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Growth, Crisis, Democracy The Political Economy of Social Coalitions and Policy Regime Change
 9781138222182, 9781315408422

Table of contents :
Cover
Title Page
Copyright Page
Table of Contents
Notes on contributors
Acknowledgements
1 Introduction: social coalitions between equilibria and crises
2 The emergence of an anti-bourgeois bloc in France
3 Abenomics and Japanese politics
4 Who turned their back on the SPD? Electoral disaffection with the German Social Democratic Party and the Hartz reforms
5 The transformation of the Swedish model since the 1990s: the political aspects of institutional change
6 The EU neoliberal policy regime and main political alternatives
7 Political reformation of social coalitions for elections
8 Developmental class coalitions: historical experiences and prospects
9 Authoritarian developmentalism, democratic neoliberalism, and economic growth in Korea: economic growth in different policy regimes
10 Class coalitions in a new democracy: the case of Brazil
Index

Citation preview

ROUTLEDGE RESEARCH IN COMPARATIVE POLITICS

Growth, Crisis, Democracy The Political Economy of Social Coalitions and Policy Regime Change

Edited by Hideko Magara and Bruno Amable

Growth, Crisis, Democracy

Since the global financial crisis of 2008, advanced economies have been making various efforts to overcome the economic impasse. While the contrast between the countries that have escaped from the crisis relatively quickly and those still suffering from serious problems is becoming clearer, a new economic crisis stemming from newly emerging economies has again impacted advanced economies. In retrospect, both leftist and rightist governments in advanced economies pursued expansive macroeconomic and welfare policies from the post-WWII period to the oil shocks of the 1970s. While we recognise that the particular policy regime in these ‘Golden Decades’, during which the left and the right implemented similar policies cross-nationally, was characterised by outstanding economic growth in each country, the specific growth patterns varied across countries. Different social coalitions underpinned different growth models. This book is premised on tentative conclusions that Magara and her research collaborators have reached as a result of three years of study related to our previous project on economic crises and policy regimes. Recognising the need to analyse fluid and unstable situations, we have set up a new research design in which we emphasise political variables – whether political leaders and citizens can overcome the various weaknesses inherent in democracy and escape from an economic crisis by establishing an effective social coalition. A new policy regime can be stable only if it is supported by a sufficiently large coalition of social groups whose most important policy demands are satisfied within the new policy regime. Hideko Magara is Professor in the Graduate School of Political Science, Waseda University, Japan. Bruno Amable is Professor of Economics at the University of Geneva, on leave from the Université Paris 1 Panthéon-Sorbonne.

Routledge Research in Comparative Politics

60 Global Perspectives on the Politics of Multiculturalism in the 21st Century A Case Study Analysis Edited by Fethi Mansouri and Boulou Ebanda de B’béri 61 Party Organization and Electoral Volatility in Central and Eastern Europe Enhancing Voter Loyalty Sergiu Gherghina 62 Politics of Religion and Nationalism Federalism, Consociationalism and Seccession Edited by Ferran Requejo and Klaus-Jürgen Nagel 63 Deficits and Debt in Industrialized Democracies Edited by Gene Park and Eisaku Ide 64 Citizenship and Democracy in an Era of Crisis Edited by Thomas Poguntke, Sigrid Roßteutscher, Rüdiger Schmitt-Beck and Sonja Zmerli 65 Drivers of Integration and Regionalism in Europe and Asia Comparative Perspectives Edited by Louis Brennan and Philomena Murray

66 Generations, Political Participation and Social Change in Western Europe Maria T. Grasso 67 The Politics of Think Tanks in Europe Jesper Dahl Kelstrup 68 The Statecraft of Consensus Democracies in a Turbulent World A Comparative Study of Austria, Belgium, Luxembourg, the Netherlands and Switzerland José M. Magone 69 Policy Change under New Democratic Capitalism Edited by Hideko Magara 70 Rampage Shootings and Gun Control Politicization and Policy Change in Western Europe Steffen Hurka 71 Growth, Crisis, Democracy The Political Economy of Social Coalitions and Policy Regime Change Edited by Hideko Magara and Bruno Amable

Growth, Crisis, Democracy The Political Economy of Social Coalitions and Policy Regime Change

Edited by Hideko Magara and Bruno Amable

Routledge O Taylor

& Francis Group

LONDON AND NEW YORK

First published 2017 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2017 selection and editorial matter, Hideko Magara and Bruno Amable; individual chapters, the contributors The right of Hideko Magara and Bruno Amable to be identified as the authors of the editorial matter, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN: 978-1-138-22218-2 (hbk) ISBN: 978-1-315-40842-2 (ebk) Typeset in Gaillard by Wearset Ltd, Boldon, Tyne and Wear

Contents

Notes on contributors Acknowledgements 1 Introduction: social coalitions between equilibria and crises

vii x 1

HIDEkO MAGARA

2 The emergence of an anti-bourgeois bloc in France

16

BRUNO AMABLE AND STEFANO PALOMBARINI

3 Abenomics and Japanese politics

46

MASANOBU IDO

4 Who turned their back on the SPD? Electoral disaffection with the German Social Democratic Party and the Hartz reforms

79

BAPTISTE FRANçON

5 The transformation of the Swedish model since the 1990s: the political aspects of institutional change

103

NANAkO FUJITA

6 The EU neoliberal policy regime and main political alternatives

120

ALBERTO MARTINELLI

7 Political reformation of social coalitions for elections YUkI YANAI

147

vi Contents 8 Developmental class coalitions: historical experiences and prospects

166

LUIz CARLOS BRESSER-PEREIRA AND MARCUS IANONI

9 Authoritarian developmentalism, democratic neoliberalism, and economic growth in Korea: economic growth in different policy regimes

196

HYUG BAEG IM

10 Class coalitions in a new democracy: the case of Brazil

222

LUIz CARLOS BRESSER-PEREIRA AND MARCUS IANONI

Index

241

Contributors

Bruno Amable (PhD in Economics, EHESS, Paris) is Professor of Economics at the University of Geneva, on leave from the Université Paris 1 PanthéonSorbonne. He has written several books and articles on comparative capitalism, including The Diversity of Modern Capitalism (Oxford University Press, 2003). He is one of the editors of Socio-Economic Review. He has been Scholar in Residence at the Max Planck Institute for Social Sciences in Cologne and Guest Professor at the Europa-Universität Viadrina Frankfurt (Oder, Germany). Luiz Carlos Bresser-Pereira is Emeritus Professor of Getulio Vargas Foundation, Brazil. He was Finance Minister (1987) and Minister of Federal Administration (1995–1998) of Brazil. He is the author of Development and Crisis in Brazil (Westview, 1984), The Theory of Inertial Inflation (Lynne Rienner, 1987), Economic Reforms in New Democracies (Cambridge, 1993, with Adam Przeworski and José María Maravall), Democracy and Public Management Reform (Oxford University Press, 2004), Globalization and Competition (Cambridge University Press, 2010), Developmental Macroeconomics (Routledge, 2014, with José Luis Oreiro and Nelson Marconi) and The Political Construction of Brazil (Lynne Rienner, 2016). Baptiste Françon is Assistant Professor in Economics at Bureau d’Économie Théorique et Appliquée (BETA), University of Lorraine. He received his MSc from Paris School of Economics in 2009 and his PhD from Université Paris 1 Panthéon-Sorbonne in 2013. He previously worked on the political economy of labour market reforms in a comparative perspective (France and Germany). Nanako Fujita is Professor at the Graduate School of Economics, Nagoya City University, Japan. She is the author of Gunnar Myrdal’s Economic Thought: From Welfare State to Welfare World (NTT, 2010, in Japanese), which won the 8th Young Scholar Award from the Japanese Society for History of Economic Thought (JSHET). She has written articles and chapters on the history of economic thought and institutional economics, which include ‘Historical Evolution of Welfare Policy Ideas: The Scandinavian Perspective’, Economic Crises and Policy Regimes (2014).

viii Contributors Marcus Ianoni is Professor of Political Science at the Fluminense Federal University, in Niteroi, Rio de Janeiro, Brazil. His main research area is interdisciplinary, located in the interface between political science, political sociology and political economy. His research topic is in explanative State Theory, above all the relationship between the State and the coalitions that support it, both socio-politically and institutionally. He has been researching the political coalitions that support the developmental State. From 2015 to 2016 he was Visiting Research Associate at the Latin American Centre, at the University of Oxford. Masanobu Ido is Professor of Political Science at Waseda University, Japan. He has published books and articles widely in the field of comparative political economy, with special emphasis on contemporary Japan. He is the editor of Varieties of Capitalism, Types of Democracy and Globalization (Routledge, 2012). Hyug Baeg Im is Professor at the Department of Political Science and International Relations, korea University. He received an MA and PhD in Political Science from the University of Chicago. His current research focuses on the impact of IT revolution and globalisation on korean democracy. His publications include ‘Better Democracy, Better Economic Growth? South korea’, International Political Science Review (2011); ‘Inter-korean and Cross-Strait Relations through the Window of Regional Integration Theories’, Asian Survey (2011); Mongering North Korean Democracy for InterKorean Peace (korea University Press, 2014). Hideko Magara is Professor of Political Science at Waseda University, Japan. Her research focuses on the mutual impacts between party politics and economic policies in capitalist democracies. She is the author of various books and articles, including Politics of Structural Reforms: Social and Industrial Policy Change in Italy and Japan (co-edited with S. Sacchi, Edward Elgar, 2013), Economic Crises and Policy Regimes (Edward Elgar, 2014) and Policy Change under New Democratic Capitalism (Routledge, 2016). She is an associate member of the Science Council of Japan, and former President of the Japan Association for Comparative Politics. Alberto Martinelli is Professor Emeritus of Political Science and Sociology at the University of Milan. His research focuses on the comparative analysis of social and political systems, the European Union, nationalism and global governance. He is the author of various books and essays, including Global Modernization: Rethinking the Project of Modernity (SAGE, 2005), Transatlantic Divide: Comparing American and European Society (Oxford University Press, 2008), ‘Nationalism in the 21st Century’, Quaderni di Scienza politica (2012) and ‘Global Governance and Sustainable Development’, World Social Science Report 2013 (ISSC and Unesco). He is the President of the International Social Science Council and former President of the International Sociological Association.

Contributors ix Stefano Palombarini is Maitre de conferences at Université Paris 8 St Denis. His research focuses on economic policy, social alliances and institutional change. He is author of La rupture du compromis social italien (CNRS Editions, 2001) and Dalla crisi politica alla crisi sistemica (Franco Angeli Editore, 2003) and co-author of L’économie politique n’est pas une science morale (Raisons d’agir, 2005) and L’économie politique du nèolibéralisme (Editions Rue d’Ulm, Paris, 2012). Yuki Yanai is Assistant Professor in the Graduate School of International Relations at the International University of Japan. His research interests lie primarily in the areas of comparative political economy and comparative political institutions. His work has appeared in International Relations of the AsiaPacific and Japanese Journal of Electoral Studies.

Acknowledgements

This is the second research outcome obtained through our international project, Growth, Crisis, Democracy: The Political Economy of Social Coalitions and Policy Regime Change, Grants-in Aid for Scientific Research (A) # 25245023, which was supported by the Japan Society for Promotion of Science. In addition to various meetings, mostly held at Waseda University, Tokyo and the International House of Japan, we were very fortunate to organise several overseas meetings. We are greatly indebted to Philippe Schmitter for hosting our joint symposium in November 2014 at the European University Institute, Fiesole, Italy, where all chapter contributors to this volume were able to exchange and share basic ideas (and enjoyed the beautiful architecture and garden at Villa La Fonte). We thank Hiroshi Shiratori for providing a wonderful opportunity to hold a meeting at the University of Oxford in November 2015. Nanako Fujita, Masanobu Ido and Hideko Magara presented their project research at Pembroke College, Oxford. We also participated in the 27th SASE Annual Meeting at London School of Economics in July 2015, where Bruno Amable, Masanobu Ido, Hideko Magara and Yuki Yanai presented their project papers. We appreciate the helpful comments and useful commitments provided at LSE by Erik Bengtsson, Robert Boyer, Marius Busemeyer, Thibault Darcillon, James Mosher, Phillipe Schmitter, Hiroshi Shiratori and Engelbert Stockhammer. In June 2016, Hideko Magara organised a special symposium at the Science Council of Japan to which Bruno Amable was invited. We gratefully acknowledge Lazlo Bruzst and Philippe Schmitter for their presentations and kumiko Haba, Ariyoshi Ogawa, Toshimitsu Shinkawa and keiichi Tsunekawa for their discussions. Finally, we thank Marc Brazzill, Yuiko Imamura, Wint Wint khaing, Nina Raffner, Bold Sambuu, Jumpei Suzuki, Tatsuhiko Yamabe and Yuta Yamada for helping us organise meetings held in Japan and abroad. Young researchers’ vigour was an indispensable factor that ensured the success of our project. Hideko Magara Bruno Amable November 2016 Tokyo and Paris

1

Introduction Social coalitions between equilibria and crises Hideko Magara

Growth, crisis and social coalitions Since the global financial crisis of 2008, advanced economies have been making various efforts to overcome the economic impasse. While the contrast between the countries that have escaped from the crisis relatively quickly and those still suffering from serious problems is becoming more evident, a new economic crisis, stemming from the emerging economies, has again affected advanced economies. In retrospect, both leftist and rightist governments in advanced economies pursued expansive macroeconomic and welfare policies from the post-WWII period to the period with oil shocks (the 1970s). While we recognise that the particular policy regime in these ‘Golden Decades’, during which the left and the right implemented similar policies in many countries (Przeworski 2001, 2014; Magara 2014), was characterised by outstanding economic growth in each country, the specific growth patterns varied. Different social coalitions underpinned different growth models. This volume is premised on the tentative conclusions that we have reached as a result of three years of study related to our previous project on economic crises and policy regimes (Magara 2014). Recognising the need to analyse fluid and unstable situations, we have set up a new research design wherein we emphasise political variables – whether political leaders and citizens can overcome the various weaknesses inherent in democracy and escape from an economic crisis by establishing effective social coalitions. A new policy regime can be stable only if it is supported by a sufficiently large coalition of social groups whose most important policy demands are satisfied within the new policy regime (Amable 2003). Ideology and floating socio-economic groups One important feature of the present global crisis is the cultural orientation that has prevailed among the financial, corporate, bureaucratic and intellectual elites (Martinelli 2014). Indeed, in policy regimes, ideology plays a significant role and affects the political position of various voters. Socio-economic groups change their policy preferences when the policy regime changes.

2 H. Magara Political demands are not necessarily a reflection of the objective economic interests of the voters. In fact, the formation of demands depends on whether particular demands are perceived as legitimate by social-political groups. This perception and the expression of political demands are formed by the dominant ideology or hegemony, which also influences how voters perceive their interests and how they form social groups. Ideology defines voters’ social identities, makes them aware that they belong to certain groups and thereby encourages them to become integrated in organisations. This process depends on the institutional structure of the economy. For instance, organising workers is easier if corporatist institutions already exist (Amable 2003: 49–50). In this context, observing how voters react to changes in the dominant ideology is important. We assume that a policy regime shift does not occur simply because the combination of members within the dominant coalition changes. Rather, it occurs when the distribution of voters as a whole moves in a new direction when the centre of gravity among the entire body of voters itself moves. Thus, a hegemonic change that leads to a policy regime change also involves positional changes in socio-economic groups in response to structural and contextual changes. Under the neoliberal policy regime, voters in advantageous sectors have moved to the upper right, that is, in more libertarian and marketoriented directions, leaving behind popular-sector voters, who have become more susceptible to xenophobic mobilisation by the new right. The stability of the policy regime thus derives from a peculiar combination of support from a small number of voters in the most competitive international sector and a large number of voters in the isolated popular sector. Problems with the delegation of power However, drastic policy regime change is rare because the state partially delegates its power and authority to dominant social groups, who in turn attempt to solidify their power for the long term. The state can reduce the administrative costs of economic management by handing over some of its power to leading groups (Schmitter 1974). Unlike the social democratic policy regime, which persisted from the post-war period until the rise of Thatcherism, the hegemonic coalition under the neoliberal policy regime represents an extremely limited segment of the entire population. Why is this small group so strong and why has the neoliberal policy regime persisted, even after the collapse of the growth model based on financial technology? The answer is that the state has delegated one of its most crucial powers to the dominant social group that manages the economy. A distinctive feature of the neoliberal policy regime is that the state has approved the ‘self-policing’ of institutions of international finance. The agency in charge of policing the most important part of the economic system has effectively decided to allow global financiers to police themselves (Chinn and Frieden 2011).

Introduction 3 Not-quite-so-neutral aspects of international institutions In addition to the critical impact of international financiers, multinational corporations also play a significant role. Within the ever-growing field of international competition, they constantly seek the lowest possible labour costs and the weakest worker protections (Chinn and Frieden 2011: 172). Our volume also examines ways in which international institutions could develop more balanced policies. There has been a notable increase in regulatory activity by international agencies composed of national governments that have delegated domestic authority to the international level (Crouch 2013). In our new project, we underscore this crucial role played by international institutions, which can take various forms and is not limited to the European Union (EU). From a policy regime perspective, the behaviours of international organisations may be the dimension in which the global trends of policy regimes, or hegemonic global ideologies, are most directly represented. Are changes in the quality of global pacts, such as EU conditionality, the Free Trade Agreement (FTA) and the Economic Partnership Agreement (EPA), destroying the diversity of capitalism? Or are they leading to the further evolution of different varieties of capitalism?

Notable policy switches in advanced economies Over three decades ago, Przeworski (1985) indicated one limit of social democratic parties, namely, the trade-off they face between class-only and supra-class strategies. Then, came the fall of the Berlin Wall. Various researchers, including Kitschelt (1993) and Boix (1998), called for the reinstatement of social democratic parties. Schmitter, in his pioneering article ‘Still the Century of Corporatism?’ (1974), predicted that the twenty-first century would witness a rise of syndicalism rather than corporatism, in which ever more fragmented interests would collide with each other. Although we have not yet discovered a political-economic model that can replace the social democracy and corporatism of the twentieth century, a social coalition between economic elites, chief executives and skilled white-collar employees – what Amable and Palombarini (2014) call the ‘bloc bourgeois’ – seems to have become a transitional pattern charactering the political economy of advanced countries. Chapters 2–5 of this volume analyse notable policy switches that have recently occurred in France, Japan, Germany and Sweden. France France is faced with a political crisis. Amable and Palombarini (Chapter 2) argue that the two major social blocs that comprised the Fifth Republic are broken: one was the leftist bloc comprising public sector employees and blue-collar workers, who were represented politically by the Socialist Party (PS) and the

4 H. Magara Communist Party, whereas the other was the rightist bloc, comprising private sector firms, the self-employed, professionals and farmers, who were politically represented by centrist, liberal and Gaullist parties. In the 1980s, the right split into two groups: a radical neoliberal core seeking drastic market reform and moderates promoting the importance of the welfare state. The ultra-right Front National has been expanding its influence, taking advantage of this rift. Amable and Palombarini (2014) proposed a new analytical notion, ‘the bloc bourgeois’, which is a social coalition comprising the middle class with higher education and is based on the mainstream of the centre-left and centre-right (Amable and Palombarini 2014). There has also emerged an ‘anti-bloc bourgeois’, a social group mainly comprising the working class, who have been excluded from the bloc bourgeois. Their political representation is still uncertain. In elections, each individual’s position in the social structure forms policy expectations, which then determines her/his vote. The recognition of a risk stemming from income loss should be highly effective as a factor determining the vote. According to Amable and Palombarini, votes for President François Hollande were not affected by cultural dimensions, such as authoritarian values and approval of homosexuals, excluding the impact of immigrant problems. Individuals in non-skilled and low-income strata believe that they can find a job if they seriously seek one. Youth and skilled workers do not respond negatively to immigrants. The expectation of a traditional social base for the left was directed to leftist economic policies. Hollande’s victory was brought about by the expectations of the leftist electorate for the leftist economic policies that Hollande had promised. However, most of these policies were ignored after the election – a policy switch occurred. Value Added Tax (VAT) was raised to 21.2 percent from 19.2 percent to cover social expenditures of firms to the amount of 13 billion euros. A ‘competitiveness pact’ was intended to promote employment by reducing labour costs. The enhanced competitiveness of firms, it was thought, would eventually lead to the enlargement of employment. However, the competitiveness pact did not produce the expected impact on employment. Thus, the government needed to alter the purpose of the competitiveness pact. Tax cuts then became considered as a link to increases corporate profits for further investment rather than for job creation. The Hollande government further promoted supply-side economic policies, led by austerity measures. After the three ministers resigned, the left-socialist group stopped participating in the government. The new economic minister, Emmanuel Macron, who wrote the neoliberal reform plan under the Sarkozy government, came from an investment bank. A spiral of budget cuts led to an economic downturn and eventually to a recession. The government could not achieve deficit reduction. It simply demanded further austerity and ‘structural reform’. Hollande’s economic direction can be seen as a new political strategy of the left, concurring with a long-term project of the PS. The party has been

Introduction 5 attempting to redefine its social base and political coalition. After 1971, the natural coalition partner of the ‘second left’ was centrist. However, after the 1990s the main theme of the French second left corresponds with the ‘third way’ advocated by the mainstream European social democratic left. Hollande’s victory meant a late victory of the second left within the PS and an end to the French exceptionalism. The Hollande strategy can be understood as a new political attempt to build a social coalition – the bloc bourgeois. This attempt has two characteristics: supporting further European integration centred on central banks and financial conservatism and promoting neoliberal structural reforms. The social base of the bloc bourgeois comprises the most favoured social groups in the income distribution (entrepreneurs, managers, skilled workers in both the public and private sectors and professionals). The strata opposed to the bloc bourgeois project comprise the popular class, workers, temporary workers, craftsmen, shopkeepers and small firms. Until the 1980s, the traditional two blocs (left and right) persisted. The political supply fitted the expectations of both sides. Each bloc embraced subgroups of the working class. However, political crisis (rifts within traditional blocs) strengthened the bloc-bourgeois project. At the same time, it also provided new opportunities for the anti-bloc-bourgeois project. The neoliberal and pro-European strategy of the government gave rise to dissatisfaction among a large number of voters, the popular class in particular, who once had been integrated into each political camp. This opened a new political space for a strategy against the bloc bourgeois. Neither leftist leaders nor the traditional right have been successful in protecting their sovereignty and maintaining the French model; this political space has not yet been filled. Front National leader Marine Le Pen’s strategic shift should be understood in this context. It was the liberal and pro-European line that won, though there was friction among the traditional social blocs, which led to the bloc-bourgeois project. Marine Le Pen is attempting to represent the most popular groups, craftsmen, shopkeepers and small firms on the right, as well as workers and non-qualified employees on the left, whose interests were sacrificed due to these frictions. Voters seem to be attracted by the ‘new’ Front National’s pro-public service attitude and support of income redistribution. The support of craftsmen and shopkeepers is the strongest. These groups used to be the core of traditional electoral support. The political map of France has been redesigned by Hollande’s strategy, which has led to a dichotomy between a commitment to a renovated Europe and neoliberal structural reform on the one hand and Marine Le Pen’s strategy for a return to strong sovereignty and the French model on the other. Hollande’s supporters are highly educated and skilled people. However, there is a huge consensus against the neoliberal Europe. The Front National is trying to compete with the bloc-bourgeois project. However, the left does not have the ability to fill the social electoral space against the bloc-bourgeois strategy because of the political and intellectual cleavages within it.

6 H. Magara The old social blocs are no longer stable. Political volatility has increased. Mere state intervention in the economy does not create a dominant social bloc. Political frictions concerning the rules of the game, namely, social and political institutions, are becoming more serious. The project of greatly liberalising the labour market has already become an ‘old’ demand. A new demand for public protection has been emerging against this. Japan Ido’s chapter reminds us of a variety of populism that is emerging through the promotion of neoliberal reforms. Unlike Amable and Palombarini’s chapter, which describes a sophisticated populist strategy by the new leader of the Front National, a new rightist party opposed to the Socialist Party’s choice of neoliberal structural reform, Ido’s chapter focuses on Prime Minister Shinzo Abe, an architect of populism, who is the most elite of the elites, the leader of Japan’s predominant conservative governing party. Ido puts Abe in the same heritage as France’s Nicolas Sarkozy, Japan’s Junichiro Koizumi and Margaret Thatcher and Ronald Reagan. He asks why conservative political leaders choose a populist political style when they are promoting neoliberal economic reforms. He suggests that they do so because neoliberal reforms damage the privileged interests of their traditional supporters who were well-established major clients of the primary parties. The established parties that protected the old policy regime are faced with a political dilemma when they attempt to switch their economic policy from Keynesianism to neoliberalism. To overcome this dilemma and win elections, these party leaders need to secure new supporters (new clients) who can compensate for the loss of traditional supporters. Political leaders try to mobilise electorates without party identification by making the most of their populist political style. In the neoliberal policy regime, an extremely limited number of the superrich have come to possess a large portion of national income, while the standard of living of most people has hardly improved. Economic gaps are growing. Each country may well need to choose neoliberal policies for their survival in the globalising world. But why would political leaders introduce such unequal policies, which go against most people’s economic interests, if they are required to be accountable to the people through periodic elections? Given that established parties once created major beneficiaries under the post-war Keynesian policy regime, this must be particularly difficult. Leaders thus rely on populism. Ido notes Schmitter’s argument (2006) that populism has some merits in the sense that it breaks loyalty to old parties, promotes the formation of new political forces, gets the issues that used to be ignored on the agenda, and urges the conjugation of the repressed cleavage structure. Viewed from this perspective, populist political leaders seem to play a similar role in introducing neoliberal policies: they weaken loyalty for traditional parties among the classes that have enjoyed the fruits of Keynesian policies,

Introduction 7 transforming the cleavage structure of politics, and attempting to reshuffle social coalitions. According to Ido, neoliberals attempted to implement unpopular reforms, which might have gone against the interests of their voters by riding the wave of the global financial markets to obtain new supporters, including urban dwellers. The form of this ‘surfing’ was precisely stock-market populism. Foreign investors, crucial players in the Tokyo stock market, heavily affected economic policies of the Abe government. It advocated a series of economic policies that favoured overseas investors. The government’s motto was to achieve economic growth by making the most of global finance. To attract foreign investors to the Tokyo market, it made every effort to make Japan the best place to invest, by promoting privatisation and deregulation, cutting corporate taxes and deregulating the labour market. At the same time, it implemented austerity policies, aiming at a higher evaluation by international rating firms. However, these policies resulted in dampened domestic demand. The new social coalition that the Liberal Democratic Party (LDP) embraced was composed of global firms, consumers and urban residents. The proportion of its old supporters – construction industry workers and farmers – has been declining and the party has excluded workers and the underclass. It aimed at an economic recovery through trickle-down. The Koizumi neoliberal reforms curtailed public work, and sought fiscal consolidation, deregulation and increases of non-standard workers. As a result, wages shrank and domestic demand became stagnant, while managers’ incomes increased. The Koizumi reforms reflected foreign investors’ expectations. What he aimed at was foreign-demand-led economic growth characterised by coordinative intervention in foreign exchange and financial deregulation. Koizumi wanted to achieve export-led economic recovery. His attempt brought a political bonus: he maintained high rates of support throughout his tenure. However, the fact was that the Koizumi structural reforms distributed their fruits only to global firms and the well-off. Traditional supporters, country dwellers and workers were excluded from the division of the pie. The 2008 financial crisis dampened the economy again. People had a difficult time and economic inequality widened. The Democratic Party of Japan (DPJ), which came to office after the 2009 election, attempted to achieve domestic-demand-led economic growth. It tried to build a new social coalition among on the one hand, urban residents and youth who were ignored by the LDP, and, on the other, the LDP’s traditional supporters who were betrayed by the Koizumi reforms. However, this project failed. So-called Abenomics can be characterised by aggressive financial deregulation and the expansion of public work. Contrary to the DPJ’s austerity-centred policy package, the Abe government switched its policy toward a growthoriented expansive one. While the DPJ attempted direct family support, the Abe government tried a policy of direct corporation support, due to its trickle-down philosophy.

