the aftermath of the Single European Act, the German banking round table ZKA was regularly consulted by the Ministry of Finance and the Bundesbank (Grossman, 2011: 643).

¹⁵Nonetheless, it is uneasy to determine whether the recent reforms towards securities markets have been driven by market changes, corporate restructuring, or the banks (Allen et al., 2005).

¹⁶For example, German regional and the more than 500 municipal savings banks have shown only a reluctant support of the European liberalization initiatives (Grossman, 2011: 646).

¹⁷Scholars also pointed to the tensions arising from the dual role of producers as acquirers of labor, thus promoting class interests, and sellers of goods competing with each other with interests varying according to sector, production strategy, market position, and so on (Callaghan, 2011).

¹⁸In contrast with Rajan and Zingales (2003a) who show that when countries were open to foreign trade and capital, financial development took place, I put stress on the openness to foreign bank entry as a barrier to securities market development.

¹⁹Civil law systems tend to have heavier regulation and favor statist solutions to economic and social problems, while common law systems regulate less and favor decentralized, market-oriented, and transparency-enhancing outcomes (Roe and Siegel, 2009: 782).

²⁰Corporatist systems of financial allocation and greater social insurance were born in the 1930s and 1940s in the midst of the Great Depression, fascism, and World War II, which increased voters’ insecurity. For the historical origins of corporatism, see Perotti and Von Thadden (2006), Roe (2006), Katzenstein (1985), Streeck and Kenworthy (2005).

²¹Nonetheless, Streeck and Kenworthy (2005: 458) recognize that the decline of centralized wage bargaining in Sweden in the early 1980s and the elimination of formal interest group representation at the board of several public agencies in the early 1990s illustrate the decline of labor inclusive corporatism.

²²Some scholars have underlined the importance of cultural homogeneity and societal cohesiveness for the viability of power-sharing corporatist arrangements (Campbell and Hall, 2009), while others have pointed to the dangers of the dramatically increasing proportion of non-European immigrants and the cocomitant rise of anti-immigrant parties for their continuing relevance in small European states (Schwartz, 2010).

²³Finish stock market capitalization is high, mostly due to the very high values of market capitalization of Nokia during 1999–2001 (Allen et al., 2005: 9). The Netherlands and Sweden have also experienced dramatic growth of stock markets. In Sweden, equity markets are still characterized by many cross-shareholdings that protect national champions from hostile takeover, however (Hall, 2007). While the Netherlands is highly coordinated market economy with regards to wage setting, investor-firm relations and relations among firms and their suppliers tend to be short-term and arms-length (Kenworthy, 2006: 77).

²⁴Japanese capital market is still underdeveloped if we exclude government bonds (Allen et al., 2005: 13).

²⁵For excellent surveys of recent comparative research on financial systems see: Deeg (2010), Deeg and O’Sullivan (2009).

²⁶Notwithstanding, according to the OECD banking profitability database, most national banking sectors still earn more than half their income from interest, dully acknowledged by Erturk and Solari (2007: 377). More generally, Engelen and Konings (2010) recognize that the available data are inconclusive because the traditional intermediating functions of investment banks (for example, bond underwriting) also generate fee.

²⁷Among the notable outcomes of the post-1980s regulatory reforms in France were the creation of the futures market and the Second Marche of unlisted securities (Clift, 2007: 553).

²⁸In spite of intense international pressures, the German government did not support the European Union Takeover Directive in 2001, and thus successfully resisted weakening of its Co-determination Law, the centerpiece of the country's corporate governance structure (Cioffi, 2010; Callaghan, 2009).

²⁹Jurgens et al. cited in Callaghan (2009: 742).

³⁰Previously, Allen and Gale (2000) identified a hybrid financial system, which they call ‘bank intermediated’.

³¹Hardie et al. (2011) distinguish among financial systems based on the relative amounts of bank assets and market-based activities of financial intermediaries.

³²In contrast, foreign ownership dominates the banking sectors in the countries of East Central Europe, namely the Czech Republic, Hungary, Poland, and Slovakia, where the market share of foreign branches and subsidiaries amounts to over 70 per cent. Nolke and Vliegenthart (2009) identified the type of capitalism in these countries as a dependent market economy, with corporate-governance practices reflecting close control on managerial decisions of local managers by Western headquarters.

³³Available at http://www.arizona.edu/∼lkenwor/WageCoorScores.pdf.

³⁴Duane Swank. The Political Economy of Developed Capitalist Democracy: An Electronic Data Base. I am grateful to Duane Swank for generously sharing the data.

³⁵For further information see: Swank (2006).

³⁶See Armingeon et al. (2010).

³⁷By pointing to the importance of simultaneous trade and capital account openness for financial development, Rajan and Zingales’ hypothesis (2003) contrasts with the sequencing literature, according to which trade liberalization should precede liberalization of domestic finance and capital account liberalization should be the last stage in the liberalization process (McKinnon, 1991).

³⁸Beck and Katz (1995).

³⁹Although banks may perform better than ‘atomistic’ markets at identifying innovative projects and enterprises, effectively monitoring managers and financial industrial expansion, banks may also acquire powerful influence over and extract rents from enterprises. Bank managers may collude with enterprises with which they have long-term, multidimensional ties against other creditors, and be reluctant to bankrupt such enterprises (Levine, 2004: 26–33).

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Jana Grittersová

Jana Grittersová is an assistant professor in political science and a cooperating faculty at the Department of Economics at the University of California, Riverside. Her research focuses on exchange rates, financial crises, central banking, financial development and growth, international financial regulation, and the political economy of postcommunist states. She is currently writing a book examining the role of state-owned, private domestic, and foreign banks in macroeconomic policies and financial stability in transition economies.