8 H. Magara Ido’s hypothesis is as follows: a new prime minister has a high rate of approval at the beginning of her/his tenure. However, people get bored as time passes. To reverse this trend, the government tries to raise stock prices. With rises in stock prices, people applaud the current government and give it a high rate of support. If stock prices go down, people sanction the government by giving it a low rate of support. Germany It is the labour market that has been the site of the most rapid changes under economic globalisation. These changes should have significant impacts in that they affect the working people’s lives most directly. Baptiste Françon explores why the SPD dramatically lost support under the second Schröder government by examining the so-called Hartz reforms, which led to radical changes in unemployment insurance and labour market policy. His remarkable chapter challenges the insider-outsider approach, which has been the mainstream in welfare policy studies, proposes a new hypothesis, and verifies it empirically. In the context of the insider-outsider argument, the researchers consider those workers with atypical labour contracts, either termed or part-time, as outsiders, and those with standard employment contracts as insiders. In this approach, the SPD promotes unemployment insurance and labour market reforms to protect the interests of the insiders who are its support base, even though it hurts the outsiders’ interests. Françon disputes the ongoing argument. He maintains that the Hartz reforms had much more severe consequences than supposed in the insider-outsider framework. In contrast to the previous argument, cleavages among working people are becoming more serious, not regarding labour market status but throughout the professions. The SPD drastically lost support by promoting reforms that endangered the status of bluecollar and unskilled white-collar workers, the party’s core supporters. Insiders are said to be protected by the strong employment protection legislation linked to non-termed, full-time employment and by the weak impact of business cycles in that unprotected outsiders can buffer economic downturns. However, permanent contracts are not always a panacea against job attrition. Workers in declining industries feel uneasy about job security despite strong employment protection legislation. As workers’ status in the atypical employment sector is transitional, it is difficult to organise them along specific interests, and autonomous political demands scarcely come up. In conservative regimes in particular, family interests are more appreciated than individual ones. In the traditional breadwinner model, female part-time workers tend to support insiders’ interests. Françon indicates that the degree of individual outsiderness can be assessed more accurately by profession rather than by employment status. In contrast to the dualist welfare state framework, Françon argues that the Hartz reforms weakened the dualist nature of the German unemployment

Introduction 9 compensation system. In other words, the Hartz reforms influenced all workers’ groups through different routes. The German compensation system is dualist in the sense that only workers with a long-term record of payment are entitled to receive generous and stable benefits linked to their income. The reform did not strengthen this dualist nature. It worked in a completely opposite direction. The Hartz reforms were implemented by the ruling SPD-Green coalition. There was financial pressure at both the federal and local levels. The SPD’s ‘third way’ basically aimed at welfare retrenchment. Its strategy focused on the demands of the expanding middle class even though it risked losing its traditional supporters’ votes. It calculated that the electoral gain of the former was greater than the loss of the latter. However, this strategy did not succeed. Rather, it had a poor electoral outcome. In the second coalition government (2003–2005), the SPD suffered a drastic decline in support. Party identification diminished during the reform period. Exposure to unemployment on a profession level determines workers’ preferences regarding unemployment compensation. The decline in the SPD’s vote can be seen as voters’ dissatisfaction with reform. In addition to unskilled blue-collar and white-collar workers, skilled workers in the manufacturing sector were particularly demotivated by the Hartz reforms. This contradicts previous arguments on the welfare dualism, that is, that the reform was implemented to protect the core interests of skilled blue-collar workers. In fact, the reform negatively affected their situation. Under the general economic trends of deindustrialisation, the risks these workers face have been considerable. It is noteworthy that they will not be able to find similar jobs easily once they are fired because skilled workers are specialised in specific skills that can be transferred only with difficulty. This can be regarded as a phenomenon of Japanisation. As such, this group strongly prefers benefits that secure their status. The Hartz reforms weakened the German principle of job security, which can explain the harsh electoral backlash. The SPD lost a relative advantage among traditional blue-collar workers. Family crossing preferences weaken the insider-outsider argument. Certain strata of outsiders act just like insiders, because they give a higher priority to family welfare when they make political choices. In the Hartz reforms, outsiders with insider partners expected that the costs of the reform would be compensated for at a family level by the gains of the reform. This holds in a regime in which the traditional breadwinner model persists and particularly in society that has a strong gender bias in atypical employment. In Germany, 70 percent of workers in atypical employment are female. Professions are greatly segregated by gender. (Women make up 10 percent of skilledblue collar workers and 81 percent of unskilled workers.) The Hartz reforms revealed political rifts by profession. The SPD lost the support of skilled blue-collar workers. The SPD promoted the reform regardless of the dynamics of welfare state retrenchment, that is, despite the direct interests of its traditional core supporters. This was a crucial rupture with the post-war

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H. Magara

social contract and produced great political and financial stress. SPD leaders made a strategic shift. The Hartz reforms did not isolate insiders. Françon argues that in the long run, insiders and outsiders have common interests that can be easily frayed. Sweden Japan and Sweden had undeniable success in the creation of post-war growth models, although their leading parties, Japan’s LDP and Sweden’s SAP, had completely opposite political orientations. However, the Japanese post-war growth model came to an end when Japan was hit by the bursting of the bubble in the early 1990s. Sweden once seemed to have succeeded in maintaining a social democratic model. Yet recent political economic developments suggest that Sweden too is trying to find an alternative model, although it will be related to the original model. The Swedish model is noted for its mixture of three mutually complementary features: a universal welfare policy, a solidaristic wage policy and an active labour market policy. According to Fujita (Chapter 5), the Swedish model has been collapsing gradually under circumstances in which post-industrialisation and globalisation spread rapidly over developed societies. Moreover, in an ageing world, the notion of a universal welfare policy has become increasingly questioned. Fujita examines the changes in the Swedish model since the 1990s, by focusing on the relationship between the two theoretical and practical notions of traditional social democracy and neoliberalism. A crucial change occurred in 1991, when the centre-right coalition government led by Carl Bildt began to introduce neoliberal economic policies. After the SAP returned to office in 1994, the Swedish economy started to recover. Fujita points out that this recovery was achieved through an increase in exports not through domestic wage moderation. However, the SAP promoted neoliberal reforms in a sufficiently recovered economy. Fujita asks whether we can still see the original characteristics of the Swedish model under this change, from a perspective that combines an analytical framework of varieties of capitalism with a regulationist theory of institutional change. An incremental change is going in the Swedish model. In following a neoliberal policy strategy, the SAP favours existing insiders. Unlike Germany as demonstrated in Françon’s chapter, Swedish flexibility has concentrated on temporary workers. A process of dualisation is proceeding in Sweden, but this dualisation is different from that occurring in Germany. The employment of Swedish permanent workers is protected. Fujita argues that the Swedish neoliberal policy regime preserves previous protection for established insiders but lowers the level of protection for new outsiders. In this sense, the main factors composing the Swedish model, solidarity and universalism, are faced with a serious dualisation problem. The Swedish insider-outside cleavage has become a political issue, in which a new social coalition is going beyond the traditional notion of left versus right.

Introduction 11

Civil society and political parties A critical juncture for the EU The existing neoliberal policy regime relies on the unevenly increased structural power of much more mobile capital in relation to labour. The key actor of its dominant social bloc should be global finance, which greatly affects the policy decisions taken by central banks and international economic organisations. For Martinelli (Chapter 6), the policy regime change approach must explore the internal composition of a powerful coalition of interests. Global finance is not at all alone. The components of its coalition are numerous and multilayered. Unlike the argument of the so-called 1 per cent against the 99 per cent, the dominant social coalition includes not only investment banks, but also commercial banks, chief executives, managers and highly paid employees, financial analysts and brokers, rating firms, business and government consultants, state bureaucrats, academic think-tanks and the media. These economic, cultural and political elites affect various policy-making processes and weaken the regulatory power of the system. In retrospect, the new aggressive entrepreneurial ‘animal spirits’ would not have had such great success without a rapid change in the cultural dimension and drastic economic policy shifts on the part of governments. The role played by the vast archipelago of the middle classes is highlighted as well. Martinelli inquires why the harsh economic crisis has not led to paradigmatic change. Global finance is still hegemonic. He assesses the key elements of the neoliberal policy regime, the economic governance of the European Union in particular, and explores two alternatives for change. In the global economy, the asymmetry of power between capital and labour has been deepening. Global firms can resort to a capital strike and delocalise their activities, playing one country against the other and one tax policy against the other. This has quickly weakened the counter-vailing power of unions and reduced the regulatory powers of governments. Even leftist governments whose political base does not explicitly include global finance and transnational corporations cannot ignore them, because national governments, central banks and international organisations are constrained by the interests of these dominant coalitions. In these circumstances, a deep divorce occurs between politics and policy: populist mass politics versus elitist policy-making. A replacement of the present hegemonic coalition with an alternative classbased one would be difficult due to the divergent interests of different groups. For Martinelli, twenty-first century nation-states are sandwiched between two pressures: global interconnectedness coming from above and new claims of domestic autonomy from below. For Martinelli, the real problem is that the decision-making power of the former is not adequately counterbalanced by the latter’s democratic institutions in a system of checks and balances. Martinelli argues that a technocracy without democratic roots will not listen sufficiently to voters’ demands, when they conflict with economic rationality, competitiveness

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H. Magara

and productivity. A key role in changing this system should be played by the intermediate bodies of civil society, including political parties, non-governmental organisations, trade unions and public intellectuals. Martinelli points out that trade unions can be key actors for possible change, if they obtain an authentic supranational perspective. Party strategies Political parties have long been said to be in decline. They may appear to represent the ‘ancien regime’ which for voters should be replaced by a new innovative regime. They are in political crisis, in that people no longer trust their ability to create a better future. Yanai (Chapter 7) analyses how parties in such an impasse can overcome their difficulties by taking advantage of economic crisis. Political parties are social coalitions that attempt to change their supporters for greater popularity and longer survival. Yanai argues that political parties try to reform their social coalitions when they are hit by an economic crisis. He points out that some parties have greater opportunities to attract voters in an economic crisis. These are new, small parties that do not bear any responsibility for the malfunctioning of the ongoing political economic system. To break the status quo and create a new system, voters may well try to push small parties into office. Yanai argues that voters can deviate from established parties more easily in an economic crisis, especially when new small parties promise to destroy the ‘ancien regime’ and create a new system. Relatively small parties obtain electoral benefits by strategically approaching voters who are not satisfied with the current system and do not have partisan loyalty. According to Yanai, these parties try to (re)form their social coalition by moving their ideal positions to win more votes. Economic crisis benefits small parties in the short run. However, it is noteworthy that swing voters, who betray established parties to change the policy regime of the country, do not differ from loyal voters in terms of socioeconomic status. Yanai implies that, in the long run, this could benefit the established political parties as well.

New developmentalism versus neoliberalism Bresser-Pereira and Ianoni (Chapter 8) have made an important theoretical contribution to the studies of social coalitions with regard to policy regime change. The 2008 global financial crisis increasingly established neoliberalism as an unstable form of organising capitalism. It has not only failed to achieve economic growth but also widened inequality. Bresser-Pereira and Ianoni address whether advanced economies can rebuild a new social coalition for growth and equality. Bresser-Pereira and Ianoni outline how democracy plays a crucial role in managing the economy under contemporary capitalism. They argue that social compromise, based on a class coalition, broadens along with the advancements in the process of democratisation in each country. They infer that this

Introduction 13 compromise expands from one that is only between the industrialists and the public bureaucracy to a wider coalition; the wider coalition encompasses a greater variety of social demands and interests, including the professional middle class, employers and workers as the society becomes more complex and democratic. In contrast, neoliberalism has a narrow compromise limited essentially to global finance and executives despite the complex structure of contemporary society, which requires a broader political compromise. As such, neoliberalism has internal contradictions and instabilities. Bresser-Pereira and Ianoni, reviewing past experiences of developmental coalitions, provide a historical perspective by presenting four paradigmatic cases of economic revolution with a strategic and decisive role of the state: (1) the UK in the second half of the eighteenth century, (2) Germany led by Bismarck, (3) Japan after the Meiji Restoration in the late nineteenth century and (4) Brazil under Vargas in the mid-twentieth century. Each was a developmental state that embraced developmental class coalitions and market coordination. Bresser-Pereira and Ianoni assess whether there remains room for a new developmental class coalition. For them, developmental class coalitions make sense only within a framework of the nation-state. In advanced economies, elites of the present day have lost their solidarity with the people because their incomes are no longer created domestically. Stressing the contradiction between still-nationalist governments, and global finance, which is increasingly less dependent on their domestic markets, they argue that developed countries will be able to utilise developmentalism again. However, it may take a more conservative form, which prioritises social order over social justice, rather than a social democratic one. Im (Chapter 9) challenges the so-called ‘incompetence of democratic government thesis’, a theory implying that authoritarian regimes perform better than democratic regimes in terms of GDP growth per capita, export growth, inflation rate, employment rate and gross fixed capital formation. Im verifies that democratic governments achieve better economic performance than authoritarian governments by examining the interaction between economic development and democratisation in Korea from the 1960s onwards. In Korea, post-transition syndromes did not occur but there were definitely waves of massive labour eruption and a sharp rise of wages. Yet, Korean firms did not reduce investment. According to Im, policy makers under the new democratic regime implemented a package of economic policies similar to those undertaken by the preceding authoritarian rulers, referred to as developmental state policies. Under authoritarianism, the state disciplined and governed the market. Being hit by an unprecedented economic fiasco in late 1997, Kim Dae Jung, the new, leftist president, accepted International Monetary Fund (IMF ) conditionalities for bail-out loans that shifted the Korean economy to the neoliberal policy regime. IMF required Korea to switch its economic policy from the developmental state model to a neoliberal economic model. However, it should be noted that Kim Dae Jung simultaneously constructed the welfare state in Korea to provide social safety nets. Unlike previous authoritarian governments, for the first time in Korea’s history, the leftist government

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H. Magara

achieved high economic growth without victimising equitable distribution. However, Kim Dae Jung aggressively promoted a set of neoliberal and flexible labour market reforms. Consequently, Lee Myung Bak’s conservative government encountered the 2008 economic crisis. Bak responded to the global financial crisis by strengthening neoliberal ‘business friendly’ policies, which widened social inequality and polarised the Korean people. Although the Korean economy still contains such shortcomings, Im asserts that Korea has achieved economic development under a democratic government by rapid democratic consolidation and continuous efforts to enhance the quality of democracy. The Brazilian case demonstrates a trajectory somewhat different from the Korean one. Following the crisis of the modernising authoritarian coalitions, Brazil has experienced three coalitions since 1977: the 1977 popular-democratic class coalition, the 1991 liberal-dependent class coalition and the 2003 socialdemocratic class coalition, which recently proved to fail. Bresser-Pereira and Ianoni (Chapter 10) illustrate how two coalitions were developmental and that attempts were made to create a social democratic welfare state. However, both coalitions ended in crisis, highlighting the difficulty in simultaneously achieving growth and distributional equality. Bresser-Pereira and Ianoni argue that development does not succeed unless there is an effective coalition that supports political leaders’ development strategies. Bresser-Pereira and Ianoni examine the political pacts that were made from 1977, which was the year of democratic shift in Brazil, to the 2015 political crisis. They provide an assumption that development is a political process that requires strategic decision-making by competent political leaders. The neoliberal response in the 1990s involved radical reforms, including privatisation of public services. However, Brazil failed to regain economic growth or catch up to more developed countries. In the 2000s, with the electoral victory of the Workers’ Party, a new attempt was made to promote a developmental strategy. Bresser-Pereira and Ianoni argue that they were successful in terms of the social aspect but not in economic terms. Brazilian industrialists refrained from forming a proposed social coalition. The country has since been divided into the haves and havenots, given there has been no new social pact that would provide an alternative to the neoliberal form.

Aims of the book How do economic crises affect the quality of democracy? How does the type of democracy practised in a given country influence each government’s attempt to escape from economic crisis? Our book examines the impact of changes in social coalitions on policy regimes. The basic framework of our project is a pathdependent perspective, working from the recognition that differences in countries’ policy responses are heavily constrained by the economic growth model chosen in the post-war period known as the ‘Golden Decades’. Each country’s choice of a growth model was based on specific social coalitions.

Introduction 15 Given the current critical juncture in the global political economy, our analysis must have a more longitudinal and dynamic perspective than ever. We highlight the importance of various post-war economic models to analyse appropriately each country’s policy responses. This volume comprises a set of comparative studies conducted by international researchers that integrate theories and approaches from political science with economics. Our study presumes that a shift to a new policy regime – a paradigmatic change through policy innovation – is constrained by changes in social interest coalitions, and discovers a set of political variables that affect economic crises and growth. We will show the significant roles played by political parties, the state, changing ideologies and international institutions. Analysing the most significant cases (Japan, Germany, Sweden, France, Korea and Brazil) and prominent policy areas within each country, we look at contemporary shifts in social coalitions.

References Amable, B. (2003) The Diversity of Modern Capitalism, Oxford: Oxford University Press. Amable, B. and S. Palombarini (2014) ‘The Bloc Bourgeois in France and Italy’ in H. Magara, ed., Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Cheltenham: Edward Elgar. Boix, C. (1998) Political Parties, Growth and Equality: Conservative and Social Democratic Economic Strategies in the World Economy, Cambridge: Cambridge University Press. Chinn, Manzie D. and Jeffrey A. Frieden (2011) Lost Decades: The Making of America’s Debt Crisis and the Long Recovery, New York: Norton. Crouch, C. (2013) ‘From Markets versus States to Corporations versus Civil Society?’ in A. Schafer and W. Streeck, eds, Politics in the Age of Austerity, Cambridge: Polity Press. Kitschelt, Herbert (1993) ‘Class Structures and Social Democratic Party Strategies’, British Journal of Political Science, vol. 23, pp. 299–337. Magara, H. ed. (2014) Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Cheltenham: Edward Elgar. Martinelli, A. (2014) ‘A Political Analysis of the Global Financial Crisis: Implications for Crisis Governance’ in H. Magara, ed., Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Cheltenham: Edward Elgar. Przeworski, A. (1985) Capitalism and Social Democracy, Cambridge: Cambridge University Press. Przeworski, A. (2001) ‘How Many Ways Can Be Third?’ in Andrew Glyn, ed., Social Democracy in Neoliberal Times: The Left and Economic Policy since 1980, Oxford: Oxford University Press. Przeworski, A. (2014) ‘Choices and Echoes: Stability and Change of Policy Regimes’ in H. Magara, ed., Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Cheltenham: Edward Elgar. Schmitter, P. C. (1974) ‘Still the Century of Corporatism?’ The Review of Politics, vol. 36, no. 1, pp. 85–131. Schmitter, P. C. (2006) ‘A Balance Sheet of the Vices and Virtues of “Populisms” ’. European University Institute and Central European University. www.eui.eu/Documents/ DepartmentsCentres/SPS/Profiles/Schmitter/PCSBalanceSheetApr06.pdf. Accessed 30 January 2017.

2

The emergence of an anti-bourgeois bloc in France Bruno Amable and Stefano Palombarini

Introduction France finds itself stuck in an enduring political crisis which has had many blatant manifestations: no incumbent government has been re-elected since the end of the 1970s, the rise of parties which are rather perfunctorily qualified as ‘populist’, the increasingly rapid loss of popularity of elected presidents, etc. (Amable et al. 2012; Amable 2014a; Amable and Palombarini 2014). The causes of this crisis can be found in the break-up of the two social blocs that had structured the political competition during the 5th Republic. The left bloc gathered the majority of the employees of the public sector and the working classes. Its political representation was the various left parties, principally the Socialist Party (PS) and the Communist Party (PCF ) engaged in explicit or implicit agreements to become partners in a coalition government since the early 1970s. The right bloc gathered the medium and superior categories of the private sector, the self-employed and professionals and farmers. Its political representation was an alliance of centrist, liberal and Gaullist parties. Both these social blocs started to break up in the 1980s. On the left, the U-turn in economic policy made in 1983 (Lordon 1997) established an enduring contradiction between on the one hand the supply-side economic policy that the PS wanted to implement, geared towards the European Monetary Unification and the achievement and deepening of the Single Market within the EU, and on the other hand the expectation of the left constituency regarding real wage increases, industrial democracy and the consolidation of the social protection system. On the right, the 1980s saw the growing divergence between a radical neoliberal core, favouring drastic market liberalisation reforms, and a more moderate fraction that wanted to preserve most of the welfare state institutions. The far right party, the Front National, benefited from this rift, proposing, until the 2000s, a drastically liberal manifesto (Ruffin 2014) which also exploited other divides more or less related to ‘cultural’ issues, such as immigration. The issue of European integration summed up all these divides and emerged progressively as a cleavage, with decisive episodes showing an opposition cutting across the left and the right constituencies: the referendums on the Maastricht

The anti-bourgeois bloc in France 17 (1992) and the constitutional (2005) treaties. Around this issue and the ones it covers such as social protection reform, labour and product market liberalisation or the stance of macroeconomic policy, started to appear two different possible social blocs likely to structure political competition in another way than the more traditional left and right blocs. A social alliance centred on the educated middle classes, the bloc bourgeois (Amable and Palombarini 2014; Amable 2017) would gather the fractions of the left and right blocs favourable to European integration and the implied reforms of French capitalism. The political representation of this bloc would be based on the mainstream centre-left and centreright parties. As a complement of this bloc, an ‘anti-bourgeois bloc’ would gather the social groups excluded from the bloc bourgeois, mainly the working classes. The political representation of this bloc would be unclear, at least in France.

Hollande’s election: expectation of a left economic policy During the presidential campaign of 2012, the candidate for the Parti socialiste (PS) François Hollande made a series of promises that led one to believe that he aimed at a strategy based on the reunification of the left bloc. His answer to the financial crisis and the banking problem was to promise in January 2012 to enact a law separating investment banking from deposit banking. He also promised to suppress the possibility of using stock options and to regulate the use of bonuses. In a famous speech held at Le Bourget, he declared that his adversary was the world of finance. He also announced that a tax on financial transactions would be enacted, hoping that other European countries would join France on that matter. But more significantly, Hollande declared1 he would change the course of European integration. If elected, his plan was to demand a renegotiation of the TSCG2 (Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) before its full ratification3 and implementation. This renegotiation would have had to go in two directions: (i) obtaining precisions on the role of the European Court of Justice in monitoring budgetary discipline and the nature of the sanctions for countries which would not respect this discipline; and (ii) enhance the ‘necessary’ discipline with a growth and employment promoting programme. It should for instance have been possible to borrow in order to finance large-scale industrial projects or for the European Investment Bank to increase its borrowing capacity. Regarding employment, it should have been possible within the framework of the European budget, to have structural funds enabling the support to investment projects in low growth countries. The project was also to introduce Eurobonds so as to mutualise the public debt of member countries. Faced with a predictable opposition from Germany, the project was soon dropped. The expectations around Hollande’s elections can be assessed with the help of a model determining the reasons for voting for him at the second round of the 2012 presidential election. We consider a two-stage determinant of the vote,

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a specification used in Amable (2014): the position of the individual in the social structure determines his or her policy expectations, and these expectations determine the decision to vote (Figure 2.1). The details of the variables are described in the appendix. Tables 2.1 and 2.2 present the results of the estimation after having eliminated all variables with non-significant coefficients (‘paths’) at the 5 per cent level according to a likelihood ratio test. As can be seen in Table 2.1, almost all the variables representing the social characteristics of the individual have been taken out of the model for being not significant, expressing the lack of direct influence on the voting decision. The only two remaining variables are the risk of income loss and the churchgoer dummy. Interestingly, individuals who expected a loss of income in the future have tended to not vote for Hollande in the second round. As expected, churchgoers preferred to vote for Sarkozy. The policy preferences correlated with the vote for Hollande are clearly left: positive or very positive appreciation of nationalisations, responsibility of unemployment not put on the unemployed themselves, refusal to consider that there are too many immigrants in France, opposition to labour market flexibilisation (the proposition to substitute a single employment contract to all existing employment contracts)4 and Sarkozy’s pension reform, opposition to nuclear energy and approval of income redistribution. ‘Cultural’ aspects (authoritarian values, tolerance towards homosexuals) play no role in voting behaviour, except the immigration issue. One element can also be noted, the vote for Hollande was correlated with expectations to increase the powers of the European Commission against the French State.

Position in the social structure

Economic policy expectations

Vote for Hollande

Figure 2.1 From social structure to vote.

The anti-bourgeois bloc in France 19 Table 2.1 The determinants of the vote for Hollande in the second round of the 2012 presidential election Voted for Hollande Risk of income loss

–0.276*** (0.085)

Opinion on nationalisations Very negative Positive Very positive The unemployed cannot find a job Not too many immigrants in France Churchgoer Strongly opposed to single employment contract Sarkozy’s pension reform was fair

–0.345** (0.172) 0.259*** (0.088) 0.576*** (0.193) 0.373*** (0.085) 0.773*** (0.095) –0.371** (0.159) 0.223** (0.099) –0.124*** (0.014)

Government’s intervention to reduce income inequalities Strongly approve Disapprove Strongly disapprove Increase the power of the EU Keep on building nuclear plants

0.194** (0.089) –0.377** (0.171) –0.590*** (0.179) 0.043*** (0.016) –0.039** (0.016)

Source: own estimates, 2012 French electoral survey. Notes Significance levels: ** 5%, *** 1%.

Looking at the determinants of the policy expectations (Table 2.2), one finds a classic divide between affluent and less affluent individuals or high-skilled vs low skilled on a certain number of issues: the approval of state intervention for decreasing income inequalities, the desirability of labour market flexibilisation (the single employment contract), the increase in VAT, pension reform or European integration. Nationalisations are particularly supported by young individuals, public sector employees and mid-skill private sector white collars. One may note that the low skilled and low income tend to think that the unemployed could find a job if they really wanted to. In general, as expected, public sector employees are more favourable than private sector employees to left policy measures. As far as ‘cultural’ aspects are concerned, the young and the high skilled have no anti-immigrant attitude. The young and public sector employees are more anti-authoritarian, more favourable to homosexual couples.

Hollande’s policy: looking for an alliance with employers to boost growth and employment Once elected, François Hollande focused his mandate on the improvement of French competitiveness, an issue he had done his best to skirt during the presidential campaign. Progressively but constantly, the prominence of the supply-side in the definition of France’s economic policy was established. As soon as July 2012, Hollande gave a mission to Louis Gallois, former CEO of













5th decile

6th decile

7th decile

8th decile

9th decile

10th decile

4th decile

0.336*** (0.102) –



Income 2nd decile

3rd decile



0.159** (0.071) –







Employment risk

Wealth Over 300,000 Euros 150,000–300,000 Euros 75,000–150,000 Euros 7,000–75,000 Euros Risk of income loss

Favourable to nationalisations

–0.213** (0.102)











0.225** (0.097) –



0.184** (0.082) 0.305*** (0.086) 0.463*** (0.102)

0.164** (0.077) –









–0.298*** (0.053)











0.161** (0.074) –

Fairness of Sarkozy’s pension reform





–0.184** (0.077) –

Opposed to the single employment contract

Table 2.2 The determinants of policy expectation

0.398*** (0.098)

















–0.109* (0.057)





0.157** (0.065) –



Against state’s intervention on inequality

0.166** (0.079) 0.343*** (0.109) 0.246*** (0.085) 0.242*** (0.091) 0.267** (0.108)









–0.199*** (0.052) –



0.254*** (0.079) 0.136** (0.063) –

Increase VAT







–0.166** (0.079) –0.212** (0.096) –0.219*** (0.082) –0.422*** (0.110) –0.152* (0.079) –

–0.155*** (0.052) –





0.175** (0.070) –

Increase the power of the EU

0.251*** (0.085) 0.285*** (0.098)



0.363*** (0.107) 0.151** (0.075) –









0.316*** (0.081) 0.233*** (0.069) 0.176** (0.088) 0.155** (0.072) –

Favourable to nuclear energy

–0.344*** (0.094)

















–0.142*** (0.052) 0.109** (0.052)









Increase the number of civil servants































Homosexuals’ adoption rights







–0.218** (0.095) –0.411*** (0.136) –0.226** (0.095) –

–0.344*** (0.093) –

0.241*** (0.066)











Unemployed could not find a job if they really wanted to































No need for hierarchy in society









–0.437*** (0.155) –







–0.147** (0.068) –









Not too many immigrants

0.282** (0.125) –

0.265** (0.118) –





Student

Unemployed

Woman



0.121** (0.057) –



Unskilled worker

Former unemployed Pensioner



0.475*** (0.099) 0.261* (0.137) 0.225* (0.118) 0.186** (0.091) 0.180** (0.091) –









–0.348*** (0.119) 0.174** (0.084) 0.265** (0.109) –







0.410*** (0.094) –



–0.314*** (0.104) –0.111** (0.054) –







0.176** (0.080) –



0.429*** (0.113) –

0.416*** (0.110) –





0.360*** (0.114) –



–0.122** (0.056) –















0.564** (0.227) –







0.311*** (0.118) 0.697*** (0.220) –





Skilled worker

Personal services

Private sector clerk

Public sector clerk

High-skill public service High-skill private sector Medium-skill public Medium-skill private Technician

Occupation Craftsman, shopkeeper Manager

0.176*** (0.054) –0.238*** (0.052)



0.466*** (0.148) –





0.214** (0.084) –



0.241** (0.120) 0.762*** (0.219) 0.241** (0.107) 0.459*** (0.116) 0.199** (0.092) 0.364*** (0.123) –







0.510*** (0.151) –











0.614*** (0.227) 0.415*** (0.099) 0.446*** (0.107) 0.382*** (0.087) 0.262** (0.120) –



–0.213*** (0.053) 0.241*** (0.054) –

















–0.565*** (0.086)

–0.400*** (0.100)





0.110** (0.051)

0.168*** (0.051) –











0.330*** (0.080) –



0.395*** (0.102) –0.266** (0.111) 0.396*** (0.087)

–0.307*** (0.118) –

0.354*** (0.080) –0.284*** (0.067)











–0.200* (0.104) –0.259** (0.107) –

–0.788*** (0.132) –0.486*** (0.136) –0.705*** (0.117) –0.312** (0.154) –







–0.268*** (0.103) –0.433*** (0.139) –0.313*** (0.101) –0.333*** (0.123) 0.520*** (0.186) 0.374*** (0.128) 0.249*** (0.067) –





0.454*** (0.114) –

0.759*** (0.141) –

–0.387*** (0.147) –



0.215** (0.086) –







0.379** (0.164) –







0.483*** (0.129) –

0.623*** (0.144) –





continued

–0.218*** (0.084) –







–0.351** (0.155) –0.228** (0.109) –



0.471*** (0.133) –

0.945*** (0.127) 0.734*** (0.133) 0.988*** (0.110) –









Churchgoer

Lives in a rural area

–0.377*** (0.055) –0.250** (0.099) –







Opposed to the single employment contract

0.412*** (0.089) –









Fairness of Sarkozy’s pension reform

Notes Significance levels: * 10%, ** 5%, *** 1%.

Source: own estimates, 2012 French electoral survey.



0.328*** (0.116) 0.184** (0.085) –

Over 55

35–44

25–34

Age 18–24

Favourable to nationalisations

Table 2.2 Continued





0.488*** (0.109) 0.351*** (0.083) 0.332*** (0.071) –

Against state’s intervention on inequality













Increase VAT

–0.104** (0.052)

0.117** (0.052) –







Increase the power of the EU

0.252*** (0.089) –









Favourable to nuclear energy

–0.296*** (0.088) –0.130** (0.052)





0.227** (0.102) –

Increase the number of civil servants

0.706*** (0.117) –

–0.726*** (0.142) –0.396*** (0.106) –0.433*** (0.093) –

Homosexuals’ adoption rights

–0.178*** (0.064)











Unemployed could not find a job if they really wanted to

–0.384** (0.178) –





0.651*** (0.143) –

No need for hierarchy in society

–0.192*** (0.068)



0.502*** (0.135) 0.316*** (0.106) 0.255*** (0.094) –

Not too many immigrants

The anti-bourgeois bloc in France 23 the aerospace company EADS, to produce a report on competitiveness. This report led to the so-called ‘competitiveness pact’ in November 2012, which is in fact a plan to reduce firms’ labour costs through a decrease in their social contributions by 20 billion Euros (1 per cent of GDP). The pact was meant to last for two years, and in 2014, the so-called ‘responsibility pact’ took over, including the measures already present in the competitiveness pact, and adding a further 10 billion Euros decrease in social contributions. The initial measures taken by the new government after Hollande’s election represented a turnaround with respect to the promises and expectations of the presidential campaign regarding economic policy. As shown in the estimations reported above, the expectations of the traditional social base of the left were directed towards left economic policies, and these expectations explained the vote for Hollande in the second round of the election. One may therefore conclude that Hollande was elected mostly by a left electorate expecting, as promised, a left economic policy. However, the promises were more ambiguous than what the majority of the electorate chose to remember. The famous speech held at Le Bourget, in which Hollande declared the world of finance as his adversary, and the promise to establish a special 75 per cent tax rate for income over one million Euros per year, were not the main elements of the campaign. The promises contained in the presidential manifesto, 60 propositions, also contained the necessity to go back to ‘sound’ fiscal policy and Hollande had distinguished himself from other PS candidates during the left primary by being the most orthodox fiscal policyoriented contender, expecting a return to budget balance within a year after being elected. The few promises of a left reorientation of economic policy that were made were for the most part ignored after the election. One issue, linked to the rise of income inequality, was the tax reform. Under the influence of a book by Piketty (2013), the public debate focused on the necessity to make the French tax system more progressive, which implied a complete reworking of taxation, merging the progressive personal income tax system with other types of taxation, in particular the various types of social contributions. This ‘fiscal revolution’ would potentially also alter the financing system of social protection and presumably the features of social protection themselves. In other words, it would have been a substantial change. Hollande had been cautious on this issue, remaining vague on what the tax reform he wanted to implement if elected would imply, but he nevertheless announced that a ‘fiscal reform’ should be the first and most important reform of his term. In fact, after the election, the project of a general reform of the French tax system was never seriously envisaged, and the idea would only crop up when Prime Minister Ayrault suggested giving a new impulse to Hollande’s mandate … shortly before being replaced by Manuel Valls. The 75 per cent tax rate project was so ill-conceived that the Constitutional court censored it. It was replaced by a temporary tax that firms, instead of the individuals, have to pay. The ecological tax that lorries should have paid was

24

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dropped because of the opposition of the small entrepreneurs and farmers, in spite of toll gates having been already installed on motorways. One important question raised during the presidential campaign concerned the financing of social protection and the type of taxation that should be devoted to it. A measure of the preceding right government had increased the VAT rate as a step towards a so-called ‘social VAT’. The PS candidate had made the abolition of that measure a key point of his contestation of Sarkozy’s economic policy. Although not significantly influencing the vote for Hollande in the second round of the election in the results presented earlier, the preferences regarding this measure were clearly separating between the right and left constituencies. The Fillon government had increased the normal VAT rate from 19.2 per cent to 21.2 per cent in order to finance a 13 billion Euros exemption of social contributions for firms. The unequal character of that measure, consisting in raising taxes for households by means of a regressive tax scheme in order to alleviate the tax bill of firms, had been stressed repeatedly by Hollande during the campaign. Once elected, Hollande indeed suppressed Sarkozy’s tax increase, but initiated a hike of his own of the normal rate to 20 per cent and the intermediary rate to 10 per cent (from 7 per cent). The seemingly social aspect was to be taken care of by a decrease of the reduced rate from 5.5 to 5 per cent, but this last measure was not agreed to by the parliament. As with Sarkozy’s measure, the VAT hike was part of an arrangement lowering firms’ social contributions. In fact, this latter element was the central part of the so-called ‘competitiveness pact’ mentioned earlier. The aim of this ‘pact’ was to decrease labour costs in order to foster employment. Parts of this cost competitiveness orientation of the economic policy of the Hollande mandate were also the extension of the freeze of base wage index for public employees decided by Sarkozy in 2011 and the minimum wage, whose raises are determined by law, was increased only slightly over the legal minimum. Initially, the competitiveness pact was meant to last for two years, but the idea was kept for the so-called ‘responsibility pact’, announced in December 2013, with an extra 10 billion Euros cut in public expenditure, an 11 billion Euros cut in firms social contributions and an extra 10 billion Euros cut in firms’ taxes. The objectives of these measures were to increase firms’ competitiveness and in fine employment. Early critics pointed out that the ‘pacts’ were not quid pro quo arrangements. No guarantee that firms would increase employment was demanded in exchange for the tax cuts. The decrease in labour costs was more or less assumed to mechanically lead to more employment. However, it became clear in late 2014 that the competitiveness pact did not produce the expected results in terms of employment. This led the government to change the official objective of the competitiveness pact: the tax cuts would only have for their objective to increase firms’ profitability in order to invest and not to specifically and directly lead to job creations.5 However, the specific tax cut aspect of the competitiveness pact was

The anti-bourgeois bloc in France 25 called tax credit for competitiveness and employment. Besides, the pact was announced in 2012 to lead to the creation of at least 300,000 jobs in two years. The responsibility pact was expected to lead to an extra 190,000 jobs by the Ministry of Labour in 2014. However, the reality of employment led to dramatic diminishment of the expectations made earlier. Unemployment had kept rising and private firm investment had decreased (−1.1 per cent between 2011 and 2014) and so did private households’ investment (−12 per cent between 2011 and 2014). In fact, the Hollande presidency engaged further in the direction of an austerity-dominated supply-side economic policy. The contestation regarding the efficiency of that policy with respect to its own objectives (investment and employment growth) was eliminated with the change of prime minister in 2014. The left of the PS was no longer represented in the government after the departure of three ministers, including the minister of the economy, and a change in prime minister. Manuel Valls, representing the right wing of the PS, replaced Jean-Marc Ayrault, provoking the departure of the Green minister. The change of government was presented as the choice ‘of clarity’. The government could not tolerate a contestation of the austerity line within its own ranks. Significantly, the new minister of the economy was chosen to be Emmanuel Macron, a former investment banker who had drafted a neoliberal report on structural reforms for the Sarkozy presidency. France had started to engage in a spiral of budget cuts leading to slowdown and eventually recession, implying missed objectives with respect to the decrease in the budget deficit to GDP ratio and calling for more austerity and/or ‘structural reforms’. In December 2012, France had promised to the European Commission to make a fiscal consolidation of 3.2 per cent of GDP over 2013–2015. In 2014, it became clear that this objective could not be satisfied, and the fiscal consolidation was in fact limited to 1.1 per cent in 2013, 0.1 per cent in 2014 and 0.2 per cent in 2015 (Etievant et al. 2014). The initial plan was to cut 50 billion Euros in public expenditure between 2015 and 2017. The increase in public expenditure would then considerably slow down and come to a halt in 2017. Cuts would affect social protection, the central administration and the local administrations. The risk was then to have the Commission reject the budget and apply the sanctions that a series of measures taken under the impulsion of Germany (twopack, six-pack, Fiscal Compact, etc.) had made easier to make more systematic than with the previous treaties. As of January 2015, there is to be no social contributions for employers on salaries paid at the minimum wage. The social contributions will decrease up to 1.6 times the minimum wage. This implies a decrease of 4.3 billion Euros for the financing of social protection (Etievant et al. 2014). This is supposed to be compensated by the state budget, but in a context of austerity, the financing of the social protection system is made more dependent on the requirements of the European Commission to respect the limits set by the treaties, more

26

B. Amable and S. Palombarini

sensitive to requirements for the implementation of ‘structural reforms’ and thus more fragile. One particularly spectacular structural reform was the ‘labour law’ of 2016 that made employment relations considerably more flexible by facilitating firing and, above all, promoting the decentralisation of bargaining at the firm level. Before the labour law, the dominant principle was the so-called ‘favourability principle’ whereby decentralised agreements could not stipulate conditions less favourable to employees than higher order agreements or regulations (sectoral agreements or law). This principle had already been questioned by a series of legislations passed under conservative administrations, but the law of 2016 made the reversal of the favourability principle the rule: firm-level agreements would have the precedence above industry- or national-level agreements even when they were less favourable to employees. The draft law of 2016 led to a massive protest movement that aggravated the divisions of the left, between a PS which did not make any attempts to conceal its neoliberal orientation, and the more ‘radical’ left. The economic orientation of the Hollande presidency corresponds partly to a new political strategy for the left but is also the continuation of a long-term project for the PS: the redefinition of its social base and political alliances. A ‘second left’ has always been present in the Socialist Party since its creation in 1971. It was favourable to decentralisation, regionalist and for a joint workermanagement control of the firm; it favoured the contract and negotiation to intervention by law; hostile to nationalisation, it refused and rejected the Marxist reference to the management of the economy by the state; carrying a very critical view of national sovereignty, it was for a federal Europe; its natural allies were the centrist parties rather than the Communist Party. But this second left remained for a very long time a minority within the PS. In 1979, at the Metz Congress of the PS, Michel Rocard – figurehead of the second left – already openly advocated the ‘economic realism’, the centrality of business and the need to support them: the liberal thought is in crisis … but so is socialist thought, because it did not dare to take on board the opposite requirement: to recognize that the act of producing needs motivations other than coercion. A centralized and rigid planning is not sufficient. His motion received only 20.4 per cent of the vote. Fifteen years later, in 1994, another major figure of the ‘second left’ refused the nomination for the presidential election despite very favourable polls, partly for personal but also for political reasons (Van Brabant and Eberle 1995). For Delors, the decisive question was whether once elected, he would have ‘the ability and political means to carry out [the] necessary reforms’ that went into the direction of the ‘modernization’ of the French economy and the deepening of European integration. His conclusion: ‘The absence of a majority to support such a policy regardless of the measures taken after the election, would not

The anti-bourgeois bloc in France 27 allow me to implement my solutions.’ Delors believed in 1994 that the structure of the political supply was inconsistent with his strategy. The Socialist Party and their allies represented for him a social bloc different from that corresponding to his objectives. He could win the election based on the left bloc, but once elected, he should abandon reforms he nonetheless considered ‘essential’ for lack of a social and political majority to support them. He thus expressed regret for the lack of a social and political alliance different to that built by the PS in previous decades. However, if one looks beyond French borders, we see that in the 1990s, themes that characterise the French second left had become dominant in much of the European social democratic left. In Europe, the anti-Marxist left, which regards the firm as the engine of economic and social progress and not as the locus of social conflict, was the ‘third way’. The major project of the third way was to radically change the forms of state intervention in the economy.6 This would transform the welfare state aiming at equal situations in a positive welfare state with very different objectives.7 Our results (Table 2.2) show that social expectations in France today still differ strongly on the subject of state intervention in the economy: it is one of the fundamental political divides. Another important one is the position vis-à-vis the European integration. However, for Giddens and the Third Way, social changes that have marked the evolution of capitalism over the last 30 years would make this cleavage obsolete. For Giddens, the economy is now heavily dominated by knowledge-based and service industries, and this has led to new and very different social groups. The society, being a very different society from that of 30 years ago, consists of new classes, such as ‘white workers’, the new ‘white collar’ that are neither clerical nor manual workers and spend the day exercising expertise on their computers. These employees are close to the middle class, they do not have a ‘class consciousness’, they change jobs during their lives, with a high social mobility. They do not recognise themselves in the traditional left-right divide. They think according to other criteria, are more individual and are more interested in modernity, improved lifestyle, democratisation of social issues, safety, planning, immigration, ecology by example. This political vision, which considers that a declining working class must not be the main left constituency, was very widespread in the European social democracy in the 1990s. If the Labour government of Tony Blair was a real social laboratory of the Third Way, the social democratic left has governed against the opposition of the radical left and often in alliance with centrist parties (or right) in most if not all European countries (Germany, Italy, Spain, Belgium …), while the French Socialist Party renewed its alliance with the Communist Party. In the ‘centrist’ turn of the Hollande presidency, and in the fact that for the first time in the 5th Republic the PS governs against the opposition of a part of the parliamentary left (Front de Gauche and a part of the Green Party), we can see both the late victory of the second left in the PS, and the end of the French exception.

28

B. Amable and S. Palombarini

National sovereignty and defence of the French model: a political space left empty Hollande’s strategy corresponds from a political point of view to the construction of a new social coalition that we have called the ‘bloc bourgeois’ (Amable et al. 2012; Amable and Palombarini 2014). Two dimensions define this political project: (i) the continuation of European integration based on the independence of the central bank and fiscal conservatism, and (ii) institutional reforms dictated by the neoliberal doctrine. If one interprets this way the ‘centrist’ turn of Hollande, the most complete opposition to his action should be structured around the challenge to European treaties and the defence of the French socio-economic model. Similarly, the social base of the bloc bourgeois is composed of the most favoured part of the social groups in terms of income distribution: entrepreneurs, managers and the skilled of both the private and public sector workers, professionals (Amable et al. 2012). A frontal opposition to the bloc bourgeois project should seek the support of all popular classes: workers, temporary workers, artisans, shopkeepers, very small entrepreneurs. Until the 1980s, the two traditional blocs (right and left) showed some consistency: there was a political supply able to meet the expectations of each bloc. And each of the two blocs included a fraction of the working classes. As we have discussed elsewhere (Amable and Palombarini 2014) the political crisis – namely the divide within traditional blocs – gave strength to the bloc bourgeois project; but at the same time it opened the space for a political project that we call the ‘anti-bloc bourgeois’. If we consider the state of the political supply in the late 1980s, there was no indication that the FN could be the leading candidate to occupy a political space defined by the defence of national sovereignty and the French model of capitalism. It is true that even then the FN had made the fight against ‘Brussels technocrats’ one of its main campaign themes, but this theme had its origins in an ultra-liberal strategy of rejection of any public intervention, and particularly at the supra-national level, in the functioning of the economy. As recalled by Ruffin (2014), during his stay at the National Assembly (1986–1988) Jean-Marie Le Pen was a strong supporter of Reaganomics. In a speech on 23 April 1986, he approximately quoted President Reagan (‘I want the state to get off of my back and take its hand out of my pocket’) and simply asked for abolition within five years of the income tax. Similarly, he called for ‘the immediate suppression’ of the wealth tax, which he challenged for its ‘harmful nature’, and stated that, following what was happening in the United States, the rate of the corporate tax should be lowered in a range between 20 and 30 per cent, depending on the result, and in any case limited to 33 per cent. In its 1988 manifesto, the FN called for ‘lower taxes, less bureaucracy’ and advocated reduced taxes and social contributions (including employers’ wage tax) ‘which penalise French companies with respect to their foreign competitors’

The anti-bourgeois bloc in France 29 and pleaded for ‘a questioning of the income tax that discourages economic activity and initiative. How? By imposing a diet on the state.’ One finds the elimination of the income tax (this time within seven years) in the 1995 FN manifesto; the same manifesto states that ‘the standard rate of VAT will be increased by one point for a period of three years; the money collected will be used in full to reduce the debt of the state’. Following the same inspiration, the FN fought in the National Assembly to defend the interests of shareholders. During the parliamentary debate of 29 April 1986, François Porteu de Morendière – FN parliament Member – opposed the project (supported by the right-wing government) that was to make room for employee representatives on the boards of directors of large companies: How far will the employee representation on the boards go? … We ask you to cancel it in order to enforce the rights of those poor shareholders, battered by years of socialism … Today you still threaten them with constraining texts on which they have no control. It is your duty, as well as your interest to respect the rights of shareholders, otherwise you will not get the confidence of investors, and if you do not allow investment, there will be no jobs. The electoral target of the FN at the time consisted of small entrepreneurs and the self-employed. At the National Assembly (23 April 1986) Jean-Marie Le Pen declared: It is in countries like the United States that we see tomorrow’s world taking shape and, unlike what was planned, not by huge concentrations of undertakings, but rather, by multiplication, the proliferation of small and medium businesses that open in some sort of way for a new era. We still find this theme in the 2002 election manifesto of Jean-Marie Le Pen, presidential candidate: Give a job to each French citizen thanks to our small and medium enterprises and their employees, giving them the means to ensure their development and prosperity, to take their place in the global competition, and become a source of job creation. The National Front of Jean-Marie Le Pen was therefore (ultra) liberal from an economic viewpoint. However, it was opposed to free trade and advocated the control of foreign trade. From this point of view, the opposition is against world trade more than Europe. In a leaflet from 1988 one reads: ‘For a European Europe, protecting its borders from immigration of the Third World and wild imports threatening its business.’ And in 1995, Le Pen declared: To restore economic prosperity in France and Europe, one must control foreign trade. This can be done either by quotas on imports into the French

30

B. Amable and S. Palombarini and European borders, either by setting up tariffs balancing the labour cost differentials. … one must not treat in the same way the import of Chinese textiles and the software produced in the United States.

At that time, the enemy of the FN was globalisation. Europe – understood as a Europe of ‘nations’ and not a federal one – was seen as a potential ally to restore a form of protectionism. The strategy of the FN in the 1980s and 1990s was to look for the support of the most liberal part of the right bloc: artisans, shopkeepers, small entrepreneurs. Using data from the electoral survey of the presidential election of 1988, we estimated a probit model explaining the possible vote for the FN. Because of the self-censorship often observed among respondents when the question of the vote for the FN is asked, it seems better to consider the answers to the question whether the respondent could vote for the FN. Among the respondents of the sample, 35 per cent answered that they could vote for the FN and 65 per cent answered they would never vote for the FN under any circumstances. The results of Table 2.3 show that the high-skilled categories among blue collars (technicians), white collars of the public or the private sector or the young (students) tend to significantly reject a possible vote for the FN. The ultra-liberal position of the National Front of Jean-Marie Le Pen was therefore not the ‘natural’ candidate to occupy the opposition to the strategy of the bloc bourgeois; for among the social groups excluded from it are the frontline workers and unskilled workers. At the same time, in the political supply landscape of the 1980s and 1990s one could find other potential candidates for the establishment of a ‘anti-bloc bourgeois’ front – that is to say, able to offer a credible policy based on the opposition to European integration and the defence of the French model. In particular, so-called ‘sovereignist’ political positions and those defending the French socio-economic characteristics (both opposition axes to the bloc bourgeois) also existed within both the right bloc and the left bloc. Tensions within each of the blocs between the liberal and pro-European strategy and the ‘social’ and sovereignist one emerged into the open in 1992 at the referendum on the Maastricht Treaty. This referendum had a fundamental importance in the French political dynamic. First because it highlighted the clashes that have since structured the Table 2.3 Possible vote for the FN: probit estimation results Vote for the FN: possible High-skilled public sector High skilled private sector Technician Student Source: own estimates, 2012 French electoral survey. Notes Significance level: *** 1%.

–0.47*** (0.06) –0.30*** (0.11) –0.36*** (0.06) –0.42*** (0.12)

The anti-bourgeois bloc in France 31 main divisions of the political supply, no longer based only on the traditional right/left divide. Also, the narrow victory of the ‘yes’ (51.04 per cent against 48.96 per cent for the ‘no’) marked the victory of liberal and pro-European integration fractions and in the ‘government’ parties both to the right and to the left. But one must remember that the victory of the ‘yes’ was achieved at the cost of major rifts within the traditional alliances. Thus, the right ‘yes’ was defended by senior leaders of the conservative post-Gaullist RPR (Rassemblement pour la république) at the time (Jacques Chirac and Edouard Balladur in particular), but another important part of the RPR (led by Charles Pasqua and Philippe Séguin) supported the ‘no’. It is interesting to quote some excerpts from the speech by Philippe Séguin (Séguin 1992) before the National Assembly. The first challenge to the Maastricht Treaty concerned the surrender of national sovereignty: The logic of the process of economic and political spiral developed in Maastricht is that of a cheap fundamentally undemocratic federalism, falsely liberal and decidedly technocratic, the Europe proposed to us is neither free nor fair or effective. It buries the concept of national sovereignty and the principles coming from the Revolution: 1992 is literally the anti-1789. The second point relates to the defence of the specificities of the French model: There is undoubtedly a French exception … which reflects this extraordinary compromise the Republic has made here, between the need for the state and the freedom of the individual and cannot be reconciled with standardization, with trivialization one wants to impose on France, on behalf of the logic of Maastricht.… The normalization of French economic policy involves in the very short-term a downward revision of our welfare system, which will quickly become an insurmountable obstacle for both harmonization and the famous ‘convergence’ of economies. Defence of national sovereignty and the French model can also be found at the time in the positions of part of the left. If President Mitterrand was first in line to defend the ‘yes’ in the referendum, a significant fraction of the left – the communist PCF, environmentalists and some socialists – were opposing it on the basis of arguments very similar to those put forward by P. Séguin. Moreover, in 1993, after the victory of the ‘yes’, the leading exponent of the ‘Republican’ wing of the Socialist Party (Jean Pierre Chevenement) left denouncing a ‘social liberal’ drift. The debate preceding the referendum on Maastricht appears as a confrontation between divergent strategies that correspond to internal lines of fracture in the left bloc and the right bloc, which relate mainly to the priorities of economic policy (fiscal balances or lower unemployment) and the European question. From 1992 on and the narrow victory of ‘yes’ in the referendum, the

32

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liberal and pro-European strategy clearly dominated, while the ‘sovereignists’ were marginalized both in the left and the right camps. The relative coherence of the political supply in the government parties does not mean – far from it – that the solution of contradictions that are present in the electoral bases of both traditional social blocs has been found. One needs only to recall the victory of the ‘no’ in the referendum in 2005 on the European Constitutional treaty (whereas the vast majority of government party leaders had supported the ‘yes’), and the result of the consultation among registered PS members that preceded it: in which the ‘yes’ – again supported by virtually unanimous leaders – had won, but with only 59 per cent (41 per cent for the ‘no’) in spite of the massive support of the party’s leadership. It is therefore certain that the liberal and pro-European strategy of government parties aroused discontent among many voters formerly integrated into their respective constituencies, especially among the lower classes: it opened the political space for a frontal opposition strategy to that of the bloc bourgeois. But the failure of attempts made by some leaders of the left and the ‘traditional’ right to impose the defence of the sovereignty and the French model in their respective camps, left this vast political space vacant.

Marine Le Pen’s strategy and the emergence of an anti-bloc bourgeois front It is in this context that we must interpret the strategic shift of the National Front, driven by Marine Le Pen. The fracture of the former social blocs produced political conflicts both to the right and to the left, from which the proponents of a liberal and pro-European line emerged as winners. This line leads to the strategy of the bloc bourgeois. Marine Le Pen has tried – so far successfully – to represent the expectations sacrificed by the outcome of these conflicts: namely, the expectations of the most popular fractions of the right bloc and the left bloc: artisans, shopkeepers, small entrepreneurs on the one hand; workers and employees with little or no qualifications on the other hand. The failure of the ‘sovereignists’ and ‘Republicans’ in the political struggles that took place until the early 1990s facilitated this task by delegitimising the main potential competitors of the FN; the real difficulty was to propose a political supply characterised not only by the opposition to European integration (which partly corresponds to the tradition of FN), but also the defence of the French socio-economic model (no small feat for a party that was so enthusiastic about the liberal revolution of Thatcher and Reagan). The presidential manifesto of Marine Le Pen in 20128 was entirely built around these two axes, which find a common expression in the defence of national sovereignty. One can find in this manifesto a renegotiation of European treaties that should ‘put an end to the dogma of free and fair competition’ in order to ‘lay the foundation for a Europe that respects popular sovereignty, national identities, languages and cultures’. If one does find the traditional theme of a ‘smart

The anti-bourgeois bloc in France 33 border protection [that] will be implemented to protect against unfair competition from countries with low labour costs and the ensuing relocations’ the turnaround with respect to the previous position of the FN is spectacular throughout the economic policy programme. The National Front manifesto proposes to ‘remove’ the monopoly of banks and to ‘de-privatize public money. The Bank of France will be able to lend to the Treasury without interest.’ The same party that had repeatedly proposed the abolition of the personal income tax in the past, gave in 2012 as a ‘priority’ to ‘make it more progressive … by creating new intermediate rates … The upper rate of the income tax will be increased to 46%. Thus, the middle class will pay less tax on income, but the very wealthiest households will pay more’. And ‘the opaque housing tax, will be integrated into the fairer income tax, in the form of an additional fee to be as progressive as the income tax’. Similarly, there is no more mentions of ‘those poor shareholders’: ‘The taxation of dividends will be reviewed to ensure that capital income should not be favoured over labour income.’ The support to labour income – especially low wages – is displayed as a major objective of the ‘new’ National Front: ‘all wages up to €1,500 will benefit from a net increase of €200’; ‘the wage index will be upgraded for small wages of the public sector’; and a ‘revaluation of pensions will be done’. The party that wanted to abolish the wealth tax, proposed in 2012 the creation of a single progressive tax on wealth, … the result of the merger between the property tax and the tax on wealth (ISF ), on a renewed common basis ensuring fiscal justice. This will remove the current real property tax, based on unjust bases dating from 1970. The ISF will be integrated into this single tax and it will correspond to a surcharge respecting the same rates as today. The National Front no longer speaks of a widespread VAT increase: The staples will continue to benefit from the reduced VAT rate to 5.5%. But VAT can be made more progressive, so as to generate new revenue and to meet the primary objective of fiscal justice. A majored VAT rate will be created for luxury products (luxury cars, luxury cosmetics and jewellery, among other examples). This proactive policy of income redistribution makes sense within a broader strategy to defend a specific social model. The 2012 programme of the National Front was very ambitious on the theme of public services: ‘in order for the rail network to cover the entire country, many regional routes will be renovated or restored’; ‘local post offices that were closed down will be reopened and the Post will regain its status as a public institution’; ‘Access to health care

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throughout the country will be a political priority by ensuring the presence of multidisciplinary hospital or medical centres in each village, desertification is a tragedy for the rural world.’ The same applies for the pension system: ‘PAYG system will be continued through a realistic and ambitious policy. Full retirement with 40 years of contributions will be restored and the legal age of retirement will be reduced to 60 years.’ Funding of the pension system will be expanded ‘to capital income in order to finance all of the services that fall under the principle of national solidarity’. The distance is therefore huge between the ultra-liberal positions of the National Front of the 1980s and 1990s, and the most recent, very socially engaged, programme. It is difficult to say whether this is a real change or a form of deceit, such as denounced by the trade union confederation CGT.9 But the temporary success of the FN electoral strategy is probably partly based on a form of ambiguity in the perception that voters have of that party. The National Front captures the support of a majority of the popular classes. In a poll by Ifop in October 2013,10 44 per cent of workers and 36 per cent of employees said they wanted to vote for the FN: this is probably voters attracted by the public services defence and the redistribution of income proposed by the ‘new’ FN. At the same time the party is very strong among the artisans and shopkeepers (35 per cent of voting intentions) that are the core of its traditional electoral base, and whose expectations are associated with lower taxes and higher flexibility of the labour market. These electors are in favour of a pension reform, limiting the size of the public sector, and blame unemployment on the lack of efforts made to find a job by the unemployed (Amable 2014a). The symbol of such ambiguity is in the results of National Front in the European elections, in June 2014. The party obtained its best scores in the working class areas of the Northern region where top of the list was Marine Le Pen (33.6 per cent); and in the South-east district, the oldest area of electoral implantation, where the list was headed by … Jean-Marie Le Pen, 85 years old (28.2 per cent). While it is true that the success of FN is very wide among popular classes, it has yet to demonstrate that a mediation strategy between demands as remote and even contradictory exists; for now more than a successful mediation, we can speak of a coexistence – at least in the perception of the voters, but also in terms of its ruling class – between the Thatcherite past positions and the new social ones.11

A future for the left? The strategy of President Hollande, based on a renewed European commitment and neoliberal structural reforms, and that of Marine Le Pen, centred on a return to national sovereignty and the defence of the French model, point to a restructuring of the French political landscape. They are attempts to overcome the political crisis caused by the fracture of traditional left and right social blocs. As evidenced by the election of François Hollande, the left bloc (based mainly on the de facto alliance between the working class and the public sector employees) is still a social majority. But the fracture on the European issue is

The anti-bourgeois bloc in France 35 deep, and President Hollande’s action also shows that – for lack of a viable mediation strategy – the unity of the left bloc no longer resists the government experience and cannot exceed the time of an election. As shown in Table 2.4, Hollande’s voters who are in favour of giving more power to the EU are found among the high and medium skilled. If the nationalist reaction proposed by the FN is a clear response to the rejection of European integration by the popular classes, it is difficult for a left that has internationalism in its genes to correspond to it. Intellectual and ideological ‘left’ production remains really divided on the issue of Europe. There is a large consensus on the opposition to the ‘neoliberal’ Europe, but the advices on the policies to be followed are radically different. As an example we can consider the collective work Changer l’Europe! (Les économistes atterrés 2013), authored by the ‘Economistes atterrés’ association.12 In the Introduction to their collective work we can read that ‘European integration must resolutely take into account the consolidation and development of the European social model. Europe must stop imposing people a target of competition based on public spending cut.’ The goal is ambitious, and the authors are aware that the ‘transformation of policies … can only occur if institutional ruptures are made to the treaties themselves’. But what institutional ruptures are they talking about? On the content of the treaty reform and the future of the single currency, the positions diverge. The last chapter of the book, written by Michel Dévoluy and Dany Lang, advocates a federal solution: they wish a further transfer of sovereignty to the EU, in accordance with democratic procedures, and the creation of a real European government chosen by universal suffrage. The Introduction to the book warns that this position is far from being shared by all authors. Instead, many of them doubt that the solution today is to strengthen federalism, even democratic. They are sceptical at first because the current balance of Table 2.4 Support for increased European integration for Hollande voters Public sector

High skilled Medium skilled

0.639*** (0.126) 0.367*** (0.110)

Private sector

High skilled Medium skilled

0.530*** (0.149) 0.381** (0.164)

Income

Decile 5 Decile 8 Decile 9 Decile 10

–0.303** (0.152) 0.217* (0.114) 0.376*** (0.112) 0.412*** (0.132)

Age

18–24 35–44

0.396*** (0.147) –0.198** (0.085)

Source: own estimates, 2012 French electoral survey. Notes Significance levels: * 10%, ** 5%, *** 1%.

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B. Amable and S. Palombarini power does not make it possible to consider such a step. These ‘Atterrés’ therefore think they must now oppose any strengthening of federalism and, for a time at least, try to restore power and leeway to national States and peoples. (p. 20)

Transfer of sovereignty to the EU and ‘democratic federalism’ on the one hand, opposition to any strengthening of federalism and return to national sovereignty on the other hand: one can hardly imagine more distant positions within a common association of left-leaning economists. The same applies for the future of the single currency. The Introduction to Changer l’Europe!13 states that among the authors of this book, some believe that the malfunctioning of the euro and the accumulated imbalances make it necessary to consider the end of the euro or, at least, an exit of some countries (or groups of countries). According to them, keeping the euro as it is, is the surest way to destroy the European social model and lead Europe to decline. In contrast, other ‘Atterrés’ think that ‘the reform of the Eurozone running is still, for now, the best solution’, because ‘the break-up of the zone would represent a serious setback for the construction of Europe’, and European countries without the Euro ‘will lose all ability to influence global economic developments and to promote their social model’ (p. 21). The goal is the same: the defence of the European social model. But the strategies to achieve it – federalism and single currency vs national sovereignty and euro exit – are totally divergent. In the galaxy of critical economists, the clearest positions (and the most distant from each other) are probably those of Jacques Sapir and Alain Lipietz. For Sapir (2009) ‘the political frameworks, the institutions are creations of history and they specify national spaces as special policy areas. It is in these specific policy areas that we need to find solutions.’ Sapir does not hesitate to propose a new political alliance that ‘goes from the extreme Left to the neoGaullists’. For him, federalism in Europe today, can only be an anti-democratic project.… The building of legal frameworks beyond Nations, and therefore beyond democratic control expressed within them, has always meant a social and political decline. Today, the European project is progressing at the same speed as the dismantling of democracy not only in Europe but in each member country. The radical rejection of the federalist perspective is consistent with the French exit from the Eurozone: ‘The interest of exit from the Euro is just to lead a truly different policy, with the combination of industrial policy and incomes

The anti-bourgeois bloc in France 37 policy, … as well as capital controls and funding a portion of the debt by the Central Bank.’ In contrast, Alain Lipietz (2012, p. 8) considers that ‘a solution is … possible for Europe’ because Europe has sixty years of experience in the construction of a supranational space. At the end of last century, it failed to adopt a governance other than by rules, a political and democratic governance, but nothing prevents the crisis itself to force it to move.… A New Deal, but that is a Green Deal. Europe has the material and institutional means to have such a goal, to save itself and help save the planet. But this requires a federalist jump. And this is probably the real obstacle: the lack of trust in the others, which reflects the lack of confidence in itself. Between these two extremes, there is a varied spectrum of positions. Fréderic Lordon (2014, p. 229) opposes the federalist project, and he is favourable to the exit from the Euro. However, Lordon criticises the proponents of ‘national sovereignty’, which do not raise ‘the question of who is the incarnation of this sovereignty’. He differentiates between a ‘left-wing sovereignism which is easily distinguished from a right-wing sovereignism usually conceiving sovereignty as “the nation”, when the first claims to uphold the sovereignty “of the people” ’. This distinction is not just philosophical: it has major implications for the profile of the social and political alliance that could meet around the break with European integration. The Right-wing sovereignism is … nothing more than a (legitimate) desire for restoring means to govern, but fully assigned to qualified leaders which ‘the nation’ is invited to recognize in – and to surrender to. Left-wing sovereignism is the other name of democracy – but finally understood in a rather demanding way. Since ‘the symbolism of the national sovereignty in the French right’ has ‘still not departed from the figure of De Gaulle’, it is difficult to conceive the alliance from the extreme Left to some néogaullistes advocated by Sapir. The position of Jacques Genereux is interesting because this economist played an active political role in the French left as co-founder and national secretary for the economy of the Parti de Gauche between 2008 and 2013. For Genereux (2013) ‘what to do (…) ideally, it is to complete the Euro, bringing to the currency area what it lacks to become an area of progress’. This is the idea that ‘another Europe is possible’, which for years functioned as a unitary horizon to a deeply divided left. Genereux pretends always to believe in it: A country like France can help. Because it is a founding member of the European Union, because it is the second economy in Europe, France can

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B. Amable and S. Palombarini attempt a coup de force. A new government … could propose a deal to its European partners: we can no longer assume in Europe policies that lead to social and financial disaster; … the goal is to stay in the Euro and negotiate.

But the faith in an ‘another Europe’ is lost: The problem is that this scenario will not happen. It is serious and credible, but there is no majority to sustain it. While this does not occur, it is the neoconservative, nationalist … or neo-Nazis movements … that recover discontent in Europe and advocate withdrawal’ Genereux notes that the other Left still exists in Europe … but it does not progress. This progressive Left has not been able to fully assume a sufficiently clear position relative to the euro. Before the crisis, we could say to voters: ‘We are proEuropean, we want to rebuild Europe, to create a balance of power … It was audible, but not anymore. … The Europeans have suffered, directly for some of them, from the austerity policies imposed. … Today, it is difficult to present oneself as pro-European: people will laugh in your face. So what to do in such a situation? Genereux admits that it is difficult. We must clearly assume that at the end of our coup de force scenario, if the other countries refuse it, there will be an exit from the euro. We’ll be outside. It is not until then the Front de gauche program,14 because the Communist Party was not ready to go that far in disobedience to the European rules. But this is the condition for the credibility of our political scenario. We must get out of the ambiguity: the priority must be the move to another policy. It is better to leave the euro to conduct another policy than to throw over another policy to save the euro. Because in the end, we do not want to save the euro, but Europe. Saving the euro and jump to a ‘democratic’ federalism, a new European Green Deal; a last attempt to negotiate with European partners before leaving the euro; breaking the Eurozone and returning to national sovereignty but clearly differentiating between left-wing and right-wing sovereignisms; a new political alliance that goes from the far left to the neo-Gaullists in the name of national sovereignty … The least that can be said is that there is no shortage of projects. In fact, the only factor that still makes that ‘Left’ an analytical category, is the rejection of neoliberal Europe: but there is no longer any shared perspective on the European issue. There are no shared ideological and theoretical foundations; and under these conditions it is easy to understand the difficulties of a synthesis at the political level. The slogan ‘another Europe is possible’ cannot conceal the collapse of the left on key issues such as the unique currency, the institutional architecture, and the relations with the other European countries.

The anti-bourgeois bloc in France 39 There are other political difficulties in addition to those, ideological and analytical, that we recalled. The Communist Party has not entered the governments led by J.M. Ayrault and M. Valls. But the communists are allies of the Socialist Party in many regions, departments, municipalities. If at the national level the Communist Party opposes the strategy of building the bloc bourgeois led by the Socialist Party, it remains difficult for voters to consider it as a credible opponent. J.L. Mélenchon – presidential candidate of a Front de gauche which involved the Communist Party – asked ‘how is it possible that we become so illegible’.15 Mélenchon’s response is related precisely to the electoral tactics of the Communist Party: the municipal elections in Grenoble, where a part of the Front de gauche has decided to run with the PS, is a mirror of the national situation. The technique of Communist leaders – who sometimes advocated an alliance with the PS, sometimes appropriated the Front de gauche – has dissolved our message. But these tactical hesitations are only a part of the problem, and they are probably less important than the lack of a unified strategy on the European issue. A policy of structural reforms in line with the expectations of European partners (especially Germany) is central to the bloc bourgeois strategy. Any objection to such a strategy requires proposing an alternative project. The National Front proposes to voters a project which is frontally opposed to that of the bloc bourgeois; on the contrary, the split within the political and intellectual left explains its inability to occupy the social and electoral space of opposition to the bloc bourgeois.

Conclusion The front page of the newspaper Le Monde, 8 February 2012, was: ‘MélenchonLe Pen, the match of populisms’.16 Populism, namely ‘a powerful protest movement, a form of resistance to the structural changes facing Europe’17 would be growing in France as in many other European countries, in response to structural reforms which are deemed indispensable.18 Le Monde proposed a simplistic opposition: on the one hand, the enlightened reason which cares about the long term and social well-being; on the other, the appeal to emotion, and the immediate feelings of the people, with no vision of the future. Our analysis shows that the situation is very different and more complex. The new configuration of the political supply in France does not follow from the economic need for unpopular reforms, but from the political crisis that has been open for at least two decades, a crisis that is linked to the rise in unemployment and to the European issue (Amable et al. 2012). This crisis coincides with the fracture of the old social blocs, and led to a situation of high political volatility. The presence of a dominant social bloc is a functional need for a political system. The old social blocs were built around a

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left/right axis defined by the social expectations on the intensity of state intervention in the economy. The impossibility to reconstruct a dominant bloc based on this sole criterion produced an enlargement of the political conflict on the rules of the social game, namely social and political institutions. The profile of the French social model is now involved in the political conflict. Structural reforms, and the European project which justify them, are not necessary for the common good (also a highly questionable notion), but for the viability of the political project that aims for the construction of a new social alliance: the bourgeois bloc. And the rise of populism in France does not correspond to a short-sighted response to the costs of the necessary reforms; it is related to attempts to give political representation to the socio-economic interests sacrificed by the emergence of the bourgeois bloc. In this theoretical framework, we can interpret the electoral success of the National Front. Under the leadership of Marine Le Pen, it adopted a programme that is in frontal opposition to the bloc bourgeois, based on euro exit, the rejection of European constraints on fiscal policy and the defence of the French social model. The action of François Hollande and the project of the ‘new’ National Front, although strictly opposed, have this in common: they are attempts to build new social alliances that go beyond the right/left traditional axis (see Figure 2.2). However, we can identify a real element of ‘populism’ in the strategy of National Front. We analysed the complete reversal in the programme of a party that – until recent years – had a blatant Thatcherite inspiration. But this deep change, which enabled the National Front to conquer a new support among the popular fraction of the former left bloc, was so far accepted by its old electorate. In the electoral base of the National Front, there are some incompatible expectations: two factors allow for the time to overcome this contradiction. First, some ambiguity related to the fact that the radical change in the programme was done in the party elite’s complete continuity. The fact that Marine Le Pen is the daughter of Jean-Marie19 symbolises this continuity. The second factor – the populist element – is the position of the National Front on the immigration and cultural issues. The rejection of immigration is the only dimension that can unify an electorate in which we find simultaneously, for example, the ‘old’ demand for a strong liberalisation of the labour market, and the new and opposite demand for employment public protection. Therefore, there is a fundamental difference between the bloc bourgeois and the National Front projects. The first is a coherent project, but based on policies that have a social and economic regressive impact: the bloc bourgeois has not become a dominant one. The second is based on a heterogeneous electoral base to the point that it is difficult to imagine that it would resist any experience of government. The bloc bourgeois and the anti-bloc bourgeois front are projects arising from the French political crisis, but it is far from certain that they can offer solutions to the crisis. The social base of the bloc bourgeois is too small; only a positive

The anti-bourgeois bloc in France 41 Structural reforms/European Union Bayrou Montebourg (left - PS)

Hollande Juppé Sarkozy

PCF State intervention/Redistribution Mélenchon Le Pen (J.M.)

FN (Marine)

Figure 2.2 The break-up of the former right bloc and left bloc on the European integration issue. The opposition of the bloc bourgeois and the anti-bloc bourgeois front and their possible dynamics.

effect on the growth of structural reforms could help to expand it and to convert the bloc bourgeois into a dominant bloc. The anti-bloc bourgeois front has a broader social base, but it is constructed only in opposition to bloc bourgeois, on the rejection of the policies it advocates; there is not a strategy of mediation among the (contradictory) interest that the bloc bourgeois sacrificed. In this political landscape reconstructed around a new axis which connects structural reforms and participation to the European integration, what space is there for the left? For a long time the left has escaped the dilemma posed by the European unification (to accept or to reject it) by imagining a third choice: the fight for ‘another Europe’. But this perspective has proven to be in vain, and the left – gradually forced to choose – exploded: from the federalist jump to the return to national sovereignty, the full spectrum of possible positions exists within it. With a political offer recomposed around these issues, the left must find a common position if it wants to continue to exist.

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Appendix The estimation of the voting model using the French electoral survey 2012 The voting model estimates the probability of voting for François Hollande at the second round of the presidential election. The dependent variable is therefore dichotomic. Explanatory variables are the following. The position in the social structure is mainly determined by six types of variables: sex, age, occupation, income and wealth levels, church attendance and the type of living environment. Men will be the reference category. Five age brackets will be taken into consideration: 18–24, 25–34, 35–44, 45–54 (reference category) and over 55. Occupations will be defined with the help of the INSEE classification: farmers (reference category), managers, craftsmen and shopkeepers, high-skill public sector employees, high-skill private sector employees, medium-skill public sector employees, medium-skill private sector employees, foremen and technicians, public sector clerks, private sector clerks, service workers, skilled (blue collar) workers, unskilled (blue collar) workers, student, unemployed, retired. The level of household income is individualised by dividing it by the squared root of the size of the household in order to account for possible intrahousehold economies of scale. The survey samples are then divided by deciles, and the first income decile is taken as the reference category. Five wealth brackets are considered: under 7,000 Euros (reference category), between 7,000 and 75,000 Euros, between 75,000 and 150,000 Euros, between 150,000 and 300,000 Euros, and over 300,000 Euros. The church attendance variable will separate individuals who attend at least twice a month (churchgoers) from the others (reference category). The living environment will separate those who live in a rural area from the others (reference category). Labour market risk is assessed thanks to the answer to the question whether it would be easy or difficult for the respondents or their partner to find another job should they lose the position they have. When the respondent has answered that it would be difficult or very difficult for her/himself or partner to find another job, the variable household’s employment risk takes a value of one, and zero otherwise. Another question concerns the likelihood of a decrease in household’s income within the next 12 months. If this is considered very likely or likely, the corresponding risk variable takes the value 1. The questions relevant for the policy expectations relate to general policy matters (taxes, income redistribution, public services, labour market regulation …). The following questions are taken into consideration. Four degrees of appreciation of the nationalisations are considered, from very negative to very positive. ‘Fairly negative’ will be the reference category. For the opposition to the single employment contract,20 four answers from totally favourable to totally opposed are available. ‘Rather opposed’ will form the reference category. An important social protection reform of the Sarkozy presidency concerned the pensions. The reform led to a significant union-led contestation

The anti-bourgeois bloc in France 43 in autumn 2010 and one electoral promise of PS candidate François Hollande was to partially reverse it. One question of the survey asked the respondent to appreciate the fairness of the reform, grading it between 0 and 10. For all variables of that type, the grade itself will be the explanatory variable. Two other questions deal with taxation and redistribution. One asks whether the respondent approves or disapproves of government intervention to reduce income inequalities. Five answers are possible: totally agree, rather agree, neither agree nor disagree, rather disagree (reference category), totally disagree. Another question asks the degree of approval of an increase in VAT (grading it between 0 and 10). The issue of increasing the VAT in order to finance social protection, allowing for a decrease in social contributions and a drop in the labour cost, had been a debate before and during the electoral campaign, opposing Nicolas Sarkozy, who was in favour of it, to the left. Finally three questions ask for the respondent position on strengthening the power of the EU vs the power of the French state, increasing or decreasing the number of nuclear plants, and increasing or decreasing the number of civil servants. The answers are grades between 0 and 10 for the degree of support to the proposition. In order to consider possible divides linked to culture and lifestyles, besides those based on economic policy issues, as in the now popular bi-dimensional representation of the political space (Kitschelt 1993, 1994), variables reflecting social values have been incorporated in the analysis. According to the bidimensional view, a new cultural divide, not independent of social structural determinants, opposes authoritarian values and communitarian conceptions of justice to the values of cultural liberalism, internationalism and gender equality (Bornschier 2010). This would split the traditional left and right social bases. Social values are identified with the help of four questions, asking about the approval with the following propositions: homosexual couples have a right to adopt children; in a society, there must be a hierarchy with leaders; the unemployed could find a job if they really wanted to; there are too many immigrants in France. Categorical variables corresponding to approval are included in the model.

Notes 1 Interview in Le Monde, 8 February 2012. 2 The TSCG is also known as the fiscal compact. The treaty specified new reinforced obligations for member states regarding budget deficit, public debt and ‘structural reforms’. 3 The treaty needed to be ratified by 12 countries before being implemented. Finland was in December 2012 the 12th country. France had ratified it in October 2012. 4 See Amable (2014b). 5 Le Monde, 8 September 2014. 6

For most socialists … the welfare state seemed to point up a way ahead to a controllable and egalitarian future, whether or not this was seen as a halfway house to ‘full socialism’ or to some version of communism. With the collapse of socialism’s historical ambitions, we have to look at the welfare state in quite a different light. (Giddens 1994, p. 150)

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B. Amable and S. Palombarini Schemes of positive welfare, oriented to manufactured rather than external risk, would be directed to fostering the autotelic self. The autotelic self is one with an inner confidence which comes from self-respect, and one where a sense of ontological security, originating in basic trust, allows for the positive appreciation of social difference. It refers to a person able to translate potential threats into rewarding challenges, someone who is able to turn entropy into a consistent flow of experience. The autotelic self does not seek to neutralize risk or to suppose that ‘someone else will take care of the problem’; risk is confronted as the active challenge which generates self-actualisation. (Giddens 1994, p. 192) One has to adopt a wide notion of welfare, taking the concept away from economic provision for the deprived towards the fostering of the autotelic self.… The effort bargain with the poor would not be the direct transfer of wealth but a transfer of employment opportunities coming from changed attitudes towards work on the part of the more affluent. (Giddens 1994, pp. 194–195)

8 9 10 11 12 13 14 15 16

www.frontnational.com/le-projet-de-marine-le-pen/. www.cgt.fr/Le-front-National UNMASKED-by-l, 41270.html. ‘L’intention de vote pour les élections européennes de 2014’, Ifop, October 2013. The opposition between the two lines, represented respectively by Jean-Marie and Marine Le Pen, escalated after the local elections of 2015, and led to the former being suspended from the party he had founded. This association brings together a large number of economists ‘strongly wishing to see the economy free of neoliberalism’ and whose action aims to provide ‘alternatives to austerity policies advocated by the current governments’ (www.atterres.org). Whose subtitle could be: Yes, but in what direction? The Front de gauche is an electoral alliance among the Communist Party, the Parti de gauche and other political movements. Interview published in the Dauphine Libere on 21 August 2014. Politicians and political scientists invariably use [populism] to designate persons or movements they do not like or would not like to have come to power. In other words, to be called a ‘populist’ is to be insulted and, if possible, excluded from ‘respectable’ liberal democratic practice. (Schmitter 2006, p. 1)

17 D. Reynié, www.sciencespo.fr/newsletter/actu/?id=1262. 18 See for instance Aghion et al. (2006). 19 Although a political rift appeared between the father and daughter, leading to the eviction of J.M. Le Pen from his position as Honorary President of FN. 20 The proposition to replace all open-ended and fixed-term contracts with a single openended contract with diminished protection was made by economists in the early 2000s (Cahuc and Kramarz 2004)and taken up in the respective manifestos for the presidential election of Nicolas Sarkozy (UMP) in 2007 and François Bayrou (MoDem) in 2012.

References Aghion, P., Cohen, E. and Pisani-Ferry, J. (2006) Economic Policy and Growth in Europe, La documentation française, Paris. Amable, B. (2014a) The Unsolved Contradictions of the Modernists: Economic Policy Expectations and Political Crisis in France 1978–2012. Document de Travail CES n°2014.23.

The anti-bourgeois bloc in France 45 Amable, B. (2014b) Who Wants the Contrat de Travail Unique? Social Support for Labor Market Flexibilization in France. Industrial Relations, Volume 53, Issue 4, pp. 636–662. Amable, B. (2017) Structural Crisis and Institutional Change in Modern Capitalism: French Capitalism in Transition, Oxford: Oxford University Press. Amable, B. and Palombarini, S. (2014) The Bloc Bourgeois in France and Italy, in Magara, H. (Ed.) Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Edward Elgar, Cheltenham. Amable, B., Guillaud, E. and Palombarini, S. (2012) Changing French Capitalism: Political and Systemic Crises in France. Journal of European Public Policy, Volume 19, Issue 8, pp. 1168–1187. Bornschier, Simon (2010). The New Cultural Divide and the Two-Dimensional Political Space in Western Europe. West European Politics, Volume 33, Issue 3, pp. 419–444. Cahuc, Pierre and Kramarz, Francis (2004). De la précarité à la mobilité: vers une Sécurité sociale professionnelle. Rapport au ministre de l’Économie, des Finances et de l’Industrie et au ministre de l’Emploi, du Travail et de la Cohésion sociale. Etievant, G., Khalfa, P., Légé, P., Marty, C., Ramaux, C., Rigaudiat, J. and Sterdyniak, H. (2014) Budget 2015: un mauvais tournant, Note Attac, Fondation Copernic, Les Économistes Atterrés, accessed at https://entreleslignesentrelesmots.wordpress. com/2014/11/13/budget-2015-un-mauvais-tournant/, May 2015. Généreux, J. (2013) La priorité, c’est sauver l’Europe, pas l’euro, interview given to Rue89, 16 November, accessed at http://rue89.nouvelobs.com/2013/11/16/jacquesgenereux-priorite-cest-sauver-leurope-leuro-247475, May 2015. Giddens, A. (1994) Beyond Left and Right: The Future of Radical Politics, Polity Press, Cambridge. Kitschelt, Herbert (1993) Class Structures and Social Democratic Party Strategies. British Journal of Political Science, Volume 23, Issue 3, pp. 299–337. Kitschelt, Herbert (1994) The Transformation of European Social Democracy, Cambridge: Cambridge University Press. Les économistes atterrés (2013) Changer l’Europe!, Les Liens qui libèrent Editions, Paris. Lipietz, A. (2012) La trop évitable crise européenne, accessed at http://lipietz.net/IMG/ pdf/LA_CRISE_EUROPEENNE_2.pdf, February 2017. Lordon, F. (1997) Les quadratures de la politique économique, Albin Michel, Paris. Lordon, F. (2014) La malfaçon: monnaie européenne et souveraineté démocratique, Les liens qui libèrent, Paris. Piketty, T. (2013) Le capital au XXI siècle, Editions du Seuil, Paris. Ruffin, F. (2014) ‘Pauvres actionnaires!’ Quarante ans de discours économique du Front national passés au crible, Fakir Editions, Amiens. Sapir, J. (2009) Je suis démocrate donc souverainiste, interview given to Horizon, Le blog de Malakine, 12 October, accessed at http://horizons.typepad.fr/accueil/2009/10/ jacques-sapir-dmocrate-donc-souverainiste.html, June 2015. Schmitter, P. C. (2006) ‘A Balance Sheet of the Vices and Virtues of “Populisms” ’. European University Institute and Central European University, accessed at www.eui. eu/Documents/DepartmentsCentres/SPS/Profiles/Schmitter/PCSBalanceSheetApr06.pdf, January 2017. Séguin, P. (1992) Speech before the National Assembly, 5 May accessed at www.cvce. eu/obj/discours_de_philippe_seguin_paris_5_mai_1992-fr-208cafc7-f175-4e91-af4fda4769440e83.html, May 2015. Van Brabant, E. and Eberle, L. (1995) Entre péripétie électorale et vision politique, le non de Delors. Mots, n°45.

3

Abenomics and Japanese politics Masanobu Ido

Introduction In its beginning, the twenty-first century was believed to be the century of a revived America and global finance capitalism. Although the global economic crisis of 2008 appeared to put this rosy picture into question, we are clearly still living in a world of global finance capitalism. In this “brave new world,” the rise and fall of a national economy are mainly determined by foreign investors (in particular, hedge and pension funds), rating agencies, and international organizations, such as the International Monetary Fund. In today’s globalized world economy, the autonomy of national economic policy is seriously curtailed. Political leaders of all the countries are under the constant pressure of the neoliberal doctrine “Implement neoliberal economic reforms and maintain fiscal discipline, otherwise you cannot survive the global economic competition.” Yet, even if we accept the validity of the neoliberal mantra, can we expect that democratic political leaders, who are accountable to the population, can replace the post-war Keynesian policy regime, which closely linked them to their political supporters, with a neoliberal policy regime? In this study, this question is investigated by examining Abe’s economic revival plan, the so-called “Abenomics.” In the wake of the 2008 global economic crisis, the Democratic Party of Japan (DPJ) took power from the Liberal Democratic Party (LDP) by arguing for a shift in economic policy. However, it ultimately lost public support with its bungled handling of the relocation of the US military base in Okinawa; this led to the strain in US-Japanese relations, its failure in crisis management relating to the Fukushima nuclear disaster after the Great Eastern Japan Earthquake on March 11, 2011, and finally, its internal conflicts and ultimate breakup. In the 2012 general election, with its slogan “Reclaiming Japan,” Abe’s LDP came into power for the first time in three years and nine months. The Abe cabinet quickly put its economic revival program, Abenomics, into practice to rescue Japan from its 20-year economic stagnation, the so-called “Lost Two Decades.” With his Abenomics, is Abe replacing post-war Japan’s Keynesian policy regime – more precisely, its conservative version under the long LDP rule – with a new neoliberal policy regime, or is Abenomics merely a cosmetic upgrade of the old policy regime? The question is whether Abe, a leader of the LDP (comprising

Abenomics and Japanese politics 47 the old institution that is strongly linked to Japan’s post-war growth), can realize a neoliberal economic reform that will sacrifice the LDP’s old clients such as the farmers and the construction industry? Through this study, Abenomics is asserted to be a conservative political party’s innovative scheme organized to solve this political dilemma. To escape from the dilemma, Abe’s LDP chose to depend on global finance capitalism. (Notably, the scheme has a precursor – Koizumi’s “mini bubble” (2002–2007)). In the post-war period, Japan achieved both high economic growth and a relatively egalitarian society with Keynesian economic policies. In this conservative Keynesian policy regime, large exporting manufacturers led economic growth, while the LDP assured political stability by redistributing pieces of the economic pie to farmers, shopkeepers, and local populations. This pattern continued until the bursting of the economic bubble during the 1990s. In the “Lost Two Decades,” Japan ceased to grow and accumulated huge debt while deflation plagued its economy. The successive LDP governments failed to change the situation. As the main instrument of Japan’s post-war growth, the LDP faced the political dilemma of choosing either to introduce neoliberal economic reforms that would prompt its supporters to abandon it or do nothing and live with an economic decline by protecting the vested interests of its supporters. Koizumi governments (2001–2006) found a way out of this cul-de-sac. By winning high popular support throughout his term, Koizumi pushed through neoliberal reforms – including the expansion of temp work to the manufacturing industry – which drastically changed the structure of the Japanese economy. This study suggests that Abe is implementing Abenomics by adopting the same trick that Koizumi, his mentor, used in his neoliberal reforms. I call Koizumi’s and Abe’s introduction of neoliberal reforms by using this trick in a populist fashion as “stock market populism.” This new species of populism was groundbreaking. By cajoling foreign investors into investing in the Tokyo stock market with their promise of neoliberal reforms, populist leaders sparked economic growth with a weaker yen and a rise in stock prices, and high approval ratings for them as a result. By winning over global finance capitalism to their side, they could implement neoliberal economic reforms that would harm the interests of their supporters. This study is organized as follows: The “stock market populism” and the recent literature on populism, finance capitalism, and global finance are explained in the second section. In the third section, how Koizumi invented stock market populism and its relation with the liberalizer’s political dilemma are described. The underlying changes in political and economic conditions throughout the past few decades that led to the birth of stock market populism are also reported. In the fourth section, whether Abe is merely repeating his mentor’s political trick of stock market populism through his implementation of Abenomics has been discussed. In the conclusion, the fate of Abenomics as stock market populism has been examined.

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Neoliberalism and “stock market populism” Populist politicians and neoliberal regimes The focus of this study is not on anti-globalist populist forces, such as rightwing parties (e.g., the Five Star Movement of Italy’s Beppe Grillo or the Front National of France’s Marine Le Pen), but rather on conservative political leaders, such as Sarkozy of France and Koizumi of Japan, who introduced neoliberal economic programs with a populist political style (notably, the political styles of Thatcher and Reagan, the very pioneers of neoliberal revolution, were described as populist). But why do conservative political leaders like Sarkozy and Koizumi adopt populist political styles in implementing neoliberal economic reforms? The key to this question lies in the reality that neoliberal reforms harm the “vested interests” of traditional supporters (their “clients”) of the established parties. Established parties that guarded the old policy regime would face a political dilemma when intending to shift from the Keynesian to neoliberal policies. To overcome this political dilemma and win elections, their political leaders needed to secure new supporters (“first-time customers”) who would compensate for the potential loss of traditional supporters. For this purpose, political leaders mobilized the non-affiliated voters with their skillful use of a populist political style. National variations in Keynesian policy regimes: social democratic, commercial, and conservative Keynesianisms In Europe and the US, settlements between organized workers and employers constituted the foundation for their post-war Keynesian policy regimes, and politically, social democratic and conservative parties adopted similar economic programs. Former President Richard Nixon reportedly said that “I am now a Keynesian in economics.”1 Yet, there were notable national variations in the Keynesian policy regimes. In its social democratic version of Keynesianism, the Swedish government relied on public works and deficit financing to solve the country’s unemployment problem. In American “commercial Keynesianism,” the economic policies of the government were focused on tax reductions and the automatic adjustment mechanism of public expenditures, placing greater emphasis on the containment of inflation than on the unemployment problem (Weir and Skocpol, 1985). Post-war Japan, where the interests of farmers and employers were coordinated within the LDP, also belongs to the category of the Keynesian policy regime. This conservative variant of the Keynesian policy regime is peculiar in that the LDP governments redistributed the gain from growth to farmers and rural population and not to urban workers. Typically, these post-war Keynesian policy regimes were formed through historical processes in which the social democratic parties’ mobilization of bluecollar workers in manufacturing were countered by the establishments’ efforts to incorporate these political challenges by the lower classes. Thus, the regimes

Abenomics and Japanese politics 49 had not only an economic rationality but also a political rationality; they were based on the public’s political support. Yet, amidst the economic globalization that began in the 1990s, large manufacturers outsourced their production processes to emerging economies, whereas within advanced countries, the share of manufacturing in the economy and that of workers in the population decreased. The Keynesian policy regime, which was based on the settlement between workers and employers, collapsed, and neoliberal policy regimes were adopted in many countries (Przeworski, 2001). Under the neoliberal policy regimes in advanced countries, a small number of the super rich monopolized a large share of the national wealth, whereas the living standard of the average citizens did not improve. The economic gap widened to a dangerous level. Even if a country needs to adopt the neoliberal policy regime for its survival in today’s globalized world, can we expect political leaders who are accountable to the public in regular elections to introduce such unequal policy regimes that are clearly incompatible with the economic interests of the majority? In particular, it must be very difficult for the established parties that organized the main “beneficiaries” (e.g., organized workers and farmers) in the post-war Keynesian policy regimes. Can we expect them to introduce a neoliberal policy regime that would compromise the “entrenched interests” of these politically powerful social classes? This is the political dilemma of policy regime change – the key subject of this study. “Virtues” of populism This study argues that populist leaders have the capability to overcome this political dilemma. In a different context of democratization, Schmitter (2006) suggests the “virtue” of populism by proposing that populism breaks up outdated party loyalties, prompts the formation of new political forces, puts previously ignored issues on the table, and promotes the articulation of repressed cleavage structures (Schmitter, 2006, p. 3). Populist leaders play a similar role in the introduction of the neoliberal policy regime; they weaken the traditional party loyalties of the social classes who benefitted from the Keynesian policy regime – workers and employers of large manufacturers – to the established parties (usually mass-based parties). Populist leaders even attack these “beneficiaries” of the old policy regime and their own established parties and accelerate the demise of the established parties, along with the traditional party systems. On the other hand, populist leaders give a “voice” in the political process to the previously neglected demands of a motley group of social classes – consumers and investors who may gain from the globalization2 – and combine and form them into new supporters of the upcoming neoliberal policy regime and its political proponents. In doing so, populist leaders transform the political cleavage structures and reshuffle the social class coalitions. Thus, in this study, I surmise that Abe and Koizumi are such populist leaders who aim to create a new social class coalition dominated by the interests of consumers and investors through their implementation of neoliberal policies. In particular, I propose that

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the political technique Koizumi and Abe use in their reformulation of social class coalitions – by “surfing” on global finance capitalism – has a groundbreaking aspect, and I call this new variant of populism the “stock market populism.” Anglo-Saxon finance capitalism vs. Japanese stock market populism Understanding the distinctiveness of Japan’s “stock market capitalism” and its growth pattern from the Anglo-Saxon finance capitalism is critical. The differences in growth patterns are driven by the contrasting economic structures – differing importance of manufacturing in the economy and the population’s contrasting preference toward risk assets in their selection of financial assets – of these two groups. Unlike the Anglo-Saxon finance capitalism, manufacturing still constitutes a large part of the Japanese economy, whereas the share of finance sector in the economy is low (Nishi, 2012). As shown in Figure 3.1, manufacturing accounts for only 12.3 percent and 10.0 percent of GDP in the

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Figure 3.1 Financial capitalism vs. deindustrialization. Sources: (1) Share of manufacturing sector, value added, in GDP in 2012 (% of GDP). (http://data. worldbank.org/indicator/NV.IND.MANF.ZS) downloaded on April 4, 2014; (2) Share of currency and deposits in households’ financial assets. OECD, OECD Factbook 2013 (Paris, OECD) (downloaded on April 5, 2014). Note Manufacturing comprises Tabulation Category D and Divisions 15–37 in the International Standard Industrial Classification of All Economic Activities, Revision 3. It is defined as the physical or chemical transformation of materials of components into new products, whether the work is performed by power-driven machines or by hand, in a factory or in the worker’s home, and the products are sold at wholesale or retail. Included are the assembly of component parts of manufactured products and recycling of waste materials (https://stats.oecd.org/glossary/detail.asp?ID=1586).

Abenomics and Japanese politics 51 US and UK, respectively, whereas it still accounts for 18.7 percent and 23.8 percent of GDP in Japan and Germany, respectively.3 In Japan, household financial assets are largely held in the form of cash and deposits, rather than in the form of risk assets, such as securities and mutual funds. In 2010, currency and deposits constituted 13.5 percent and 28.0 percent of the household financial assets in the US and UK, while the ratios were 50.4 percent and 40.1 percent in Japan and Germany.4 With the low share of manufacturing in the economy and the population’s wide practice of holding stocks, economic growth in the Anglo-Saxon finance capitalism is led by strong consumer demand by households with asset income increasing because of the rise in stocks and land prices (Boyer, 2000). Notably, the American growth during the twenty-first century has been punctuated by a cycle of speculative bubbles (the dot-com bubble and Bush’s housing bubble) riding on extravagant spending by a population heavily indebted with new types of financial products such as sub-prime mortgages and subsequent busts (Crouch, 2008, 2011; Chinn and Frieden, 2011). On the other hand, Japan’s stock market populism takes a firm-centered approach to growth. With the revival of the competitiveness of Japan’s exporting manufacturers as its primary goal, the stock market populism creates “mini bubbles” with lower yen and a rise in stock prices (Koizumi’s “mini bubble” in the early 2000s and its successor, Abenomics). Here, weaker yen is expected to boost the export competitiveness of large manufacturers. With their improved performance, they, in turn, raise wages and stimulate domestic demand. Global finance and stock market capitalisms A groundbreaking aspect of this variant of populism lies in achieving the high public support that neoliberal political leaders pander to foreign investors in their efforts to lure investments into Japan’s stock markets, thereby realizing cheaper yen and a rise in stock prices. By “surfing” the global finance markets, these economic liberalizers can implement otherwise unpopular reforms that are often against the vested interests of their constituencies. Through trial and error, Koizumi learned to use this political trick to introduce neoliberal reforms, and as a political heir of Koizumi, Abe refined it in his Abenomics. Abe, in his second cabinet, has been implementing neoliberal reforms by using the same political tricks Koizumi skillfully employed. The next section will examine the structural changes in the world economy, the Japanese economy, and the politics since the 1990s that facilitated the populist leaders’ use of political tricks in their economic liberalizations.

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Koizumi’s mini bubble: the birth of “stock market populism” The LDP and the conservative Keynesian regime Post-war Japan’s “conservative Keynesianism” was established because of the clientelistic manipulation of “redistributing” a part of the product of economic growth earned by large exporting manufacturers to farmers, the construction industry, and local populations through public works, such as railroads, roads, and dam projects (Ido, 2013). (Pempel [2012] characterized the key dynamics of this Japanese version of clientelism as “pork and productivity,” and Rosenbluth and Thies [2010] called it an “alliance of iron and rice,” apparently after Bismarck’s “marriage of iron and rye.”) Essentially, a coalition of big exporters and agricultural interests was formed within the LDP – the party that was in power for most of the post-war period. This conservative Keynesianism had two pillars in society: (1) large exporting manufacturers with long-term horizons, which gathered around main banks with cross-shareholding relationships; and (2) social actors and classes that include the construction industry, farmers, and local populations who benefitted from the LDP’s public works – a type of a local “redistribution” system. On the other hand, organized workers and urban populations were excluded from policymaking and were not the subject of redistribution. Policy measures were (1) the government’s targeting policy toward potential growth industries for promoting export; (2) artificially low interest rates as part of their export promotion measures; (3) eligibility for loans with preferential interest rates for companies in targeted industries; (4) public works (with the construction industry, farmers, and rural populations as beneficiaries); and (5) protectionist policies (for agriculture and retail sectors [Johnson (1982); Calder (1993)]). With the rapid urbanization of the Japanese society and the arrival of a globalized world economy, post-war conservative Keynesianism faced the greatest challenge in the late 1980s. Japan responded to the political and economic challenges by changing the electoral system for the Diet in the early 1990s. Responding to globalization, political leaders adopted deregulation measures and liberalized the Japanese economy to a certain extent. Yet, even if it was necessary for them to fulfill the demands of global corporations, can we expect LDP politicians to open up the Japanese economy and introduce truly radical neoliberal economic policies that are against the interests of the LDP’s traditional supporters, such as farmers and rural population? Pempel (2012) attributes the major cause of the current Japanese stalemate and stagnation to this incompatibility of “pork and productivity.” The LDP experienced infinite difficulties in its attempt to establish a neoliberal regime because it eventually conflicted with the interests of the LDP’s core constituencies. Yet, the fact remains that Koizumi somehow managed to overcome this political dilemma, and he successfully introduced a neoliberal policy regime. In the early 2000s, Koizumi performed a series of drastic reforms, including the

Abenomics and Japanese politics 53 privatization of Japan Post, expansion of temporary works to manufacturing, and vowing to “destroy the LDP” despite he being its president. (Although it still remains unclear whether he will succeed in the liberalization of the Japanese economy, Abe apparently wishes to repeat Koizumi’s success in this regard with his “third arrow” of Abenomics – his growth strategy.) Why could populist Koizumi – the leader of the established party, LDP, which shored up the postwar conservative Keynesian policy regime – succeed in implementing a transition to a neoliberal policy regime that clearly conflicts with the interests of LDP’s traditional supporters? The key to Koizumi’s success in this political acrobat lies in his ability to use global finance capital in his mobilization efforts toward new supporters. Transformation of the world and Japanese political economies Transformation of the world economy With the “Nixon Shock” of August 1971, the Bretton Woods system of fixed exchange rates ended, and the world shifted to a floating exchange rate system. During the 1980s, with the beginning of the liberalization of financial markets in the US, the cross-border movement of capital sharply increased. With the establishment of a floating exchange system and the increased movement of capital across borders, Keynesian financial policy lost its effectiveness, and governments had no other choice but to resort to a monetary policy. The age of global finance capitalism has arrived. The ratio of financial assets to GDP jumped from 120 percent in 1980 to 355 percent in 2007 (McKinsey Research Institute, 2013, p. 2). Institutional investors, such as hedge funds and international rating agencies, have become sufficiently powerful to impact the rise and fall of the national economy and are posing a threat to national sovereignty. The symbolic event occurred on Black Wednesday in 1992. Despite the Bank of England’s desperate effort at the intervention against George Soros’ short-selling sterling, the British government was forced to withdraw from the European exchange rate mechanism, and Soros made a profit of approximately £1 billion. Yet, the ever increasing cross-border flow of money has destabilized the world economy. The globalized world economy has been hit by one crisis after another – Latin America’s debt crisis in the 1980s, the Asian currency crisis of the 1990s, and the current global economic crisis (Chinn and Frieden, 2011). Transformation of the Japanese economy Japanese capitalism has changed from a communitarian capitalism with longterm horizons to an Anglo-Saxon-type capitalism with short-term horizons (Dore, 2011). In particular, the key institution that shores up the Japanese communitarian capitalism – the network of cross-shareholdings of financial institutions and manufacturing firms – has collapsed. Instead, foreign stockholders have increased their presence in the Tokyo Stock Exchange (TSE). In 2013, the

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combined shares of foreigners (30.8 percent) and individuals (18.7 percent) jumped to 49.5 percent (just short of the majority), whereas the shares of the core members of Japan’s communitarian capitalism – banks (3.6 percent), institutional investors (23.0 percent) (including trust banks [17.2 percent], life insurance corporations [3.7 percent], non-life insurance corporations [1.4 percent], and other financial institutions [0.7 percent]), and business corporations (21.3 percent) – have dropped (see Figure 3.2). In particular, foreign shareholders – now a key player in the Tokyo stock market – have gained tremendous influence in the Abe cabinet’s formulation of economic policies. Abe has proposed a series of foreign investor-friendly policies, such as a shift to more aggressive allocation policies of the Government Pension Investment Fund and corporate tax cuts. In line with the wishes of foreign investors, some Japanese firms have implemented corporate governance reforms. Among the companies listed in the first section of the TSE, 74 percent have outside directors on their boards,5 including Toyota, and Nippon Steel & Sumitomo Metal, which are symbols of post-war Japanese capitalism.6 100 90 80 70

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Abenomics and Japanese politics 55 Transformation of Japanese politics Finally, since the 1990s, the LDP has dropped its ability to mobilize citizens, resulting in a sharply reduced membership. In national surveys, support for the LDP has declined, while non-affiliated voters have increased drastically to become the largest political force among the electorates (see Figure 3.3). In recent years, non-affiliated voters – most from urban populations – determine the outcome of national elections. (In particular, urban populations with their newly acquired high turnout rates became the critical swing votes in elections [Sugawara, 2014].) The system of government subsidies to political parties, which was introduced as part of the 1990s political reforms, has also changed the behavior of Japanese parties. The LDP, which was heavily criticized for its political corruption, has radically reduced its dependence on donations by companies and organizations; instead, it relies heavily on the political party subsidies. The share of the political party subsidies in the revenues of party headquarters has surpassed 60 percent in the LDP and 80 percent in the DPJ (Nakakita, 2012, p. 124). As a result, in the twenty-first century, Japanese politics has evolved to be driven by the adversary, party-centered logic of political 60 Independents

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Figure 3.3 LDP support and non-affiliated voters. Source: Mainichi Opinion Surveys. Note Data are annual averages.

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competition. The LDP and the DPJ compete for power by presenting their manifestos to the electorate. In this UK-style two-party system, party competition became policy centered. Non-affiliated voters occupy the central position because vote-maximizing political parties need them as critical swing votes to win elections. Koizumi mini bubble: the birth of “stock market populism” Neoliberal policy regime, “stock market populism,” and social class coalition With a born populist like Koizumi, the underlying structural changes in the world and Japanese economies and political environment since the 1990s materialized into the remodeling of the Japanese political economy in the twentyfirst century. The modified Japanese political economy of the twenty-first century is a neoliberal economic policy regime accompanied by a new mode of politics, i.e., “stock market populism.” Stock market populism rides on global finance capitalism and draws support from the general public as consumers. Its inventor is Koizumi, and Abe’s second Cabinet is merely repeating the political acrobat that was very skillfully played by his political mentor. As a set of economic policies, the neoliberal economic policy regime of twenty-first century Japan has the characteristics as follows. First, the government strengthens the competitiveness of Japan’s global companies by diminishing the value of the yen with its foreign exchange intervention and monetary moderation. Economic growth is led by foreign demand and not by domestic demand. Second, the government aims to achieve a rise in share prices by attracting investment in Japanese stocks from foreign investors, such as hedge and sovereign funds. The rising share prices are expected to improve the balance sheets of the global companies and expand the consumption by the wealthy population who achieved high profits from the stock market. In effect, the motto is “realize economic growth by riding on the global finance.” Finally, to keep foreign investment in the Tokyo stock market, the government implements privatization and deregulation policies and makes every effort to promote Japan as the best place for company operations (e.g., corporate tax cuts and deregulation of the labor market). The government adopts an austerity policy, because the international rating agencies’ rating of Japan – the standard foreign institutional investors decide their investment in Japanese stocks – depends on their evaluation of the Japanese government’s effort in this regard. As a result, domestic demand stagnates. As a populist leader, Koizumi pioneered stock market populism as a new mode of politics that underpins the neoliberal policy regime of twenty-first century Japan. Building on his popularity among the general public and fostering the support from foreign investors, Koizumi, with his centralization of political power, destroyed the old social class coalition that shored up the LDP’s conservative Keynesian policies and aimed to create a new social class coalition

Abenomics and Japanese politics 57 that would underpin a neoliberal policy regime. The new social class coalition was expected to be composed of the elements as follows: (1) the core of the social class coalition is occupied by global companies in the automobile and electronics industries that previously exported their products but now shifted their production overseas; (2) while the traditional constituencies of the LDP, such as the construction industry, farmers, and the rural populations, decrease their presence; (3) consumers and urban populations join the coalition as beneficiaries of neoliberal policies and the liberalization of the economy; (4) and organized workers and the underclasses are excluded from the coalition. In the neoliberal policy regime, they are only potential beneficiaries of economic recovery through a trickle-down mechanism. Koizumi’s version of “stock market populism”: coordinated monetary moderation and foreign exchange intervention With wide popular support, Koizumi, a radical liberalizer who had long advocated the privatization of postal services, assumed power as Japan’s new prime minister in April 2001. Despite being ostracized by the fellow LDP parliamentarians as an “eccentric,” Koizumi won the LDP presidential election in April, held after the resignation of the extremely unpopular Prime Minister Mori, with the overwhelming support of the rank-and-file party members. With his neoliberal slogan “No pain, no reform. No reform, no growth,” Koizumi set out to curb public works spending and pursued fiscal consolidation while deregulating the labor market and expanding non-regular workers. As a result, wages did not rise, domestic demand stagnated, and management compensation increased (Dore, 2006). More importantly, Koizumi’s neoliberal reform satisfied the expectations of foreign investors. Economic expansion in the Koizumi era (February 2002–February 2008), the “Izanami Boom” in Japan, was driven by a strong foreign demand. The government’s exchange rate intervention and monetary easing realized weak yen, thereby contributing to this economic recovery through export. Although Japan’s economy continued to stagnate, Prime Minister Koizumi did not resort to large-scale public works programs to achieve economic recovery, as the LDP used to do during recessions. Instead, Koizumi turned to the Bank of Japan (BOJ)’s monetary policy for economic recovery. In March 2001, the BOJ had started its quantitative easing (QE). With this unconventional monetary policy, the BOJ had increased the commercial bank current account balance by purchasing long-term Japanese government bonds. Simultaneously, the BOJ had promised to continue QE until the consumer price index reached above 0 percent compared with the previous year. The Koizumi cabinet pressured the BOJ to expand QE and to adopt an inflation target. The BOJ expanded QE several times, although quite reluctantly, and with the coming of the new governor, Toshihiko Fukui, in March 2003, the BOJ shifted to a more cooperative stance toward the government and aggressively expanded QE.

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During 2003–2004, the government performed large-scale foreign exchange interventions, amounting to ¥35 trillion, to stem an appreciation of the yen (see Figure 3.4). The officers in charge were two bureaucrats, vice-ministers of International Affairs at the Ministry of Finance, Mr. Haruhiko Kuroda and Mr. Zembei Mizoguchi. In particular, Mr. Mizoguchi had the honor of being dubbed as “Mr. Dollar” by Businessweek.7 The BOJ, for its part, underpinned these large-scale interventions by implementing QE (Kamikawa, 2010, chapter 7). The Koizumi cabinet’s coordinated foreign exchange and monetary policies produced an astounding result. Weak yen from 2003 to 2004 led to the massive purchase of Japanese stocks by foreign investment funds. The injection of public funds to Resona Bank in May 2003 gave a crucial momentum to the aggressive purchase of Japanese stocks by foreign investors. From May 2003 to June 2007, the net purchase of Japanese stocks by foreigners reached a total of ¥37 trillion, which led the TSE to post a record surge in share prices (Hattori, 2008, p. 132) (see Figure 3.5). America, amidst the Bush bubble, provided the motor for Koizumi’s foreign demand-led economic growth. At that time, Bush was espousing the “homeownership society” and was promoting homeownership among the public, particularly to minority groups (Chinn and Frieden, 2011). The American economy 140 130

Koizumi mini bubble (Feb. 2002–Feb. 2008)

Abenomics (Nov. 2012–)

Yen/dollar rate

120 110 100 90 80

Jan. 00 May 00 Sep. 00 Jan. 01 May 01 Sep. 01 Jan. 02 May 02 Sep. 02 Jan. 03 May 03 Sep. 03 Jan. 04 May 04 Sep. 04 Jan. 05 May 05 Sep. 05 Jan. 06 May 06 Sep. 06 Jan. 07 May 07 Sep. 07 Jan. 08 May 08 Sep. 08 Jan. 09 May 09 Sep. 09 Jan. 10 May 10 Sep. 10 Jan. 11 May 11 Sep. 11 Jan. 12 May 12 Sep. 12 Jan. 13 May 13 Sep. 13 Jan. 14 May 14 Sep. 14 Jan. 15 May 15

70

Figure 3.4 Japanese yen/US dollar exchange rates. Source: Bank of Japan time-series statistics (monthly) (www.stat-search.boj.or.jp/ssi/mtshtml/ m_en.html)). Notes Foreign Exchange Rate/Tokyo Market Interbank Rate. US dollar/yen central rate, average in the month, Tokyo Market.

Abenomics and Japanese politics 59 4,000,000

Koizumi bubble (Feb. 2002–Feb. 2008)

Abenomics (Jun. 2013–)

3,000,000

Million yen

2,000,000

1,000,000

0

–1,000,000

Jun. 02 Oct. 02 Feb. 03 Jun. 03 Oct. 03 Feb. 04 Jun. 04 Oct. 04 Feb. 05 Jun. 05 Oct. 05 Feb. 06 Jun. 06 Oct. 06 Feb. 07 Jun. 07 Oct. 07 Feb. 08 Jun. 08 Oct. 08 Feb. 09 Jun. 09 Oct. 09 Feb. 10 Jun. 10 Oct. 10 Feb. 11 Jun. 11 Oct. 11 Feb. 12 Jun. 12 Oct. 12 Feb. 13 Jun. 13 Oct. 13 Feb. 14

–2,000,000

Figure 3.5 Monthly net investments in Tokyo shares by foreign-based investors. Source: www.traders.co.jp/domestic_stocks/stocks_data/investment_3/investment_3.asp.

languished after the burst of the IT bubble. Bush rescued the American economy from the recession by creating a housing bubble in which the public was heavily indebted with home mortgages but continued to generously spend money. This credit-led growth of the US, which was based on the indebted public’s overspending, provided foreign demand for Japanese export. Large Japanese companies restored the international competitiveness thanks to the weak yen and expanded their exports to the US and China. Koizumi’s efforts secured export-led economic recovery. Politics of Koizumi’s “stock market populism” Koizumi’s coordinated foreign exchange intervention and monetary easing induced a weak yen, which lifted stock prices with the aggressive participation of foreign investors in the Tokyo stock market on one hand and restored the competitiveness of Japan’s global companies on the other. Japan realized an exportled economic recovery; this resulted in a political bonus for Koizumi – the Koizumi cabinet maintained high approval ratings throughout its tenure – which was a rare feat in Japanese politics (see Figure 3.6). In essence, the general public’s satisfaction with high stock prices was one of the main motors of Koizumi’s high popularity. Figure 3.7 depicts changes in Nikkei index and Koizumi cabinet’s approval ratings for this period.

90

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Nikkei Index

30,000

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70

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50

Yen

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May 01 Aug. 01 Nov. 01 Feb. 02 May 02 Aug. 02 Nov. 02 Feb. 03 May 03 Aug. 03 Nov. 03 Feb. 04 May 04 Aug. 04 Nov. 04 Feb. 05 May 05 Aug. 05 Nov. 05 Feb. 06 May 06 Aug. 06

10 5,000

Figure 3.6 Koizumi cabinet’s approval ratings and the Nikkei Index. Sources: Approval ratings: NHK HP (www.nhk.or.jp/bunken/yoron/political/); Nikkei Index: Nikkei Heikin Profile HP (http://indexes.nikkei.co.jp/nkave/index/profile?idx=nk225). Note Data on approval ratings for the cabinet are monthly. Data on Nikkei Index are monthly averages.

Nikkei_DIF

60

1,000

50

500

40

0

30

–500

20

–1,000

10

–1,500

0

–2,000 Mar. 03 May 03 Jul. 03 Sep. 03 Nov. 03 Jan. 04 Mar. 04 May 04 Jul. 04 Sep. 04 Nov. 04 Jan. 05 Mar. 05 May 05 Jul. 05 Sep. 05 Nov. 05 Jan. 06 Mar. 06 May 06 Jul. 06 Sep. 06

1,500

Yen

Percentage

Approval ratings 70

Figure 3.7 Koizumi cabinet’s approval ratings and changes in Nikkei Index (Mar. 2003– Sep. 2006).

Abenomics and Japanese politics 61 My hypothesis is as follows: Initially, new prime ministers receive high approval ratings. Yet, as time passes by, the public gets tired of them. One factor can reverse the trend – that is, stock price increases. When stock prices increase, the public rewards the current cabinet with high approval ratings. When stock prices decrease, the public punishes the current cabinet with a decline in its approval ratings. For the period of March 2003 to September 2006, I estimated this relationship. (As the starting point, I chose March 2003 when more government-friendly Mr. Fukui’s monetary easing began.) (The independent variables are: Time = Dummy variable for time trend; Nikkei_DIF = Changes in Nikkei Index; Dummy is to capture the effect of Koizumi’s populist manipulation of the public opinion in the political drama of “Postal Privatization” Diet in October 2005). The estimates are as follows, Y = 52.70** – 0.13 Time* + 4.10 Nikkei_DIF** + 10.53 Dummy* (33.41) (–2.21) (3.07) (2.19) Adjusted R Square = 0.25 Numbers in parentheses are t-values. N = 43 (Mar. 2003–Sep. 2006), **: Significant at 0.01 level, *: Significant at 0.05 level. Dummy: Oct. 2005 = 1 (“Postal Privatization” Diet), Otherwise 0. With wide and consistent popular support acquired in this manner (especially among urban populations and non-affiliated voters who were excluded in the LDP’s conservative Keynesian regime), Koizumi fought with fellow LDP politicians who represented the voices of the LDP’s traditional constituencies by bashing them as the “rebels” and overwhelmed their opposition with his implementation of neoliberal policies. There was a political rationality to this seemingly reckless neoliberal attempt by Koizumi, which might have “destroyed the LDP as an organization.” Koizumi’s implementation of neoliberal reforms encroached on the vital interests of farmers, the construction industry, and rural populations and led to the defection of these traditional supporters from the LDP. However, in recent elections, non-affiliated voters (most of whom are urban residents) have increasingly determined the outcomes. As a votemaximizing populist leader, Koizumi adopted the neoliberal reform as a politically rational strategy. He calculated that the non-affiliated voters’ support for neoliberal reforms would more than compensate for the loss of the LDP’s traditional constituencies in elections. Notably, non-affiliated voters and urban residents gave a round of applause to Koizumi for fighting with the fellow LDP politicians, who represented farmers and rural population. Consequences of Koizumi’s “structural reforms” Japan’s global firms and the rich were the only ones who shared in the fruits of the economic growth that Koizumi helped to create. The LDP’s traditional constituents, such as farmers and rural population, and also other workers were

62

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excluded from the distribution of the pie of the economic growth. Although firms recorded ever-growing current account surpluses, they were never distributed to workers and were only accumulated as contributions to the firms’ internal reserves (Dore, 2006). Nominal per-capita compensation of employees continued to decline in the Izanami Boom period (see Figure 3.8). In addition, Koizumi’s liberalization of temporary work in manufacturing industry expanded low-pay, non-regular workers among the youth and served to widen the economic gap. Expectations of non-affiliated voters and urban residents for the Koizumi reforms were widely disappointing. The 2008 global financial crisis terminated Koizumi’s “Izanami Boom.” The Japanese economy plunged into economic stagnation again; thus, people’s lives became difficult and the economic gap widened. With seemingly endless political scandals of ministers and the Social Insurance Agency’s “Missing Pensions” scandal, there was a sense of deep disappointment among the public during the LDP’s rule. Finally, the DPJ’s victory in 2009 ended more than five decades of almost continuous LDP rule. The DPJ government aimed to achieve domestic demand-led growth while it strived to form a new social class coalition by linking the groups that the LDP had ignored (urban residents and the youth) with the LDP’s traditional supporters whom Koizumi mercilessly betrayed in his

5.1 5.0

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4.9 4.8

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2002

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2004

2006

2008

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2012

Per-capita compensation of employees (million yen)

60

Per-capita compensation of employees

Figure 3.8 Current profits of Japanese corporations and per-capita compensation of employees (nominal). Sources: current profits: Ministry of Finance Japan, Financial Statements Statistics of Japanese Corporations by Industry (www.mof.go.jp/pri/reference/ssc/results/), downloaded May 6, 2014; per-capita compensation of employees (nominal): Cabinet Office, Government of Japan, System of National Accounts (www.esri.cao.go.jp/jp/sna/data/data_list/kakuhou/files/h24/h24_kaku_top.html), downloaded May 8, 2014; Statistics Japan, Labour Force Survey (Basic Tabulation) (www.stat.go.jp/data/ roudou/longtime/03roudou.htm), downloaded May 8, 2014.

Abenomics and Japanese politics 63 liberalization of the Japanese economy (farmers and rural populations). The DPJ’s experiment with this new “radical Keynesian policy regime” ended as a complete failure (Ido, 2013).

Politics of Abenomics: “stock market populism” repeated The December 2012 General Election and the birth of the Abe cabinet Under the DPJ government, the yen became strong against the dollar from the 90-yen to 70-yen level, and the Nikkei Stock Average dropped to the 8,000-yen level. In the campaigns for the December 2012 General Elections, Abe’s LDP upheld an economic revival program, Abenomics. The LDP manifesto set a 2 percent inflation target and committed to beat Japan’s long deflation with aggressive monetary easing and achieving 3 percent above nominal economic growth. The manifesto also called for the expansion of the public works programs. During the election campaign, Abe openly challenged the independence of the BOJ by bashing its “too little, too slow” monetary easing as the major culprit of Japan’s long deflation. As the LDP’s victory was considered to be certain given the DPJ’s unpopularity, Abe’s speech on his plan for monetary easing and large-scale public works projects sparked a massive foreign investment in Japanese stocks, which led to a weak yen and the uplifting of the Nikkei stock market index (Yomiuri Shimbun Seijibu [2013], pp. 70–71). In the general elections, Abe’s LDP won with a landslide victory. The LDP captured 294 seats – well over the majority of 241 seats. With 31 seats of its ally, the New Komei party, the LDP secured two-thirds majority in the Lower House, which can override the decision of the Upper House. Nonetheless, the LDP’s sweeping victory was a result of a deep division among the opposition. With a large number of new small parties (called “third forces”) on the scene, non-LDP votes weakened in the single-seat districts. The LDP won 43.01 percent of votes in the single-member districts but captured only 27.62 percent in the proportional districts (Yomiuri Shimbun Seijibu, 2013, pp. 87–88). The DPJ experienced a humiliating defeat, decreasing its seats from 230 to 57 – which is less than a fourth. On the other hand, small parties of the “third forces” made a big breakthrough (the Japan Restoration Party led by populist Hashimoto became the third largest party winning 54 seats, whereas Your Party captured 18 seats).8 Non-affiliated voters and the change of power Non-affiliated voters’ changed attitudes were critical to the return of the LDP. In the 2009 general elections, a majority of non-affiliated voters (58 percent) cast their votes for the DPJ. In particular, the DPJ was popular among urban residents and young couples because of its innovative programs supporting child allowances and the elimination of high school tuition. According to an exit poll conducted by the Asahi Shimbun for the 2009 general elections (electoral

64

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districts), 82 percent of DPJ supporters voted for DPJ candidates. However, only 60 percent of LDP supporters voted for LDP candidates, reflecting the historic unpopularity of Prime Minister Aso. Remarkably, the majority (58 percent) of non-affiliated voters cast their ballots for DPJ candidates. For the 2012 general elections, the Asahi Shimbun repeated the surveys from the 2009 general elections, with the results demonstrating a complete reversal. In 2012, only 61 percent of DPJ supporters voted for DPJ candidates, and the share of actual DPJ supporters among the people surveyed decreased from 25 percent to 18 percent. In contrast, 78 percent of LDP supporters voted for LDP candidates. Critically, non-affiliated voters, who had become disillusioned with the DPJ government, abandoned the DPJ and returned to Abe’s LDP. In the 2012 general elections, only 23 percent of non-affiliated voters cast their votes for the DPJ, while 32 percent of their votes went to the LDP (Figure 3.9). Abenomics This was the second term for Abe as Prime Minister. When he became the Prime Minister in September 2006, he concentrated his efforts single-mindedly on national security issues while sidelining the economic concerns, focusing on the realization of his ultra-right political goals of rewriting Japan’s pacifist constitution and ending “the post-war regime.” Abe’s pursuit of the hawkish security agenda quickly alienated the public who languished under the deep recession. Abe’s LDP suffered a crushing defeat in the Upper House elections. In the “Twisted Diet,” in which different majorities rule in Upper and Lower Houses, Abe reached a deadlock. Eventually, after one year, he abruptly stepped down from the office because of a series of misconducts by his cabinet members and a large-scale pension record scandal (he later explained that the resignation was because of his illness9). Abe drew bitter lessons from the failures of his first cabinet (2006−2007). He considered his failure to win the support of the media as the major culprit behind his unsuccessful first cabinet. In contrast, the second Abe cabinet adopted a skillful media strategy. For instance, his appointment of Isao Iijima, Koizumi’s top political aide and fixer, as his top aide illustrates Abe’s seriousness in his use of populist technique.10 Further, Abe intervened in the appointment of the president of NHK (Japan Broadcasting Corporation) and made the public broadcaster practically a mouthpiece of the government. The second lesson Abe drew from the failures of his first term is that the public wants the realization of economic recovery from the government, and national security is only of secondary importance, although it is Abe’s top agenda.11 Thus, in his second cabinet, especially in its early days, Abe shelved his pet projects relating to constitutional revision and national security and focused entirely on economic recovery through his Abenomics program. The result has contributed to Abe’s unusually high approval ratings.12 New Prime Minister Abe quickly announced the economic revival program, which was based on three arrows: aggressive monetary easing (the first arrow),

DPJ

LDP

25%

Other parties

Non-affiliated voters

37%

11

18%

20%

11

18

7

24 60 82 58 29

DPJ 18%

17

LDP

Other parties

30%

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25%

10 6

7

30

15 15 78 32

Others JRP LDP DPJ

61

23 6

Figure 3.9 How did the supporters of the DPJ, the LDP, and non-affiliated voters cast their votes in districts in the 2009 and 2012 General Elections? (Exit Polls by Asahi Shimbun). Source: Asahi Shimbun, “Mutoha minshuni soppo: Asahi shimbun deguchi chosa.” Dec. 17, 2012, Dec. 17, 2012 (www.asahi.com/senkyo/sousenkyo46/news/TKY201212160205.html).

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expansive public spending (the second arrow), and a growth strategy that would spur investment (the third arrow) (the so-called “Abenomics”). Abe first put into practice the “second arrow,” i.e., public spending, and in January, the Abe cabinet approved a ¥20.2 trillion stimulus package that was expected to boost the real GDP by 2 percent and create approximately 600,000 jobs.13 In contrast to the DPJ’s austerity-centered policy, the Abe government clearly shifted to an expansive, growth-oriented focus. In terms of its contents, the stimulus package was primarily composed of large-scale public projects and the establishment of public-private investment funds. Unlike the DPJ government’s “direct assistance to households” policy (with a catchphrase “from concrete to human-beings”), Abe adopted the government’s “direct assistance to companies” policy and accompanied it with his “trickle-down” philosophy. For the “third arrow,” i.e., growth policy, Abe revived the Council on Fiscal and Economic Policy and created two new government bodies: Headquarters for Japan’s Economic Revitalization and the Council for Industrial Competitiveness. Abenomics and “stock market populism”: the Bank of Japan under Kuroda The centerpiece of Abenomics is undoubtedly “his first arrow,” i.e., aggressive monetary ease by the BOJ. Abe promotes bold monetary ease as essential to end Japan’s long deflation. Based on this conviction, Abe has strongly pressurized the central bank to adopt a 2 percent inflation target and to practice “unlimited ease” until it achieved the target. His deep suspicion of the BOJ comes from his experience in the Koizumi cabinet and his acceptance of economic doctrines of the so-called “reflationist” scholars. With coordinated monetary and fiscal policies, Abenomics differs from the past policies; yet, Abe needed to realize the control of the BOJ by the government to achieve the policy coordination. Since it obtained its independence from the government under the revised 1998 Bank of Japan Law, the government and the central bank have maintained differing opinions over monetary policy. In February 1999, under its governor, Masaru Hayami, the BOJ lowered its call rate to effectively zero and declared that the so-called zero-interest-rate policy would continue until the concern of deflation was dispelled. From its start, Hayami was very skeptical about the efficacy of the policy and considered it an aberrant emergency measure. Amidst America’s dot-com boom, the central bank quickly and forcibly abandoned the policy in August 2000, rejecting the government’s demand to postpone the decision in its decision-making body, Monetary Policy Meeting.14 Yet, the BOJ’s premature withdrawal was soon found to be a disaster. Immediately after the decision, the collapse of the dotcom bubble sent Japan’s economy into a tailspin. Fearing further intervention by the government, the central bank was forced to adopt a more drastic policy of QE in March 2001. The BOJ changed its policy target from the traditional interest rates to the current account balance that commercial banks maintained

Abenomics and Japanese politics 67 at the BOJ. However, the BOJ, again, hastily ended its QE in March 2006 despite strong opposition from the government. In particular, Abe, who was the chief cabinet secretary of the Koizumi cabinet, demanded the BOJ refrain from terminating its quantitative ease (Yomiuri Shimbun Seijibu, 2013, p. 96). Thus, Abe strengthened his belief that the government’s effort to end deflation was blocked by the BOJ and leveled his criticism at its stiff-necked attitude. After his resignation in 2007, Abe was influenced by economists of the so-called “reflationist” school, such as former Yale economics professor Hamada Koichi and Kikuo Iwata (economics professor at Gakushuin University).15 According to the reflationist school, which views deflation as the major culprit of Japan’s “lost two decades,” if the BOJ set an inflation target and increased money supply, people would feel confident about the arrival of inflation, and as a result, inflation would actually materialize and Japan would get out of its long slump. According to the reflationist scholars, the continued deflation of Japan is a creation of the BOJ’s wrong monetary policy. The central bank’s monetary policy was very passive, very slow, and very little (Iwata, 2013). In particular, its hasty abandonment of QE in the early 2000s resulted in today’s prolonged deflation (Iwata, 2013; Krugman, 2013). To this charge, the BOJ argued that the role of monetary policy in combating deflation is limited. As a result, its monetary easing was always very little and very late or simply inadequate. Specifically, the BOJ dismissed its adoption of inflation targets as ineffective. It also claimed that it needed to consider land and stock prices other than consumer prices for the decision of monetary policy, and the BOJ did not consider Japan’s deflation as a cause of its economic slump but rather deemed it as a consequence of Japan’s long recession after the collapse of the 1990s bubble. The BOJ thought that a mild deflation would have no negative effect on Japan’s economy (Iwata, 2012). Regarding it as the major obstacle for defeating deflation, Iwata indeed named the BOJ as the “guardian of deflation” with hostility (Iwata, 2012). Thus, the foremost concern for Abenomics was whether the government could bring the BOJ under its control and successfully force it to accept the government’s inflation target. Against the backdrop of a weak yen and an uplift of stock markets triggered by the high expectation for Abenomics, Abe easily achieved this goal. The BOJ became a supporter of Abenomics. On January 22, 2013, the BOJ agreed to adopt a 2 percent inflation target and announced that it would purchase government bonds and other financial assets for an unlimited duration to attain the goal.16 In March, Abe nominated an advocate of loose monetary policy, Haruhiko Kuroda (the President of the Asian Development Bank), as the new BOJ governor. As described above, Kuroda was a currency official in charge of Japan’s campaign to avert the appreciation of yen through market intervention in the Koizumi era. As such, Kuroda is a high-ranking member of the global “currency mafia.” Simultaneously, Abe appointed one of the gurus of “reflationists,” Kikuo Iwata, and a senior BOJ official, Hiroshi Nakaso, as two BOJ vicegovernors. The former governor Shirakawa left the job about three weeks prior

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to the end of his term.17 Having obtained Kuroda, the right person, in the right place, Abe could repeat the game his mentor Koizumi had invented, namely “Stock Market Populism.” In April, the BOJ announced the adoption of a “Quantitative-Qualitative Easing” and called it “monetary easing in an entirely new dimension.” Specifically, the central bank promised to attain a 2 percent inflation target within two years. For this purpose, the BOJ would double the monetary base (from approximately ¥138 trillion at the end of 2012 to ¥270 trillion at the end of 2013), buy all types of long-term government bonds (by lifting the 1–3 year period restriction), and purchase risk assets such as exchange-traded and real-estate trust funds. The bold plan of monetary ease immediately ignited foreign investors’ hectic selling of yen and the enthusiastic purchase of Japanese stocks, which weakened the yen and triggered a surge in the Nikkei Index (see Figure 3.10).18 As in the case of Koizumi’s “mini boom” – the “Izanami Boom” – the spike in stock prices gave Abe high approval ratings (see Figure 3.11). Again, the general public’s satisfaction with high stock prices contributed to Abe’s high popularity. Figure 3.12 depicts changes in the Nikkei Index and the Abe cabinet’s approval ratings. My hypothesis is the same as that for the Koizumi “mini bubble”: initially, new prime ministers receive high approval ratings. Yet, as time passes by, the public gets tired of them. One factor can reverse the trend – that is, stock price increases. When stock prices increase, the public rewards the current cabinet with high approval ratings. When stock prices decrease, the public punishes the 2,000,000 1,500,000

BoJ introduced the QQE Abe announced a tax hike BoJ’s addional monetary ease

1,000,000 500,000

500,000 –1,000,000 –1,500,000

2013/1/1w 2013/1/4w 2013/2/2w 2013/3/1w 2013/3/4w 2013/4/3w 2013/5/2w 2013/5/5w 2013/6/3w 2013/7/2w 2013/7/5w 2013/8/3w 2013/9/2w 2013/10/1w 2013/10/4w 2013/11/2w 2013/12/1w 2013/12/4w 2014/1/2w 2014/2/1w 2014/2/4w 2014/3/3w 2014/4/2w 2014/5/1w 2014/5/4w 2014/6/2w 2014/7/1w 2014/7/4w 2014/8/2w 2014/9/1w 2014/9/4w 2013/10/3w 2013/11/1w 2013/11/4w 2013/12/3w 2013/1/1w 2014/1/4w 2014/2/3w 2014/3/2w 2014/4/1w 2014/4/4w 2014/5/2w 2014/6/1w

0

June shock

GDP shock

Figure 3.10 Weekly net investments in Tokyo shares by foreign-based investors (ave. period). Source: www.traders.co.jp/domestic_stocks/stocks_data/investment_3/investment_3.asp.

70

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State Secrecy Law Reinterpretation of (Dec. 2013) Two ministers the constitution resigned (July 2014) (Nov. 2014)

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Jan. 13 Feb. 13 Mar. 13 Apr. 13 May 13 Jun. 13 Jul. 13 Aug. 13 Sep. 13 Oct. 13 Nov. 13 Dec. 13 Jan. 14 Feb. 14 Mar. 14 Apr. 14 May 14 Jun. 14 Jul. 14 Aug. 14 Sep. 14 Oct. 14 Nov. 14 Dec. 14 Jan. 15 Feb. 15 Mar. 15 Apr. 15

0

10,000

Figure 3.11 Abe cabinet’s approval ratings and Nikkei Index. Sources: approval ratings: NHK HP (www.nhk.or.jp/bunken/yoron/political/); Nikkei Index: Nikkei Heikin Profile HP (http://indexes.nikkei.co.jp/nkave/index/profile?idx=nk225)). Note Data on approval ratings for the cabinet are monthly. Data on Nikkei Index are monthly averages.

Approval

70

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April 15

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December 14

October 14

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0 October 13

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August 13

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June 13

–1,000

April 13

20

February 13

Percentage

50

Figure 3.12 Relationships between changes in Nikkei Index and approval ratings during the Abe period.

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current cabinet with a decline in its approval ratings. For the period of January 2013–April 2015, I estimated this relationship. The independent variables are: Time = Dummy variable for time trend; Nikkei_DIF = Changes in Nikkei Index; Dummy: Dec. 2013 = 1 (State secrecy law), July 2014 = 1 (Reinterpretation of the constitution regarding collective self-defense), Nov. 2014 = 1 (two ministers resigned), Otherwise 0. Then, I obtained the following estimates: Y = 63.25** – 0.60 Time** + 2.91 Nikkei_DIF** – 7.99 Dummy** (64.14) (–9.9) (3.65) (–5.21) Adjusted R Square = 0.85 Numbers in parentheses are t-values. N=27 (Feb. 2013–Apr. 2015), **: Significant at 0.01 level. “June shock”: the third arrow that was never shot Although upgrading the productivity of the Japanese economy is indispensable, Abenomics’ “third arrow” – structural reforms – is the weakest among the three arrows. In January, Abe established a planning organ for structural reforms, the Council for the Industrial Competitiveness. The members of the Council come from managers of large companies, such as Sumitomo Corporation, Mizuho Financial Group, Toray Industries, and Takeda Pharmaceuticals, as well as managers of new generations, such as Mr. Mikitani of Rakuten and Heizo Takenaka, an architect of Koizumi structural reforms. The progress of structural reforms was, however, frustrated by the stand-off in the Council. In the debates on structural reforms in the Council, its proreform members’ proposals for the deregulation of agriculture (e.g., purchase of farmland by companies) and medical services (e.g., medical treatment partially covered by insurance) faced strong opposition from the Ministry of Agriculture and the Ministry of Health, Labour and Welfare who represented farm lobbies and doctors, respectively – the LDP’s strongholds.19 In the end, when Abe announced his plan for the growth strategy on June 5th, neither the proposal to liberalize medical treatment partially covered by insurance nor that for the purchase of farmland by companies were included. In these areas where “invested interests,” such as farm lobbies and doctors, exerted strong influence, Abe could not realize deregulation. In the stock market, the announcement of his “third arrow” came as a great disappointment to Abe as a bold reformer. The Nikkei Index experienced a huge dip. In the formal document on structural reform, a cut on corporate tax and radical reforms in the labor market, agriculture, medicine, and education were not included, although there were plans for national strategic zones to promote investment by foreigners in Japan.20 Fearing the reactions of the LDP’s interest groups, Abe postponed structural reforms to after the upcoming Upper House elections in July, hoping to abolish the “Twisted Diet” situation, which would ultimately give him free rein.21

Abenomics and Japanese politics 71 The July 2013 House of Councillors election Abe won a sizable victory in the Upper House elections of July 2013 by emphasizing the results of his Abenomics’ economic revival program. Notably, during the elections, the Nikkei Index had jumped to ¥14,000 from approximately ¥9,000 when the House of Representatives was dissolved in November. Relative to the exchange rates, the yen continued to weaken from ¥80 to approximately ¥100. Thanks to the weak yen, export companies had improved their performances, and people had unusually high expectations for Abenomics. Although the opposition parties harshly criticized the government’s economic policies, they also had no response. On the issue of returning to the nuclear power, the LDP appealed for the need to restart nuclear power stations for a resourceless Japan, while the oppositions were either against or expressed reservations about it. Yet, only two years after the Fukushima nuclear disaster, the return to nuclear power did not become an issue during the elections. As it turned out, the LDP, by itself, secured majority of the votes, winning 65 of the 121 seats for election – a clear-cut victory for the ruling coalition. Combined with their uncontested seats, the LDP and the New Komei combined captured the highest number of seats (122). Abe ended the “Twisted Diet.” On the other hand, the DPJ sharply reduced its seats from 44 to 17. Hashimoto’s populist Japan Restoration Party fell far short of the expectations, winning only 8 seats (Yomiuri Shimbun Seijibu, 2013, chapter 7).22 Yet, Abe’s huge victory that brought majorities in both houses was a mixed blessing. Abe should embark on the most difficult part of Abenomics, his “third arrow,” with both houses under his control. Meanwhile, the crushing victory of the LDP revived a large number of its “old guards,” who were elected from rural districts and backed by its farm lobbies and other interest groups of “vested interests.” These resurrected zombie LDP politicians might attack Abe to obstruct his effort to deregulate agriculture, health care, and other sensitive areas (Sugawara, 2013). Decision to raise consumption tax and Abe’s visit to Yasukuni Shrine On October 1, 2013, Prime Minister Abe announced that the consumption tax would be raised from the current 5 percent to 8 percent in April 2014. It would be the first raise in 17 years since 1997, when the consumption tax was increased from 3 percent to 5 percent. Simultaneously, Abe declared a plan for a ¥5 trillion stimulus package to reduce the impact of the tax increase on households and business. Fortunately, the tax hike exerted little harmful effect on the popularity of Abe’s cabinet, and the stock market reacted favorably to the news. Although he concentrated on economic recovery in his first year of office, Abe continued forward to also address national security issues. In the Diet, which started on October 15, 2013, he proposed a bill to establish the Security Council of Japan and the National Secrecy Bill, which captured the media’s attention. Meanwhile, with his control of both houses, Abe forcibly legislated important bills for his growth strategy with rapidity. As it turned out, without

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much debate, key bills of the growth strategy such as the Industrial Competitiveness Enhancement Act, Revised Electricity Business Act, Regenerative Medicine Act, and Farmland Integration Bank Act passed the Diet. Eventually, 27 out of 31 government-sponsored bills were enacted.23 Since the LDP’s huge victory in the July 2013 Upper House elections, Abe has become more vocal in advocating his revisionist view of history and has stimulated nationalism among the public by utilizing the people’s fear of an assertive China. In December 2013, Abe visited the Yasukuni Shrine to meet the strong expectations of conservative supporters (Abe is the president of the Shinto Association of Spiritual Leadership). His visit to the controversial shrine, which is viewed as a symbol of Japanese militarism by many in Japan and abroad, not only sparked Korean and Chinese fury, as expected, but also invited unusual expressions of concern from the US24 and raised strong doubts regarding his seriousness about economic recovery among foreign shareholders, which led to a sharp decline in the Tokyo stock market. Nevertheless, Abe’s approval ratings did not drop but actually registered a slight rise after his visit to Yasukuni Shrine (see Figure 3.11). After Abe’s visit, the approval ratings for his cabinet increased from 50 percent (December 2013) to 54 percent (January 2014).25 This was due to the changed international environment, especially the perceived threat of rising China, that Abe can now strengthen his popularity by inspiring nationalism among the public. New growth strategy and reinterpretation of the constitution On June 24, 2014, the government approved the New Growth Strategy – a new blueprint for structural reforms or the third arrow of Abenomics. The new plan stipulated the reduction of the effective corporate tax rate from the current 30 percent to a 20 percent level over the next few years. With it, the government aimed to improve the international competitiveness of Japanese firms and attract foreign firms to Japan. The plan also included the Government Pension Investment Fund (GPIF )’s increased holding of stocks and labor market reforms. With these items, the New Growth Strategy was widely hailed by foreign investors, which greatly boosted share prices.26 Satisfied with the result, Abe forced the reinterpretation of Japan’s pacifist constitution. On July 1, the government authorized the reinterpretation of the constitution to allow its military forces, the Self-Defense Forces (SDF ), to exercise the right of collective self-defense. The reinterpretation was taken to mark a turning point in post-war Japan’s defense-only national security policy, which prohibited SDF activities on foreign soil. For the first time since the end of World War II, SDF can fight back against attacks on Japan’s allies.27

Abenomics and Japanese politics 73 The Bank of Japan’s (BOJ’s) additional monetary ease in October 2014 Immediately after the consumption tax hike in April, many forecasted that the economy would gradually recover from approximately July onward. With the bad weather in summer, consumption remained sluggish. However, having climbed to 1.5 percent in April, the consumer price index (excluding fresh food) or core inflation rate gradually declined to 1.0 percent in September (these figures exclude the effects of the consumption tax hike). Many blamed the hasty implementation of the large-scale consumption tax hike in April, which dampened consumption, for the unexpected and abrupt slump of the consumer price index. It increasingly seemed unlikely that the government and the BOJ would achieve their 2 percent inflation target. On October 31, Kuroda’s BOJ took the bold measure of an additional monetary ease. The surprise move pushed the yen down and boosted stocks quickly.28 On the same day, the GPIF announced new allocation targets. According to the new investment principle, the GPIF would more than double equity allocation by raising the holding of both domestic and foreign stocks (each from 12 percent to 25 percent). Furthermore, it would raise the holding of foreign bonds from 11 percent to 15 percent. In contrast, it would reduce the holding of domestic bonds from 60 percent to 35 percent. This was a clear departure from the previous conservative posture, which had focused on domestic bonds in its asset allocation.29 “GDP shock” and the December 2014 General Election The law stipulated that the government would raise the consumption tax to 10 percent in October 2015. Abe publicly stated that his decision to implement another consumption tax hike would depend upon the percentage of the real GDP in the coming July–September quarter. As the annualized quarterly growth rate of the real GDP had dropped to −7.3 percent in the previous April–June quarter, many economists had predicted approximately 2 percent growth in the July–September quarter. Contrary to such forecasts, in November, the government reported that Japan had recorded a negative growth (annualized rate of − 1.6 percent compared with the previous year) in two consecutive quarters. The “GDP Shock” affected the Japanese economy. The Nikkei Index plunged by 517 yen.30 Fearing that it would throw the Japanese economy back into a deflationary spiral, Abe decided to delay the implementation of another consumption tax hike and unveiled massive economic-stimulus measures. Furthermore, he proclaimed the dissolution of the Lower House to validate the mandate of his premiership regarding the important issue of the postponement of another consumption tax hike. On November 18, Abe announced that the government would delay another consumption tax to 10 percent until April 2017, dissolve the Lower House on November 21, and hold a general election on December 14.31 In the general elections on December 14, the LDP and Komei together won 326 seats, more than two-thirds “super majority” that would allow the Lower

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House to override the Upper House decisions. The LDP alone obtained 291 seats. Abe touted this election as an “Abenomics election,” a referendum on his economic recovery programs. With the crushing victory in the election, Abe established his position in terms of a longtime leadership. Building on the momentum, he even showed a strong desire to revise Japan’s pacifist constitution. In contrast, the DPJ won only 73 seats. Its president, Kaieda, lost a seat. Among “third force” parties, the Japan Innovation Party remained approximately the same, and the Party for Future Generations faced a dismal failure. The JCP doubled its seats.32

Conclusion Referring to an old story of “three arrows” familiar to the Japanese, Abe sold his plan to revive the Japanese economy, known as Abenomics, to the Japanese and foreign investors. The story of the “third arrow” actually appeared in Kurosawa’s masterpiece movie Ran. Unlike the original story, Ran, a movie on samurais in medieval Japan, is a story of the failure of the “three arrows.” Having decided to retire and transfer his family estate to his sons, a lord instructed them to cooperate with each other to protect his domain, using an allegory of three arrows. Although one arrow could be broken easily, the three arrows cannot be broken when they are combined. In the movie, the lord was mercilessly betrayed by his two sons, similar to Shakespeare’s King Lear, and finally he became completely insane. Unlike Kurosawa, a nationalist Abe intended to emphasize the virtue of cooperation – a key to the Japanese communitarian capitalism according to Dore (1986, 2000) – and the importance of regaining the economic power of Japan (and the national pride) in his economic revival program. Essentially, Abenomics is the twenty-first century’s version of the “rich country with a strong army (Fukoku Kyohei)” policy of the Meiji period. With his program of loose monetary policy, aggressive public works projects, and deregulation, Abe aimed to return Japan to the growth path by mobilizing the support of diverse social groups throughout the Japanese society. Each of the “three arrows” is directed at different social groups. The “first arrow,” bold monetary easing, is aimed at Japan’s global companies that languished under high yen in the past two decades, using foreign investors as pilot burners. The “second arrow,” expansive fiscal policy, targeted “Old LDP” constituents (farmers, the construction industry, and rural populations). The “third arrow,” structural reforms, is directed at the LDP’s “new constituents” (consumers and urban population), as well as global companies. Like Koizumi’s “mini bubble,” Abenomics is a variant of “stock market populism” – a politico-economic strategy of the conservative party in the age of global finance capitalism. The LDP aims to achieve two goals – one economic, one political – at the same time by reviving the competitiveness of Japan’s global companies and broadening its power base. With its “first arrow” and weak yen, Abenomics, as an economic strategy, pursues the revival of the Japanese economy led by exports from its global companies.

Abenomics and Japanese politics 75 On the other hand, Abenomics, as a political strategy, pursues two potentially incompatible goals: mobilizing urban residents – mostly non-affiliated voters – as consumers with its “third arrow” (deregulation of the economy) on one hand and regain the LDP’s traditional supporters, such as farmers and rural populations, who left as a result of Koizumi’s neoliberal structural reforms with its “second arrow” (expansion of public works projects) on the other. With the aggressive buying of Japanese stocks by foreign investors that results in a weak yen and jump in stock prices, like Koizumi, Abe can also play this game of pure political acrobat. This is the mechanism of stock market populism. The “magic wand” Abe waves to materialize this effect is the BOJ’s monetary easing. Max Weber’s reflection on the crisis of charismatic rule is an omen of Abe’s future. If proof of his charismatic qualification fails him for long, the leader endowed with charisma tends to think his magical or heroic powers have deserted him. If he is for long unsuccessful, above all if his leadership fails to benefit his followers, it is likely that his charismatic authority will disappear. (Weber, 1957, p. 360) If he is forsaken by his “magic wand” and the BOJ’s quantitative easing ceases to lift the Japanese stock market, Abe will be forced to step down again. However, hedge funds and other foreign investors are known to be quick to leave. How long can Abe perform miracles of an ever-rising Tokyo stock market with his “magic wand”?

Notes 1 Wikipedia, item on “We are all Keynesians now” (http://en.wikipedia.org/wiki/ We_are_all_Keynesians_now). 2 For the interests of citizens in advance countries as consumers/investors, see Reich, R.B., Supercapitalism (Paris: Vintage Books, 2008). 3 The World Bank, Manufacturing, value added (% of GDP) (http://data.worldbank. org/indicator/NV.IND.MANF.ZS). 4 OECD, OECD Factbook 2013 (OECD, Paris) (downloaded April 5, 2014). 5 “Shasetsu: Shagai torishimariyaku okazarinishinaide,” Asahi Shimbun, June 27, 2014. 6 “Kabu to seiji to gaikokujin: ‘Gaikokujin hoyu 3 wari no inpakuto,’ ” Nikkei Veritas, no. 323 (March 9–15, 2014). 7 “Commentary: Don’t Let Japan’s ‘Mr. Dollar’ Get Away With It,” Businessweek, March 21, 2004 (www.businessweek.com/stories/2004-03-21/commentary-dontlet-japans-mr-dot-dollar-get-away-with-it). 8 “Japan’s Election: DPJ, RIP?” The Economist, December 17, 2012 (www.economist. com/blogs/banyan/2012/12/japans-election-0). 9 Walker, Peter, “Bold Populist Who Seemed an Ideal PM,” theguardian.com, September 12, 2007 (www.theguardian.com/world/2007/sep/12/japan.peterwalker). 10 Pesek, W., “Curse of Second 100 Days,” Bloomberg View, May 2, 2013 (www. bloombergview.com/articles/2013-05-02/abenomics-meets-curse-of-second-100days); Kingston, J. “Abe-phoria: A National Punching Bag Morphs into a Popular

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22 23 24 25 26

M. Ido Leader,” Japan Times, April 7, 2013 (www.japantimes.co.jp/opinion/2013/04/07/ commentary/abe-phoria-a-national-punching-bag-morphs-into-a-popular-leader/#. U5LPvPl_v_E). Sieg, Linda, Yuko Yoshikawa, and Tetsushi Kajimoto, “Special Report: The Deeper Agenda Behind ‘Abenomics,’ ” Reuters, May 23, 2013 (www.reuters.com/article/ 2013/05/24/us-japan-abe-specialreport-idUSBRE94N04020130524). In an interview, reflecting on his mistake in his first cabinet Abe says, “When I served as prime minister last time, I failed to prioritize my agenda. I was eager to complete everything at once, and ended my administration in failure.” And he adds “Let’s say that I have set the priorities right this time to reflect the concerns of the people, and the results are increasingly noticeable, which may explain the high approval ratings.” (Shinzo Abe, “Japan Is Back: A Conversation With Shinzo Abe,” Foreign Affairs, July/August 2013 (www.foreignaffairs.com/discussions/interviews/japan-is-back).) “Kinkyu Keizai taisaku wo ketttei,” Asahi Shimbun, January 11, 2013. “Kakon nokoshita zerokinri kaijo, kinpakuno kakehiki akirakani Nigingijiroku,” NihonKeizai Shimbun, January 27, 2011 (www.nikkei.com/article/DGXNASFL 260AS_W1A120C1000000/). Yuko Yoshikawa, and Tetsushi Kajimoto, “Special Report: The Deeper Agenda Behind ‘Abenomics,’ ” Reuters, May 23, 2013 (www.reuters.com/article/2013/05/ 24/us-japan-abe-specialreport-idUSBRE94N04020130524). Fujikawa, Megumi, Tatsuo Ito, and Takashi Nakamichi, “Bank of Japan Relents, Raises Inflation Target: Facing Pressure From New Government, Policy Board Agrees to Adopt New 2% Target and Strengthen Monetary Easing Effort,” The Wall Street Journal (Online), January 22, 2013 (http://online.wsj.com/articles/SB1000142412 7887323485704578256701087555208). Fujikawa, M., “New Bank of Japan Head Branded ‘Out of Mainstream,’ ” The Wall Street Journal, February 24, 2013 (http://online.wsj.com/news/articles/SB100014 24127887323384604578324672010905616). Stewart, Heather, “Japan Aims to Jump-start Economy with $1.4tn of Quantitative Easing: Haruhiko Kuroda, the Bank of Japan’s New Governor, Launches Aggressive Drive to End a Deflationary Decade,” theguardian.com, April 4, 2013 (www.the guardian.com/business/2013/apr/04/japan-quantitative-easing-70bn). “Daisannoya matowa doko minkan giin to kanryou tsunahiki seichousenryakude shudoken arasoi,” Asahi Shimbun, April 14, 2013; “Kensho seichosenryaku kanmin kobo saigowa kanteishudo seronkanki de kaigiranritsu,” Nikkei Shimbun, June 6, 2013. “Datsu defure ni seichou sokoage setubitoushigenzei wo meiki ‘Nihon saiko senryaku’ wo kettei,” Nihon Keizai Shimbun, June 13, 2013; “Senkyo ishikisi honenuki. Keizaiseisaku kakugikettei minkan teigen ikizu,” Asahi Shimbun, June 15, 2013. “The Third Arrow: Misfire,” The Economist, June 15, 2013; “Seicho no ya kabuyasu no senrei,” Asahi Shimbun, June 5, 2013; “Seicho senryaku takai mokuhyou narabu ‘itami’ sanninsengo ni sakiokuri shijidantai no hanpatsu saskeru,” Nihon Keizai Shimbun, June 6, 2013. “Japan’s Upper-house Election: Back on Top,” The Economist, July 22, 2013 (www. economist.com/blogs/banyan/2013/07/japans-upper-house-election). “Kakekomi kaketus, mikkade kyuhon yoto kakonn nokosu kyokoshingi,” Asahi Shimbun, December 8, 2013. McCurry, Justin, “Japan’s Shinzo Abe Angers Neighbors and US by Visiting War Dead Shrine,” theguardian.com, December 26, 2013 (www.theguardian.com/ world/2013/dec/26/japan-shinzo-abe-tension-neighbours-shrine). The data are from NHK monthly surveys. (www.nhk.or.jp/bunken/yoron/ political/2013.html). The survey for December 2013 was conducted December 6–8, 2013. Abe visited the Yasukuni Shrine on December 26, 2013. “Shijo ni apiru shinseicho senryaku honebuto no hoshin kakugikettei,” Asahi Shimbun, June 25, 2014; “Kisaku ya kinjitebakari da,” Tokyo Shimbun, June 25, 2014.

Abenomics and Japanese politics 77 27 Ryota, Enman and Tomina Koshikatsu, “Seifu shudanteki jieikenkousi e kakugikettei kenpou kaishaku wo henkou,” Asahi Shimbun Digital, July 2, 2014; “Kenpo kaishaku henko wo kakugi kettei shudanteki jieiken no koshi yonin,” Nihon Keizai Shimbun digital version, July 1, 2014. 28 “Nichigin ga tsuika kanwa,” Asahi Shimbun, November 11, 2014. 29 The Associated Press, “Japan Slides Into Recession as Tax Hike Takes Toll,” The New York Times, November 16, 2014 (www.nytimes.com/aponline/2014/11/16/ world/asia/ap-as-japan-economy.html?ref=world&_r=0); “Nenkin Tsumitatekin kokunai kokugai kabusiki hiritsu wo kaku 25% ni minaosi,” Asahi Shimbun digital, October 31, 2014. 30 McLannahan, Ben, “Abenomics’ Direction Uncertain after GDP Shock,” Financial Times, November 17, 2014 (www.ft.com/cms/s/0/d9a4b26e-6e2a-11e4-bffb00144feabdc0.html#axzz3bmwPK6jA). 31 “Sakiokuri zozei mo kadaimo,” Asahi Shimbun, November 19, 2014. 32 “Jiko taisho sanbun no ni iji ‘Abenomikusu’ keizoku e,” Asahi Shimbun digital, December 15, 2014.

References Boyer, Robert (2000), “Is a Finance-led Growth Regime a Viable Alternative to Fordism? A Preliminary Analysis,” Economy and Society, vol. 29, no. 1, pp. 111–145. Calder, Kent E. (1993), Strategic Capitalism: Private Business and Public Purpose in Japanese Industrial Finance (Princeton, NJ: Princeton University Press). Chinn, M. and J. Frieden (2011), Lost Decades (New York: W.W. Norton). Crouch, C. (2008), “After the Privatized Keynesianism,” Compass, no. 41, pp. 1–5. (http://clients.squareeye.net/uploads/compass/documents/CTP41Keynesianisam Crouch.pdf ). Crouch, C. (2011), The Strange Non-death of Neo-liberalism (Cambridge: Polity). Dore, R. (1986), Flexible Rigidities (Stanford, CT: Stanford University Press). Dore, R. (2000), Stock Market Capitalism, Welfare Capitalism: Japan and Germany versus the Anglo-Saxons (Oxford: Oxford University Press). Dore, R. (2006), Dare no tameno kaisha nisuruka (Tokyo: Iwanami shoten). Dore, R. (2011), Kinnyu ga nottoru sekai keizai (Tokyo: Chuko shinsho). Hattori, S. (2008), Kinnyuseisaku no gosan (Tokyo: NTT Shuppan). Ido, M. (2013), “Party Politics and the Changing Labour Market in Japan,” in H. Magara and S. Sacchi (eds.), The Politics of Structural Reforms: Social and Industrial Policy Change in Italy and Japan (Cheltenham: Edward Elgar). Iwata, Kikuo (2012), Defure no bannin (Tokyo: Nihon Keizai Shimbunsha). Iwata, Kikuo (2013), Rifure wa tadashii (Tokyo: PHP Shuppan). Johnson, C. (1982), MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 (Stanford, CT: Stanford University Press). Kamikawa, R. (2010), Koizumi kaikaku no seijigaku (Politics of Koizumi Reforms) (Tokyo: Toyokeizai Shimposha). Krugman, P. (2013), “Tsusetsu daha yoi choko ni chumoku,” in Bungei shunju (ed.), Abenomikusu daironsou (Tokyo: Bungeishunjusha). McKinsey Research Institute (2013), Financial Globalization: Retreat or Reset? Global Capital Markets 2013 (www.mckinsey.com/insights/global_capital_markets/financial_ globalization). Nakakita, T. (2012), Gendai nihon no seito demokurashi (Tokyo: Iwanami shoten).

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Nishi, H. (2012), “Kinnyuka to nihonkeizai no shihon chikuseki patan no kettei youin,” Kikan Keizairiron, vol. 49, no. 3, pp. 52–67. Pempel, T.J. (2012), “Between Pork and Productivity,” in M. Ido (ed.), Varieties of Capitalism and Types of Democracy (London: Routledge). Przeworski, Adam (2001), “How Many Ways Can Be Third?,” in Andrew Glyn (ed.), Social Democracy in Neoliberal Times: The Left and Economic Policy since 1980 (Oxford: Oxford University Press), pp. 312–333. Rosenbluth, F. and M. Thies (2010), Japan Transformed (Princeton, NJ: Princeton University Press). Schmitter, P.C. (2006), A Balance Sheet of the Vices and Virtues of “Populisms.” (www. eui.eu/Documents/DepartmentsCentres/SPS/Profiles/Schmitter/PCSBalanceSheetApr06.pdf ). Sugawara, Taku (2013), “Abe naikaku no kiso wa banjakuninattaka,” Voice, Septermber 2013, pp. 130–138. Sugawara, Taku (2014), “Seiji – saiseisan sareru konmei to eikyouryoku wo masu yukensha,” in E. Oguma (ed.), Heiseishi zohoban (Tokyo: Kawade shobo). Weber, M. (1947), The Theory of Social and Economic Organizations (New York: Free Press). Weir, M. and T. Skocpol (1985), “State Structures and Possibilities for ‘Keynesian’ Responses to the Great Depression in Sweden, Britain, and the United States,” in P. Evans, D. Rueschemeyer, and J. Stephens (eds.), Bringing the State Back In (Cambridge: Cambridge University Press), pp. 107–163. Yomiuri Shimbun Seijibu (2013), Abe Shinzo: Gyakuten fukkatsu no 300 nichi (Tokyo: Shinchosha).

4

Who turned their back on the SPD? Electoral disaffection with the German Social Democratic Party and the Hartz reforms Baptiste Françon

Introduction From 2003 to 2005, the second Schröder government implemented in Germany a comprehensive set of reforms coined as Agenda 2010.1 While the government’s plans covered all areas of social insurance, the most significant measures eventually targeted the unemployment insurance (UI): the so-called Hartz reforms involved a deep recalibration of unemployment benefits as well as severe cuts in their generosity. These reforms generated a great deal of attention from both public and academic circles, not the least because they were implemented by the Social Democratic Party (SPD). Indeed common wisdom usually relates leftist governments to the promotion of welfare state, rather than the opposite. This view is supported by classical partisanship approaches in political economy, where leftist governments are expected to satisfy the strong preferences for welfare policies of their core constituencies (Korpi and Palme, 2003). However, this perspective has been challenged by contributions that emphasise the emergence of an insider-outsider cleavage within the labour force since the 1980s (e.g. Saint-Paul, 1996, 2000; Rueda, 2005, 2007; Palier and Martin, 2008; Emmenegger et al., 2012). According to this literature, trends of dualisation in European countries have led to a polarisation of the unemployment risk, with labour market outsiders bearing most of this risk. Conversely, insiders have remained broadly insulated from unemployment, mostly because of the high employment protection associated with their labour contract. At the political level, this labour market trend exacerbated distributional conflicts pertaining to UI as insiders disproportionally contribute to its funding whereas it mainly benefits outsiders. Faced with antagonist demands from their traditional constituencies, it thus became rational for social democratic parties to lower unemployment benefits generosity in order to secure insiders’ support, as they electorally outweigh outsiders (Rueda, 2005). However, this strategy potentially entails significant political costs. In the German case, the SPD eventually experienced strong electoral backlash in the aftermaths of the reforms. In this chapter, our objective is to determine to what extent this electoral backlash can be traced back to the dissatisfaction with the

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Hartz reforms. Moreover, we seek to uncover how opposition to the reforms was structured, i.e. which social groups within the labour force were the most inclined to defect from the SPD as it implemented the reforms. Drawing on comprehensive information on a panel of West Germans from the SocioEconomic Panel (SOEP), we analyse the evolution in the support for the SPD during that period, controlling for a number of socio-economic characteristics. We are notably interested in the impact of characteristics that capture individual exposure to unemployment, since this exposure is usually regarded as the main determinant of preferences for UI (Wright, 1986; Iversen and Soskice, 2001; Moene and Wallerstein, 2001). This leads us to pay particular attention to how support for the SPD varied with a worker’s labour market status and occupation, these two dimensions being commonly mobilised in the literature to assess unemployment risk. In this chapter, we provide evidence that disaffection with the SPD was strongly related to a worker’s occupation, with blue-collar and unskilled whitecollar workers being particularly likely to decrease their support at the time the reforms were implemented. In comparison, discrepancies in political attitudes according to the labour market status were less pronounced. As discontent grew stronger among occupations where the risk of unemployment was more prevalent, we argue that dissatisfaction with the Hartz reforms indeed played an important role in the electoral backlash that affected the SPD during that period. This chapter contributes to the political economy literature on welfare state reform in two ways. First, its results corroborate empirical findings that emphasise the role of unemployment exposure attached to a worker’s occupation in driving preferences for social protection (Iversen and Soskice, 2001; Cusack et al., 2006; Rehm, 2009, 2011). It is also broadly in line with recent contributions pointing out that social divide between insiders and outsiders actually runs across occupations rather than labour market status (Häusermann and Schwander, 2013). Second, this chapter provides important insights about one of the most emblematic labour market reforms implemented in Continental Europe during this last decade. In particular, it challenges the welfare state dualisation thesis according to which recent UI reforms were designed in order to ensure support from core constituencies of national social pacts (Clegg, 2007; Palier and Thelen, 2010). Indeed our results show a strong disaffection from social groups that were traditionally pivotal in the German model (skilled bluecollar workers for instance) because the Hartz reforms eventually weakened the status-securing principles of the UI they previously enjoyed, as we argue. This chapter is organised as follows. The next section reviews the literature about the determinants of preferences for UI, focusing on contributions that emphasise the role of the insider-outsider cleavage in recent episodes of labour market reform. The third section details the major features of the Hartz reforms and outlines its political context. The next section presents the data and the estimation strategy, while the section after that presents the main results. The final section concludes.

Who turned their back on the SDP? 81

Literature review Preferences for unemployment insurance and insider-outsider politics Departing from the literature that emphasises the importance of income in shaping welfare policy preferences (Meltzer and Richard, 1981), many studies actually suggest that the insurance motive fundamentally drives political attitudes toward social protection (Wright, 1986; Iversen and Soskice, 2001; Moene and Wallerstein, 2001). In this framework, workers primarily perceive social protection as a way to maintain their income in the event of job loss (unemployment, sickness, retirement …). This might be particularly relevant in the case of UI, where most benefits are earnings-related and therefore perform horizontal (from high-risk toward low-risk individuals) rather than vertical redistribution (from poor toward rich people). The workers’ exposure to unemployment thus appears as an important determinant of preferences for unemployment benefits. In line with this framework, proponents of the insider-outsider politics thesis define the labour market status as the prominent factor influencing one’s unemployment risk, and in turn in shaping one’s preferences for UI (Saint-Paul, 1996, 2000; Rueda 2005, 2007). In its original formulation, the insider-outsider theory has primarily focused on the role of labour turnover costs in the wage bargaining process (Lindbeck and Snower, 1989). Nonetheless, this terminology has been increasingly used in the recent political economy literature to oppose workers in standard employment to those unemployed or in atypical employment. Atypical employment includes various employment relationships, such as part-time work, fixed-term contracts and agency work. These atypical contracts have been gradually introduced since the 1980s, or equivalently their use by employers has been eased. The increase of the share of atypical jobs in the labour force was a salient feature of recent labour markets trends in Europe (on Germany see Eichhorst and Marx, 2011). According to David Rueda (2005), insiders have broadly become insulated from unemployment in two ways. First, they benefit from the strong employment protection legislation (EPL) associated with open-ended full-time positions. Furthermore, they have become less exposed to business cycles, because outsiders act as a buffer in case of economic downturns. Indeed, the latter are not covered by equivalently strong EPL, with regard to redundancies costs or legal limitations of lay-off for instance. Insiders and outsiders should therefore have conflicting views about job security regulation and labour market policy. On the one hand, insiders want to preserve the EPL associated with their status, while outsiders conceive strong EPL as a barrier to their entry on the labour market. On the other hand, insiders want to contain UI expenditures because they disproportionally contribute to their funding, while outsiders support generous unemployment benefits as they experience frequent unemployment spells. This cleavage appears especially problematic for social democratic parties, as they face antagonist demands from their traditional constituencies. Nevertheless,

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Rueda claims that they will prioritise insiders’ over outsiders’ demands, because of the electoral and institutional weight of the former. In that respect, left parties should support UI retrenchment in a context of increasing fiscal pressure and/or international competition. While the insider-outsider thesis might provide a useful conceptual framework to understand the underpinning logic that drove the Hartz reforms, some of its underlying assumptions present some limitations. In particular, the focus on the current labour market status as the most relevant factor to influence preferences for UI has been questioned in the literature on two levels. First, current labour market status is often a temporary attribute of workers and forwardlooking individuals might therefore consider that it only marginally contributes to their unemployment risk (Emmenegger, 2009). Fixed-term contracts, for instance, are extensively used by employers to screen young workers and will eventually lead to a permanent contract (Blanchard and Landier, 2002). Conversely, a permanent contract does not entirely prevent a worker from being made redundant: workers in declining industries should reasonably fear for their job security, even if they enjoy strong EPL. Second, there are strong obstacles that might impede the rise of an autonomous political demand from workers in atypical employment. The fact that their status is transitory implies that they might not be able to collectively organise around their specific interests. Moreover, many of them actually share the advantages of secure employment through their marital status and are thus prompt to support insiders’ interests (Pierson, 2001, p. 448). This might be particularly relevant in ‘conservative’ European countries like Germany where part-time employment essentially results from female employment in a traditional breadwinner family model (Giesecke, 2009). In an effort to overcome these limitations, proponents of the insider-outsider thesis have recently argued that the degree of individual ‘outsiderness’ is best captured by a worker’s occupation (Häusermann and Schwander, 2013). Indeed, the occupation is an important determinant of a worker’s unemployment risk, as job scarcity, technical change and/or outsourcing should similarly affect workers with comparable sets of skills. Furthermore, occupational groups are based on skills that are hard to acquire and not easily transferable from one occupation to the other, which implies low mobility between these groups. Besides, there is a strong social identity attached to occupations as trade unions have been traditionally organised around them. This implies that individuals working in the same occupation are likely to share similar social policy preferences. Häusermann and Schwander consequently proposed an operationalisation of insider-outsider divides based on the probability of being atypically employed or unemployed in a given occupation. They empirically show that individual support for generous labour market policies increases with the degree of ‘outsiderness’ of a worker’s occupation. Moreover, these findings share similarities with empirical contributions that have outlined the importance of labour market risks at the occupational level in shaping preferences for welfare policy (Cusack et al., 2006; Rehm, 2009, 2011). In particular, they are in line with Rehm (2011) who shows that these risks are a

Who turned their back on the SDP? 83 significant determinant of individuals’ positive attitudes toward generous UI. However, an important distinction arises from the fact that his measure of labour market vulnerability solely relies on occupational unemployment rates, not taking the probability of being atypically employed into consideration. When assessing preferences for UI, high rates of atypical employment within a given occupation are indeed informative about a worker’s vulnerability only to the extent that it eventually materialises in a higher probability of becoming unemployed. To provide an example, we should not expect workers in an occupation with a high prevalence of fixed-term contracts to be especially supportive of generous unemployment benefits if these contracts precede hiring on a permanent basis (because they are used as a screening device). Hence, we argue that occupational unemployment rates should ultimately drive UI preferences.2 Reform design and the welfare state dualisation thesis While the aforementioned literature analyses individual attitudes toward global UI generosity, it usefully highlights which characteristics should be relevant to explain differentiated support for across-the-board reforms. Still, it is important to acknowledge that public unemployment compensation systems also differ in their distributive properties. These properties depend on multiple parameters, e.g. eligibility requirements, benefit duration, replacement rate, criteria of job suitability … Hence, design of unemployment compensation schemes might also be subject to political conflict. For instance, workers exposed to high turnover rates should prefer low eligibility requirements in terms of past contributions. Likewise, workers with low probabilities of finding a new job in case of job redundancy should support long benefits duration. This implies that governments may be able to design UI reforms that preserve core interests of their constituencies to the detriment of others, which would also result in a differentiated support. This type of argument has been advocated by proponents of the welfare state dualisation thesis, which also builds on an insider-outsider cleavage based on labour market status (Palier and Martin, 2008; Palier, 2010; Emmenegger et al., 2012). Drawing on an industrial relations perspective, this literature highlights the role of insiders, and particularly of their unions’ representative, in the welfare state retrenchment process. Similarly to Rueda (2005), insiders are expected to support cost containment reforms targeted at outsiders in order to guarantee the financial sustainability of social protection regimes, without further increase in social contributions. With respect to labour market policy, such a dualised reform path takes the form of an exclusion of outsiders from the UI scheme through stricter eligibility requirements and shorter compensation duration (Clegg, 2007; Palier and Thelen, 2010). Outsiders are then assigned to new schemes of flat-rate meanstested social assistance, only offering a minimal safety net. According to the dualisation thesis, this reform design broadly preserves insiders’ interests as they would still receive generous benefits in case of job redundancy. Indeed, legal

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protection attached to their labour market status confers them employment stability, so that they remain eligible to the UI scheme despite stricter requirements in terms of past contributions. Reduction in compensation duration might prove more problematic but should be supported by those insiders endowed with high-demanded skills, as they are expected to easily find new jobs (Palier and Thelen, 2010, p. 136).

The Hartz reforms A dualised reform path? In this chapter, we are primarily interested in analysing how the Hartz reforms affected the support for the SPD. In the last section we reviewed various contributions about the determinants of preferences for unemployment benefits. Part of this literature pointed at the fact that the reforms design should be taken into consideration, because differentiated support might also arise because of differentiated impact. Therefore we propose here to summarise the most salient aspects of the reforms. Against the claim of welfare state dualisation, we follow Clasen and Goerne (2011) in that we argue that the Hartz reforms decreased the dual character of the German unemployment compensation system (also see Stephens et al., 2012, p. 97). In other words they virtually affected all groups of workers, although through different channels. The Hartz reforms consisted of four packages of measures spread from 2003 to 2005. They entailed substantial changes in various areas of the unemployment policy, such as the creation of single gateways for the benefit and employment administrations, the development of new training programmes or the introduction of government-sponsored jobs (the infamous Ein-Euro-Jobs). Hartz IV, passed in December 2003 and implemented in January 2005, was the most controversial and high profile of these packages. Prior to Hartz IV, there were three compensation schemes for the unemployed: unemployed filling the eligibility requirements in terms of past contributions were entitled to earningsrelated benefits from the unemployment insurance; once their rights were exhausted, they could still enjoy earnings-related benefits from the unemployment assistance (UA) at a lower replacement rate, virtually for an unlimited period of time; only unemployed without entitlements to UI benefits had to rely on flat-rate means-tested social assistance (SA). Hence, the underpinning logic of this system was mainly one of occupational status maintenance that secured workers’ standard of living, a typical trait of conservative welfare states (EspingAndersen, 1999). Their status was also protected through narrow criteria for work suitability, as unemployed in these schemes were not obliged to accept jobs under conventional wages. The German compensation system has therefore been traditionally dualised, in the sense that only workers with long contribution records were entitled to generous and durable earning-related benefits. As already argued by Clasen and Goerne (2011), the reforms did not increase this dual character, quite the contrary. It is indeed true that some features were

Who turned their back on the SDP? 85 especially detrimental to workers experiencing frequent or long spells of unemployment. For instance, the necessary contributions for UI benefits were now calculated on the 2 years preceding dismissal (3 years before), strengthening the eligibility requirements. Also, UA was merged with SA into a new flat-rate means-tested benefit, which implied significant benefit cuts for about two-thirds of the unemployed that formerly depended on these schemes and little to no monetary gains for the remaining third (Goebel and Richter, 2012). However, while the suppression of the UA scheme directly harmed the unemployed who had already exhausted their rights to UI, it also challenged traditional status-securing features of the German compensation system which workers with long contribution records were the only ones to enjoy (Streeck and Trampusch, 2005). The standard of living of middle- and high-income workers was thus no longer guaranteed by earnings-related benefits in case of prolonged unemployment. Besides, the new assistance scheme enhanced the risk of social decline as references to conventional wages were removed from the criteria of work suitability and sanctions in case of job refusal were increased. This evolution was all the more problematic as maximum UI compensation duration for the unemployed over 45 was contemporaneously reduced, with potential cut in duration ranging from 6 to 14 months depending on the age group. This implied an increased probability of falling into the new means-tested assistance scheme after benefits exhaustion. It also severely restrained the possibility for old age workers to withdraw from the labour market, as long compensation durations were extensively used as a bridge to early retirement (Trampusch, 2005). By and large, the Hartz reforms entailed a comprehensive set of measures that deeply transformed the architecture of compensation schemes. Unemployed were directly harmed by this process, but eventually their impact concerned a much larger share of the population since they weakened insurance principles constitutive of the German compensation system. Political context The Hartz reforms were implemented during the second term of office of the SPD-Green coalition, which was re-elected in September 2002. At this time, the situation in the labour market was highly problematic, the unemployment rate having reached its highest peak since the reunification. It was also a salient issue in public eyes because the fight against unemployment had already been a prominent theme in the first campaign of Chancellor Gerhard Schröder. Moreover, the government had to deal with financial pressures at the federal and local level (Streeck and Trampusch, 2005; Hassel and Schiller, 2010a, 2010b). Even though these external constraints certainly increased incentives for the government to take action, the Hartz reforms were also part of a deliberate ‘Third Way’ strategy from the SPD (Neue Mitte). Welfare state retrenchment was an essential feature of this programmatic shift, a view endorsed by Schröder himself in the Blair–Schröder manifesto of 1999. This strategy relies on the assumption that social democratic parties should focus on social demands from the growing

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middle class in order to win elections, at the risk of losing support from traditional constituencies as electoral gains are expected to exceed the losses. Noteworthy is that such a strategy appears at odds with the rationale emphasised by the welfare dualisation thesis. The absence of a credible left competitor in the first place certainly reinforced the attractiveness of such a strategy, as the SPD could expect to minimise its losses among disappointed voters (Picot, 2009). However, this electoral strategy did not appear to be successful for the SPD. It suffered its worst electoral outcomes since the post-war years in subsequent elections, partly because some of its members withdrew from the SPD to create a new left wing party (Die Linke) that could capitalise on the reform opponents’ vote. Furthermore, the reforms remained a controversial legacy for the SPD frequently making their way back in the public debate, as was the case when the benefits calculation rule for social assistance was eventually declared unconstitutional by the German Federal Constitutional Court in 2010. Although the unions’ umbrella association was publicly critical of the reform, some authors put forward their ambiguity during the legislative process, suggesting that the reform highlighted potential divisions within and between unions (Carlin and Soskice, 2009; Palier and Thelen, 2010). Threats of general strikes were indeed rapidly abandoned and most of the demonstrations that took place during the legislative process involved civil society actors (especially unemployed support groups in East Germany). But the absence of radical opposition from the unions needs also to be nuanced as massive demonstrations are not typical of the German industrial relations regime. Eventually, opposition from the unions took other forms, as some of their members became active founders of Die Linke (Hassel and Schiller, 2010a, p. 98).

Empirical analysis The partisanship variable In order to investigate the change in individual attitudes toward the SPD as it implemented the Hartz reforms, we use the longitudinal German SocioEconomic Panel (SOEP) in our empirical analysis. This panel gives us information on various characteristics at the individual level: in particular, it allows us to explore which socio-economic characteristics might be relevant to account for the support for (or the opposition to) the SPD during that period, focusing on labour market status and occupation as they are supposedly strong determinants of UI preferences according to the literature. More critically, it also provides us with information on party identification, the dependent variable in our regressions. This partisanship variable is based upon two subsequent questions. In a first step, respondents are asked: Many people in Germany are inclined to a certain political party, although from time to time they vote for another political party. What about you: Are you inclined – generally speaking – to a particular party?

Who turned their back on the SDP? 87 Then in a second step, they indicate which party they support (if they answered positively to the first question). The wording of the first question emphasises the duration of the attachment to a particular party. The partisanship variable is therefore likely to reflect overall agreement with the main political orientations of this party.3 It is especially relevant to assess, among other possible factors, discontent with the reforms: the reforms were indeed the cornerstone of a major shift in the political agenda of the SPD and were particularly high profile in public debates at that time, so that we expect a decline in the identification with the SPD from people disagreeing with their most salient features. On the contrary, the wording of the question makes this partisanship variable less likely to capture the influence of transitory factors, such as the charisma of party leaders or low-profile measures that do not fundamentally alter a party’s political agenda. Hence, we argue that it is better suited to our purpose of inferring preferences for the reform than a classic indicator of voting intentions. Figure 4.1 displays some descriptive statistics about the evolution of this partisanship variable over time for West Germans of voting age. For every year, it depicts the respective proportion of supporters of each of the five major parties (among individuals who declared a party inclination). As stated earlier, our

60

Percentage of support

50 40 30 20 10

CDU/CSU SPD FDP

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

Grünen Linke Party identification rate

Figure 4.1 Evolution of the support for the main political parties in West Germany (1991–2008). Note Sample: SOEP, West-German citizens, adult population. Author’s calculations.

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variable should not be confused with voting intentions; this is why it does not reflect actual votes at the time of Federal Elections (the vertical lines in Figure 4.1). This figure shows that smaller parties typically have a small share of loyal supporters among their voters, as the proportion of the former is always way below the scores they achieved in Federal Elections. Conversely, the two major parties have a relative higher share of loyal supporters compared to the votes they receive in a Federal Election. Of particular interest in Figure 4.1 is the substantive decline in SPD support during the second term of the coalition (2003–2005), with its three worst scores since 1991. As we argue, a substantial share of this decline can be ascribed to the implementation of the Hartz reforms. The fact that we do not observe an equivalent decline in the support for the Green Party indicates that the SPD was largely held responsible for the reform. This is in line with the fact that this party played the leading role in public eyes: the Chancellor took credit for it publicly and legislative work was subordinated to the Ministry of Work and Economy and the Ministry of Finance, affiliated to the SPD as well. This is also why we choose to focus on the evolution of the support for the SPD in our regressions.4 Finally, Figure 4.1 displays the share of respondents that declare party identification (dashed line), whatever this party is. Again, it does not reflect actual turnout rates at Federal Elections (about 80 per cent over this period in West Germany), unsurprisingly as the partisanship variable presumes a stronger attachment to a party than voting intentions. The overall support tends to be cyclical and increases around every Federal Election, electoral campaigns typically raising the immediate interest for politics. Worth noticing are also the relatively lower rates of party identification during the reform implementation. While it arguably reflects the contemporary drop in SPD support, we cannot exclude that other parties also lost supporters in the reform process.5 This point is discussed more thoroughly in the results section. Estimation strategy Our main sample of interest covers a period from the first Federal Election after German Reunification (December 1990) to the end of the second term of the SPD-Green coalition (September 2005).6 We only consider the active population from the private sector in our regressions, as we focus here on the relationship between preferences for the Hartz reforms and the unemployment risk attached to one’s labour market status or occupation. Thus, our sample does not include inactive people and workers from the public sector. While the latter are almost fully protected against redundancy by their status, there are concerns that other factors might drive their political preferences for the reform. In particular, one could argue that civil servants might be worried about the decrease of the public sphere of influence induced by this episode of welfare state retrenchment.7 The variation in the support for the SPD during the reforms implementation is identified using a dummy that takes the value of one from March 2003 to September 2005, and zero otherwise. We choose this time span in order to

Who turned their back on the SDP? 89 isolate the political impact of the most controversial features of the reform.8 The lower bound corresponds to the Agenda 2010 speech by Chancellor Schröder, who publicly announced that the reform would also result in strong cuts in UI benefits duration and in unemployment assistance level. While the eventuality of merging unemployment and social assistance had already been discussed by the Hartz Commission, this was the first time that such drastic cuts were officially brought to public attention by the government (Hassel and Schiller, 2010a, p. 105). We do not consider the period subsequent to the 2005 Federal Election, as the agreement to a coalition with the right-wing CDU might also have altered the public perception of the SPD. Still, the low rates of support for the SPD (and its historically low scores in all subsequent Federal Elections) suggest that the reforms had long-lasting political effect (Figure 4.1). We restrict our analysis to West German voters because our estimation strategy is not well suited for East Germans. While we rely on the variation in SPD partisanship to explore which social groups might have been reluctant about the reform, it is likely that a large number of its potential opponents in East Germany were long-term supporters of the leftist PDS (the successor of the former Communist Party): indeed, the PDS and the SPD had very similar levels of support among East Germans prior to the reform, according to our partisanship variable. This might in turn blur our results, as the variation in the SPD support would not be substantial enough to correctly identify which group defected during the reform implementation. We do not have similar concerns in the case of West Germany: the Green Party apart, there was not an equivalent left competitor for the SPD during our period of analysis (the radical left party Die Linke was only founded shortly before the 2005 Federal Election). Model and main explanatory variables We estimate Heckman Probit Selection Models in our regressions in order to address the two-step design of our dependent variable. Indeed, we only observe identification with the SPD for individuals who first acknowledge an inclination toward a political party, whereas these two outcomes are not necessarily independent. There are concerns that individuals with a party identification (with the SPD or any other party) are selected on unobservable characteristics, which could in turn bias our estimates if we used a simple Probit model. The Heckman Probit Selection Model takes into account the possibility that the error terms of the two equations are jointly distributed. A correlation factor (rho-statistic) is then estimated that indicates the strength of the relationship between both dependent variables. Formally, we estimate the following system of two equations:

Yi = α.I2003–2005 + β.Statusi + γ.I2003–2005.Statusi + δ.Occupi +  θ.I2003–2005.Occupi + ϕ.Xi + εi Yi′ = α ′.I2003–2005 + β ′.Statusi + γ ′.I2003–2005.Statusi + δ ′.Occupi + θ ′.I2003–2005.Occupi + ϕ.Xi′ + εi′ 

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where Y ′ represents the (latent) propensity to support any political party and Y the (latent) propensity to support the SPD. Socio-economic characteristics depicting the individual’s labour market status (Status) and occupation (Occup) are then introduced in the right-hand side of our regressions and interacted with the I2003–2005 time dummy to examine possible political discrepancies during the implementation of the reform.9 X and X′ represent vectors of controls, where some of them are only included in X′ in order to meet exclusion restriction requirements. Because observations are pooled over time, robust standard errors are computed to account for potential heteroscedasticity. Five broad categories are defined for the labour market status: unemployment, atypical employment, full-time permanent employment, regular part-time employment (open-ended) and self-employment. The atypical employment category includes all individuals working in a fixed-term contract (part- or fulltime) and agency work. It also includes workers in Mini-Jobs, a precarious form of contracts for low-paid, mostly part-time, employment, which does not give entitlements to UI benefits. Following usual classification from the insideroutsider literature, the atypical employment and unemployed categories are outsiders’ groups, individuals in full-time permanent employment being the insiders (and the reference category), and self-employed an ‘upscale’ group with very low preferences for UI (Rueda, 2005). We define a distinct category for regular part-time employment (open-ended), because this is a historically stable form of employment in Germany related to a traditional breadwinner family model, and should therefore be distinguished from atypical employment. For the occupation, we rely on self-reported information to define six major categories: skilled and unskilled blue-collar workers (BC workers), skilled and unskilled white-collar workers (WC workers) and managers/executives; the last category again includes self-employed, as it characterises both a labour market status and an occupation. Unskilled occupations are defined as occupations which do not necessitate qualification or extensive on-the-job training, contrary to skilled occupations that necessitate qualification or vocational training.10 The skilled BC workers’ category is defined as the reference category in our regressions because it is one of the most numerous classes. Moreover, they have a central position in the German political economy. They were a core element of the social pact in the post-war years and the inheritance of specific political resources give them a disproportionate weight in the political sphere, in particular because they are strongly unionised. In this view, this category is often considered as the typical insiders within the German model by proponents of the welfare dualisation thesis (Palier and Thelen, 2010). Additional controls Beside the labour market status and the occupation, we introduce standard demographic controls (age, sex) in the SPD support equation. We also control for the household pre-tax income, a classic determinant of political polarisation. Furthermore, we include a dummy for unions’ membership, which measures the

Who turned their back on the SDP? 91 degree of working class consciousness. It is likely to increase the support for the SPD, given the strong historical ties between unions and the SPD in Germany. The selection equation includes controls commonly used in the political science literature discussing the participation in politics. We control for the age to take into account the length of exposure to democratic institutions, and for the age squared to control for a possible quadratic relation. Two further controls measure political exposure. First, we include a measure of the temporal distance to the closest election, which allows us to capture the peaks in the identification rate induced by electoral campaigns. Moreover, we use a subjective measure of the individual’s interest in politics. We also introduce some measures of social embeddedness, which should lead to a greater participation in politics: marriage, union membership, the frequency to involve in volunteer work or to visit friends and relatives. Finally, we also control for the household pre-tax income as participation in politics is economically costly.

Main results Political divides across labour market status In Table 4.1 we display results from two Heckman Probit regressions that test the empirical relevance of political divides across two socio-economic dimensions, namely the labour market status and the occupation. In this section, we are primarily interested in the coefficients from the second step of the estimation because they have a straightforward interpretation (columns 1 and 3). They indicate which individual characteristics determine the support for the SPD among West Germans who declare an attachment to a political party. In particular, the analysis of the interactions with the time dummy allows us to assess which socio-economic groups turned away from the SPD as it implemented the Hartz reforms. Additionally, we report the coefficients from the first step of the Heckman Probit estimation for each model (columns 2 and 4). They give us information about the variation in the overall party identification as the reform was implemented. We can infer from these estimates whether competitors from the SPD might also have been affected by the reform process, i.e. whether we can observe general disaffection with all main parties as the reforms were implemented. However, we will remain cautious in their interpretation: it is less obvious that the observed variation can be ascribed to the reform’s political impact, as the other main parties had their own political agenda. In Model 1 we focus on political discrepancies along the line of the usual insider-outsider cleavage in terms of labour market status. Looking at the coefficients from the SPD support equation in column 1, we see that all of our controls have a high significant impact on this support over the period of analysis. In particular, union membership is associated with a positive impact on SPD support. As expected, individuals with a lower household income are also more supportive. Furthermore, Model 1 includes the categorical variable depicting

(0.024) (0.025)

(0.031) (0.029)

0.113*** 0.105*** Ref. 0.056*** 0.065***

(0.017) (0.018)

(0.022) (0.020)

–0.094** Ref. –0.141*** –0.687***

–0.087** –0.051 Ref. –0.097*** –0.578***

–0.062 Ref. –0.033 0.273***

Labour market status Unemployed Atypical Permanent full-time Regular part-time Self-employed

(0.031) (0.036)

(0.044) (0.038)

–0.003 Ref. 0.112 0.169** 0.198***

–0.172*** –0.014 Ref. –0.103** –0.017

–0.320***

I2003–2005 × Occupation Unskilled blue-collar Skilled blue-collar Unskilled white-collar Skilled white-collar Managers/executives

(0.046) (0.049)

(0.067) (0.055)

–0.124***

–0.209***

(0.015)

Party identification

SPD support (0.021)

(3)

(2)

(1) SPD support

Model 2

Model 1

I2003–2005 × Labour market status Unemployed 0.082 Atypical –0.079 Permanent full-time Ref. Regular part-time –0.034 Self-employed 0.168***

I2003–2005

Dependent variables

Table 4.1 Change in the support for the SPD (2003–2005): labour market status and occupation

(0.025) (0.031)

(0.030)

(0.070) (0.055) (0.056)

(0.069)

(0.049) (0.064)

(0.057)

(0.045)

0.122*** Ref. 0.067*** 0.142***

0.028 Ref. –0.004 0.130*** 0.160***

0.023 Ref. –0.089** 0.086

–0.216***

(0.017) (0.022)

(0.021)

(0.045) (0.038) (0.041)

(0.044)

(0.033) (0.044)

(0.039)

(0.030)

Party identification

(4)

82016

N (N censored)

(41634)

(0.110) (0.027)

0.605*** –0.042*** –2.517***

0.077*** 0.163*** 0.049***

0.026*** –0.014*** –0.005

(0.007) (0.007) (0.070)

(0.011) (0.010) (0.010)

(0.003) (0.004) (0.011)

76065

–1.051*** 0.035 –70579

0.054*** –0.057*** 0.164***

(38278)

(0.118) (0.029)

(0.005) (0.006) (0.017)

(0.000) (0.018)

(0.031) (0.025) (0.027)

(0.029)

0.587*** –0.048*** –2.426***

0.089*** 0.150*** 0.048***

0.024*** –0.012** –0.026*

0.001*** 0.143***

–0.014 Ref. 0.049* 0.104*** 0.145***

(0.007) (0.007) (0.075)

(0.012) (0.011) (0.010)

(0.004) (0.004) (0.012)

(0.000) (0.013)

(0.022) (0.018) (0.020)

(0.019)

Notes Heckman Probit Selection Model, adjusted robust standard errors in parentheses. Significance level: * p < 0.05, ** p < 0.01, *** p < 0.001. I2003–2005 is a time dummy that takes value 1 from March 2003 to September 2005 and zero otherwise. Sample: SOEP, adult West German citizens, active population from the private sector in Model 1, employed in the private sector in Model 2.

–1.038*** 0.114*** –76026

Political exposure Interest in politics Time to election Intercept Rho-statistic Log pseudolikelihood

Social embeddedness Married Volunteer work Social contacts

(0.005) (0.006) (0.016)

0.048*** –0.050*** 0.146***

Demographics Age Age squared Female

(0.000) (0.013)

–0.002*** 0.469***

0.002*** 0.115***

–0.002*** 0.506***

Other socio-economic factors Income Union membership (0.000) (0.017)

0.073* Ref. –0.040 –0.092*** –0.249***

Occupation Unskilled blue-collar Skilled blue-collar Unskilled white-collar Skilled white-collar Managers/executives

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the labour market status and its interaction with the time dummy. The corresponding coefficients should be interpreted as follows: the non-interacted coefficients represent the political discrepancy of each labour market status category relatively to the reference category (permanent full-time job) prior to the Hartz reforms; in addition, we can infer from the interacted coefficients how these discrepancies evolved during the period of implementation. According to our estimates, there is some evidence that the labour market status determines the propensity to support the SPD prior to the reform: individuals in unemployment, part-time and self-employment were significantly less prone to support the SPD than workers in regular employment. Turning to the interaction terms, we do not find evidence of a political response to the reforms structured by the labour market status, as hypothesised by the classical insideroutsider politics framework. The overall effect given by the time dummy is negative and very significant, suggesting that support for the SPD decreased among insiders and outsiders during their implementation. Beside, coefficients for unemployed and atypically employed fail to achieve significance, being even positive for unemployed: this implies that outsiders were not more inclined than insiders to defect from the SPD. Only self-employed individuals were less prone to reduce their support, the coefficient for their interaction term being positive and highly significant. Estimates from the overall party identification equation lead us to moderate some of our previous conclusions (column 2). The negative and significant coefficient on the time dummy suggests that the drop in the SPD support broadly translated into political ‘turn-out’ from their former supporters. Focusing on the coefficients for the interaction terms, we see that they are all negative, but only significant for the unemployed and the regular part-time workers. This means that individuals belonging to these two categories were more likely than insiders to lose their party attachment during the reform implementation (whatever this party was). This effect is particularly strong for unemployed people, but as stated above it cannot be ascribed to a larger drop in the SPD support; this implies that competitors from the SPD also lost support from the unemployed in the reform process. Transferring Hirschman’s (1970) conceptual framework to our analysis, a possible interpretation of this effect is that it reflects an ‘exit’ strategy, in opposition to the ‘voice’ strategy that consists in picking another party to express one’s aversion to the reform. In the case of West German unemployed, we can relate this ‘exit’ choice to the fact that none of the main parties was likely to go back over the cuts in long-term unemployment benefits.11 On the contrary, employed individuals might have expected that electoral punishment would eventually bring political parties to reconsider some features of the reform that were the most detrimental to them. Such expectations would have proven realistic, as the duration of unemployment insurance benefits was again extended at up to 24 months for older workers by the Grand Coalition government in 2008. The significant negative effect for workers in regular part-time work is puzzling; again, it does not reflect a larger decrease in the SPD support for this

Who turned their back on the SDP? 95 category, but we do not believe that it results from the same ‘exit’ logic as for the unemployed either. Finally, we do not find outsiders in atypical employment to differ significantly from insiders in their overall party identification. This further suggests that insider-outsider politics based on labour market status fail to fully account for the decline in SPD support. Political divides across occupations In Model 2, we introduce the occupational categories and their interaction with the time dummy, while we still control for the labour market status.12 There is here strong evidence of distinct political preferences across the occupational dimension. Looking at the non-interacted coefficients from the SPD support equation (column 3), we find skilled WC workers and managers/executives to have a lower propensity to support the SPD than skilled BC workers (our reference category here) prior to the reform, whereas unskilled BC workers are associated with a relatively higher support for the SPD. Only unskilled WC workers do not significantly differ from the reference category. The coefficients for the interaction terms are broadly in line with the literature that defines unemployment exposure at the occupational level as a strong determinant of preferences for UI, to the extent that part of the decline in the SPD support can be ascribed to discontent with the reforms. Indeed, this decline was large among occupations where we expect unemployment risk to be important. The positive and significant estimates for skilled WC workers and managers/executives indicate that they were less inclined than skilled BC workers to defect from the SPD as the reforms were implemented. The substantial positive coefficient for the unskilled WC workers could also suggest a smaller propensity to defect, but it is not significant. Of particular interest, the small and insignificant coefficient for unskilled BC workers indicates that they had an equivalent propensity to disaffect with the SPD as skilled BC workers. At first sight, these results suggest that skilled workers from the manufacturing sector were especially reluctant about the Hartz reforms, along with unskilled BC and WC workers. This contradicts claims from the welfare dualisation thesis according to which the reforms were designed in order to preserve core interests of skilled BC constituencies (Palier and Thelen, 2010, p. 136). A plausible explanation though is that features of the reforms were in fact detrimental to them. First, the unemployment risk of these workers is far from negligible, in a general economic context of deindustrialisation. Moreover, they have a low probability of finding an equivalent job in terms of income after a dismissal, as skilled BC workers are frequently endowed with specific skills which are not easily transferable from one job to another. Hence, this group should have high preferences for status-securing benefits, because they are looking to insure their specific asset (Iversen and Soskice, 2001). But the Hartz reforms precisely weakened former status-securing principles of the German compensation system, which could in turn explain the strong electoral backlash from their side.13

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While these results show that occupations are relevant to explain differentiated decline in SPD support during the reforms implementation, the substantive effects of occupation discrepancies are sizeable too. Computing the discrete change in the propensity to support the SPD during that period (among respondents declaring a party inclination), we find this propensity to have dropped by about 12.9 percentage points for unskilled BC workers and 12.6 percentage points for skilled BC workers; by contrast, the decline for unskilled WC workers, skilled WC workers and managers/executives was only of 8.4, 6.2 and 4.9 percentage points respectively.14 Eventually, this implies that the SPD lost its comparative electoral advantage among its traditional BC workers’ constituencies as it implemented the Hartz reforms. Finally, estimates for the occupational interaction terms from the selection equation (column 4) are comparable to the findings from the SPD support equation.15 The significant and negative coefficient for the time dummy indicates a general drop in party identification that broadly reflects the impact of the general drop in SPD support. Moreover, this effect is significantly smaller for skilled WC workers and managers/executives; this is consistent with the fact that these occupations were also more likely to maintain their support for the SPD. The coefficient for unskilled BC workers is again not significant, which further suggests that unskilled and skilled BC workers did not react differently during the implementation period.

Conclusion In this chapter, we have found little evidence that the Hartz reforms were driven by an insider-outsider cleavage based on labour market status. If some results suggest that the unemployed were relatively more reluctant about the reform, this was clearly not the case for the atypically employed: we do not find significant differences in the behaviour of this group in any of our regressions. Moreover, we find political divides among different occupational groups to be much more relevant in the context of the Hartz reforms. For instance, strong evidence indicates that the SPD lost significant support among BC workers, and in particular skilled BC workers, when it implemented the reform. Again, this result is at odds with claims of an insider-outsider cleavage: insiders from the manufacturing sector do not appear to have been pushing for the reform. However, it is in line with the literature that emphasises the role of unemployment risks associated with one’s occupation in shaping political preferences for unemployment insurance. Hence, this chapter contributes to the debate on the dynamics of European welfare state retrenchment. In the German case, it shows that the SPD implemented the reform in spite, and not because, of the direct interests of their traditional constituencies: this implied electoral backlash from a large share of the labour force, and not only from labour market outsiders in atypical employment. The Hartz reform thus appears as an important break in the German post-war social pact, which can be related to the more general

Who turned their back on the SDP? 97 liberalisation process experienced by Germany in the last two decades (Streeck, 2009). To conclude, we would like to discuss the reach of our results. One could argue that the Hartz reform figures as an exception, and we cannot rule out that the insider-outsider cleavage is relevant to explain recent UI reforms in other countries. Indeed, we want to acknowledge that the Hartz reform presents singular features, because it was implemented under great political and fiscal stress and also because it was part of a strategic programmatic shift led by SPD party leaders. It entailed substantive cuts in and recalibration of benefits and can therefore be considered as the most comprehensive and drastic UI reform undertaken in Europe in recent years. Still, we believe that some of our results have general implications. In particular, we show that labour market insiders may also have strong preferences for generous unemployment benefits, despite the legal protections associated with their status. Moreover, the Hartz reform teaches us that the scope of UI reforms that efficiently isolate insiders from major downside effects is limited, because insiders and outsiders have common interests in long-term status-securing income support schemes and because these vested interests cannot be easily disentangled.

Appendix A: data and measures Data: in our empirical analysis, we use the SOEP data set. Information on data and variables is available from the Deutsche Institut für Wirtschaftsforschung (DIW Berlin) website. We define West Germans as individuals with German citizenship and currently living in West Germany (old Bundesländer). In Model 1, the 82,016 observations correspond to 15,603 distinct individuals; the number of observations per individual ranges from 1 to 15, with a median of 4 observations per individual. Occupation: we use self-reported information to build our 6 occupational categories. The ‘unskilled BC worker’ category includes untrained and trained (on-the-job) BC workers. Likewise, the ‘unskilled WC worker’ category includes untrained and trained (on-the-job) WC workers. The ‘skilled BC worker’ category includes skilled BC workers (Facharbeiter), foremen and master craftsmen, where all these occupations necessitate qualification or vocational training. The ‘skilled BC worker’ category corresponds to qualified professionals (e.g. executive officer, bookkeeper, technical draftsman). The ‘manager/executive’ category corresponds to highly qualified professionals (e.g. scientist, attorney, head of department) and workers in managerial positions. Finally, the ‘selfemployed’ category also includes family members working for the self-employed. Note that the broad division between BC workers, WC workers and selfemployed corresponds to actual administrative categories, which pertained to distinct social protection regimes (mostly pensions) until recently. Income: the measure corresponds to the household pre-tax income, deflated by the German consumer prices index provided by national accounts (Destatis) and square-root transformed.

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Social embeddedness: married individuals also include those who declare a life partner, while not being married. Other questions on social embeddedness depict the frequency to engage in social activities. Respondents are being asked: How frequently do you engage in the following activities? • •

volunteer work in clubs, associations, or social services; visit with friends, relatives, or neighbors.

Answers range from ‘never’ to ‘weekly’. As the category ‘never’ is overrepresented in the answers, we instead use dummy variables in our regressions that take the value zero if the respondent answered ‘never’, and one otherwise. Political exposure: the individual’s interest in politics is measured by the following question: ‘How interested are you in politics?’ The four possible answers range from ‘not interested’ to ‘very interested’, where we assign the maximum value to the latter. Finally, the temporal distance from an election is measured in months and has been log-transformed in order to give more weight to the periods very close to Federal Elections.

Appendix B: descriptive statistics Full sample (Model 1)

Men

Women

Mean

Mean

Mean

St. deviation

Dependent variables Overall support SPD support

0.492 0.214

(0.500) (0.410)

0.533 0.224

0.444 0.202

Labour market status Unemployment Atypical Permanent full-time Regular part-time Self-employed Occupational risk

0.073 0.086 0.585 0.151 0.106 2.874

(0.259) (0.280) (0.493) (0.358) (0.308) (1.561)

0.069 0.046 0.741 0.014 0.130 2.754

0.077 0.132 0.400 0.314 0.078 3.017

Occupation Unskilled blue-collar Skilled blue-collar Unskilled white-collar Skilled white-collar Manager/executive

0.140 0.164 0.118 0.250 0.150

(0.347) (0.370) (0.323) (0.433) (0.357)

0.124 0.270 0.041 0.158 0.209

0.160 0.037 0.210 0.359 0.079

169.120 (59.806) 0.171 (0.377)

171.334 0.222

166.494 0.111

41.496 0.000

40.765 1.000

Other socio-economic factors Income (square root) Union membership Demographics Age Female

41.162 0.458

(10.797) (0.498)

Who turned their back on the SDP? 99 Full sample (Model 1)

Men

Women

Mean

Mean

Mean

St. deviation

Social embeddedness Married Volunteer work Social contacts

0.754 0.303 0.423

(0.431) (0.459) (0.494)

0.770 0.332 0.407

0.735 0.268 0.442

Political exposure Interest in politics Time to election (log)

2.288 2.219

(0.773) (0.673)

2.455 2.219

2.091 2.218

Notes 1 A direct reference to the 2010 Lisbon Strategy promoted by the European Commission. 2 This assumption does by no means presume a negative assessment of the operationalisation proposed by Häusermann and Schwander (2013) but results from our focus on UI preferences. In fact, their measure has a broader range of application as it is designed to simultaneously capture other fundamental aspects of labour market ‘outsiderness’, such as low income or low job mobility. 3 The stability of the partisanship for the two major parties (SPD and CDU/CSU) is indeed important. Using SOEP’s longitudinal design, Zuckerman and Kroh (2006, p. 73) notably show that most people do not deviate from one major party to another, only 7 per cent of the respondents doing so over a 10-year period (prior to the implementation of the Hartz reforms). 4 Note that our main results remain when we analyse the variation in the cumulated support for the two parties that were in power (results available upon request). 5 The right-wing CDU had a majority in the Federal Council (Bundesrat) during the reform implementation, but did not use its veto power and might therefore also have been held accountable for the reform. 6 The SOEP actually starts in 1984 but we restrict our sample to the post-reunification area in order to prevent political considerations about the reunification process to interfere with our results. Our main results hold with an extended sample (1984–2005, available upon request). 7 We actually find public servants to have been relatively more likely to defect from the SPD (result not displayed here, available upon request). To the extent that it reflects discontent with the reforms, this comes in contradiction with Rueda (2005) where civil servants are classified as insiders and are thus expected to support UI reforms. 8 The first two packages of the Hartz reforms had already been voted at the end of 2002, but mainly implied administrative restructuring of the employment public service, a feature that we do not expect to be highly salient or controversial. Also note that we rule out the possibility that part of the variation we observe can be ascribed to long-standing effect of the 2001 ‘Riester’ pension reform, another high-profile reform from the SPD, because it did not have a substantial political impact in the first place, as one can see from Figure 4.1. 9 Some authors (Ai and Norton, 2003; Norton et al., 2004) argue that this linear approximation can lead to errors in the sign and statistical significance of the interaction terms. Building on their methodology, we have computed marginal effects for our interaction terms but we did not find any substantive difference with our results (results available upon request).

100 B. Françon 10 See Appendix A for more details on the occupation typology from which these categories are derived. 11 Eventually, the left radical party Die Linke provided a ‘voice’ option for unemployed interests. Using the SOEP dataset, Kroh and Siedler (2008, p. 630) show that West German unemployed have indeed become one of their core constituency. 12 Unemployed are dropped in Model 2 and subsequent regressions because we do not have information about their occupation. 13 Note that due to data limitations, we cannot directly test the skill specificity index of Cusack et al. (2006), while it appears to be a potentially important predictor of preferences. 14 These substantive effects are computed by applying the Average Marginal Effect rule for discrete variables. 15 The rho statistic becomes insignificant in Model 2, suggesting that the correlation of the error terms in Model 1 was due to the absence of the occupational dummies. While this indicates that there is no imperative need for a bi-variate model once we include these occupational dummies, we stand by this empirical strategy as it might marginally improve the estimates accuracy. All the regressions in this chapter were reestimated using simple Probit models and they always yielded comparable results (available upon request).

References Ai, C. and Norton, E.C. (2003) ‘Interaction Terms in Logit and Probit Models’, Economics Letters, 80, 123–129. Blanchard, O. and Landier, A. (2002) ‘The Perverse Effects of Partial Labour Market Reforms: Fixed Term Contracts in France’, The Economic Journal, 112, F214–F244. Carlin, W. and Soskice, D. (2009) ‘German Economic Performance: Disentangling the Role of Supply-Side Reforms, Macroeconomic Policy and Coordinated Economy Institutions’, Socio-Economic Review, 7, 67–99. Clasen, J. and Goerne, A. (2011) ‘Exit Bismarck, Enter Dualism? Assessing Contemporary German Labour Market Policy’, Journal of Social Policy, 40, 795–810. Clegg, D. (2007) ‘Continental Drift: On Unemployment Policy Change in Bismarckian Welfare States’, Social Policy and Administration, 41, 597–617. Cusack, T., Iversen, T. and Rehm, P. (2006) ‘Risks at Work: The Demand and Supply Sides of Government Redistribution’, Oxford Review of Economic Policy, 22, 365–389. Eichhorst, W. and Marx, P. (2011) ‘Reforming German Labour Market Institutions: A Dual Path to Flexibility’, Journal of European Social Policy, 21, 73–87. Emmenegger, P. (2009) ‘Barriers to Entry: Insider/Outsider Politics and the Determinants of Job Security Regulations’, Journal of European Social Policy, 19, 131–146. Emmenegger, P., Häusermann, S., Palier, B. and Seeleib-Kaiser, M. (eds) (2012) The Age of Dualization: The Changing Face of Inequality in Deindustrializing Societies, Oxford, Oxford University Press. Esping-Andersen, G. (1999) Social Foundations of Postindustrial Economies, Oxford, Oxford University Press. Giesecke, J. (2009) ‘Socio-economic Risks of Atypical Employment Relationships: Evidence from the German Labour Market’, European Sociological Review, 25, 629–646. Goebel, J. and Richter, M. (2012) Nach der Einführung von Arbeitslosengeld II: Deutlich mehr Verlierer als Gewinner unter den Hilfeempfängern, DIW Wochenbericht No. 50, 753–761.

Who turned their back on the SDP? 101 Hassel, A. and Schiller, C. (2010a) ‘Sozialpolitik im Finanzföderalismus–Hartz IV als Antwort auf die Krise der Kommunalfinanzen’, Politische Vierteljahresschrift, 51, 95–117. Hassel, A. and Schiller, C. (2010b) Der Fall Hartz IV. Wie es zur Agenda 2010 kam und wie es weiter gehen wird, Frankfurt, Campus. Häusermann, S. and Schwander, H. (2013) ‘Who Is In and Who Is Out? A Risk-based Conceptualization of Insiders and Outsiders’, Journal of European Social Policy, 23, 248–269. Hirschman, A.O. (1970) Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States, Cambridge, MA, Harvard University Press. Iversen, T. and Soskice, D. (2001) ‘An Asset Theory of Social Policy Preferences’, The American Political Science Review, 95, 875–894. Korpi, W. and Palme, J. (2003) ‘New Politics and Class Politics in the Context of Austerity and Globalization: Welfare State Regress in 18 Countries, 1975–95’, American Political Science Review, 97, 425–446. Kroh, M. and Siedler, T. (2008) Die Anhänger der ‘Linken’: Rückhalt quer durch alle Einkommensschichten, DIW Wochenbericht No. 80, 628–639. Lindbeck, A. and Snower, D.J. (1989) The Insider-Outsider Theory of Employment and Unemployment, Cambridge, MA, MIT Press. Meltzer, A.H. and Richard, S.F. (1981) ‘A Rational Theory of the Size of Government’, Journal of Political Economy, 89, 914–927. Moene, K. and Wallerstein, M. (2001) ‘Inequality, Social Insurance and Redistribution’, American Political Science Review, 95, 859–874. Norton, E.C., Wang, H. and Ai, C. (2004) ‘Computing Interaction Effects and Standard Errors in Logit and Probit Models’, Stata Journal, 4, 154–167. Palier, B. (ed.) (2010) A Long Goodbye to Bismarck? The Politics of Welfare Reform in Continental Europe, Amsterdam, Amsterdam University Press. Palier, B. and Martin, C. (eds) (2008) Reforming the Bismarckian Welfare Systems, Oxford, Blackwell. Palier, B. and Thelen, K. (2010) ‘Institutionalizing Dualism: Complementarities and Change in France and Germany’, Politics & Society, 38, 119–148. Picot, G. (2009) ‘Party Competition and Reforms of Unemployment Benefits in Germany: How a Small Change in Electoral Demand Can Make a Big Difference’, German Politics, 18, 155–179. Pierson, P. (2001) ‘Coping with Permanent Austerity: Welfare State Restructuring in Affluent Democracies’. In Pierson, P. (ed.), The New Politics of the Welfare State, Oxford, Oxford University Press, 410–456. Rehm, P. (2009) ‘Risks and Redistribution: An Individual-Level Analysis’, Comparative Political Studies, 42, 855–881. Rehm, P. (2011) ‘Social Policy by Popular Demand’, World Politics, 63, 271–299. Rueda, D. (2005) ‘Insider-Outsider Politics in Industrialized Democracies: The Challenge to Social Democratic Parties’, American Political Science Review, 99, 61–74. Rueda, D. (2007) Social Democracy Inside Out: Partisanship and Labor Market Policy in Industrialized Democracies, Oxford, Oxford University Press. Saint-Paul, G. (1996) ‘Exploring the Political Economy of Labour Market Institutions’, Economic Policy, 23, 265–315. Saint-Paul, G. (2000) The Political Economy of Labour Market Institutions, Oxford, Oxford University Press. Stephens, J.D., van Kersbergen, K., Hassel, A. and Palier, B. (2012) ‘Bruno Palier (ed.) A Long Goodbye to Bismarck? The Politics of Welfare Reform in Continental Europe,

102 B. Françon Amsterdam, Amsterdam University Press, 2010’, Journal of European Social Policy, 22, 90–101. Streeck, W. (2009) Re-forming Capitalism: Institutional Change in the German Political Economy, Oxford, Oxford University Press. Streeck, W. and Trampusch, C. (2005) ‘Economic Reform and the Political Economy of the German Welfare State’, German Politics, 14, 174–195. Trampusch, C. (2005) ‘Institutional Resettlement: The Case of Early Retirement in Germany’. In Streeck, W. and Trampusch, C. (eds), Beyond Continuity: Explorations in the Dynamics of Advanced Political Economies, Oxford, Oxford University Press, 203–228. Wright, R. (1986) ‘The Redistributive Roles of Unemployment Insurance and the Dynamics of Voting’, Journal of Public Economics, 31, 377–399. Zuckerman, A.S. and Kroh, M. (2006) ‘The Social Logic of Bounded Partisanship in Germany: A Comparison of West Germans, East Germans, and Immigrants’, Comparative European Politics, 4, 65–93.

5

The transformation of the Swedish model since the 1990s The political aspects of institutional change Nanako Fujita

Introduction Sweden’s Social Democratic Party (Sveriges socialdemokratiska arbetareparti: SAP) constructed the “Swedish model” while in power between 1932 and 1976. Although we have various definitions of the Swedish model, each revolves around three primary policies: (1) a universal welfare policy; (2) a solidaristic wage policy; (3) an active labor market policy (ALMP). The universal welfare policy was established based on Per Alvin Hansson’s slogan of a “People’s Home” (Folkhem) in 1928 and the subsequent population debate by Mr. and Mrs. Myrdal in the 1930s. The second and third policies were adopted as the economic strategy of the “Rehn-Meidner model” in the 1950s that was built on the labor-management cooperation in place since the “Saltsjöbaden Agreement” in 1938. Although Sweden managed to maintain these policies until the beginning of 1980s, the Rehn-Meidner model gradually collapsed as a result of post-industrialization and globalization, and the universal welfare policy became limited by the aging domestic population and the increase of the “new social risk.” Finally, the economic crisis caused by the bursting of the economic bubble at the end of 1990 prompted a re-examination of the Swedish model (Fujita 2014). In 1991, there was a change of government from the SAP to the center-right alliance. The new Prime Minister, Carl Bildt, a party leader of the Moderates, immediately focused on escaping from the economic crisis and injected a large amount of public funds into failing banks, which has often been called “the Stockholm solution.” After that, Bildt began to introduce neoliberal economic policies for financial reconstruction. Although neoliberal policies had been in place in Sweden since the “Third Way” implemented by the SAP’s financial minister, Kjell-Olof Feldt, in the early 1980s,1 Bildt’s administration broadened and strengthened them. They greatly reduced income tax and corporation tax, and implemented competing policies and deregulations in some monopolistic markets.2 The famous “Ädel reform” decentralized public welfare services. Opinions on Bildt’s administration have been divided. While Bildt dealt with the bad loan problem quite well, he couldn’t recover Sweden’s economy. During his administration, it continued to display negative growth and high unemployment rate, and the fiscal deficit swelled.

104 N. Fujita In 1994, the SAP returned to power. After this change of government, the Swedish economy began to recover remarkably. This economic recovery was largely the result of an increase in exports achieved by somewhat accidental shifting to a floating exchange-rate system in 1992, rather than domestic wage moderation. The floating exchange-rate system resulted in the immediate depreciation of the Swedish krona by about 20 percent. Thanks largely to an average GDP growth rate of 3.2 percent from 1993 to 2000, the fiscal deficit had been converted to a surplus by 2001. Nevertheless, the SAP even promoted the previous neoliberal reforms in this stronger economy.3 Sweden operates under a neoliberal policy regime.4 Since the 1990s, various neoliberal reforms have been implemented in spite of government changes and business fluctuations. The center-right alliance returned to power after the 2006 election. They further abolished gift, inheritance, and wealth taxes.5 The criteria for unemployment and sickness insurances were made severe and the benefits were reduced. Considerable privatization has been implemented within education and caring. The most recent election in 2014 resulted in the SAP returning to power, but the neoliberal trend is not likely to be converted. This study examines the transformation of the Swedish model since the 1990s, by which we consider the relationship between Sweden’s traditional social democracy and recent worldwide neoliberal policy regime. We observe its transformative process in both theoretical and empirical context. In the next section, we ask whether we can still confirm the original and individual characteristics of the Swedish model in recent theoretical frameworks of varieties of capitalism and institutional change. Then, in the third section, we examine the validity of the theories by observing various data, and add further consideration. In the last section, we conclude.

Theoretical frameworks: varieties of capitalism and institutional change The Swedish variety of capitalism The Swedish political economy has been changing largely in line with major changes in the world political economy from a Keynesian or social democratic policy regime to a neoliberal policy regime. Although Sweden managed to maintain its unique system until the 1980s, the 1990 economic crisis by bursting of the bubble finally prompted a regime change and neoliberal reforms. However, when we observe the world experiences since the 1990s, we come to know that neoliberalism is no longer a monolithic thought. Under the previous social democratic policy regime, neoliberalism criticized existing welfare states and strongly promoted free market competition. But when the policy regime changed actually to a neoliberal one, and the problem of how to manage the market became aggravated after economic shocks, the necessity of state intervention once again became clear. In order to maintain and reproduce a free competitive economy, social inclusion was needed. Today,

The Swedish model since the 1990s 105 neoliberal policy ideas vary from the work-first principle to the social investment strategy. Some studies insist that Sweden has already moved to a neoliberal model and has lost the previous characteristics of a social democratic model. For instance, against the dichotomy of the Varieties of Capitalism (VoC) approach of Hall and Soskice (2001), Schneider and Paunescu (2012) claim that Spain, Denmark, Finland, the Netherlands, and Sweden all moved from a pure Coordinated Market Economy (CME) to the Liberal Market Economies (LME)-like cluster, and then further to a pure LME cluster from 1990 to 2005. At the same time, they point out that Austria, France, and Germany have remained in the CME cluster, while Italy and Belgium have moved towards the CME model. According to them, the types of capitalism are more varied and more dynamic than the original VoC approach these days: “It is neither fully compatible with the liberalization thesis nor with the stable dichotomy suggested by Hall and Soskice (2001)” (Schneider and Paunescu 2012, 742). In this regard, Schröder (2013) insisted on the need to combine the VoC approach and existing welfare state studies to better understand recent varieties of capitalism. He observed Sweden’s change as similar to both the production system and the welfare system: Decentralizing its industrial relations, Sweden deregulated its financial and corporate governance market and cut welfare programs. As economic coordination decreased, the welfare state was retrenched. Schröder insisted that we should overcome the static view of varieties of capitalism. He regarded Esping-Andersen’s argument of three welfare regimes, the VoC firm-based dichotomy of capitalism, and the regulationists’ dynamic institutional change theories as mutually complementary (Schröder 2013, 42). Yet, he did not discuss its details any more. “Today, no one would really claim that Sweden is a neoliberal state, though it is said to have been undergoing process of ‘neoliberalization,’ and the outcome is said to be an example of ‘circumscribed neoliberalism’ ” (Larsson et al. 2012, 7–8). This sentence sharply describes the current ambiguous situation of Sweden under neoliberal policy regime. As the Swedish people have uniquely mixed their traditions and neoliberal reforms, we should investigate the recent dynamics of the Swedish variety of capitalism. Varieties of liberalization As we have seen, authors insist that we can still recognize varieties of capitalism even under the worldwide neoliberal policy regime, but those varieties are likely to be neither static nor the same as the original Hall and Soskice dichotomy. Then, what type of neoliberalization has been progressing in traditionally social democratic Sweden? We have to think about this new phase. In this respect, Thelen (2014) emphasized that we should pay attention to the varieties of liberalization. She insisted that we should observe not only the VoC dichotomy of LMEs and CMEs based on firm-based employer coordination, but also its critique’s dichotomy of solidaristic and dualistic economies

106 N. Fujita from the viewpoint of “encompassingness.”6 In order to understand the current divergent trajectories of liberalization, we must distinguish between “coordinated capitalism” and “egalitarian capitalism.” Thelen is trying to integrate the VoC approach and welfare state studies from the theoretical point of view. However, her idea differs to that of Schröder (2013) abovementioned in that she considers the degrees of coordination and egalitalianism separately. While both the approaches of VoC and Schröder regarded the relationship between production and welfare, in other words, coordination and egalitalianism as parallel and complementary, Thelen believes the issue is not so simple, because the two do not move following the same logic and power. Various processes of liberalization, therefore, should be put into the matrix with those two independent standards. Consequently, Thelen (2014) distinguished three main trajectories of the recent liberalization process: (1) liberalization based on class conflict; (2) liberalization based on cross-class coalitions that unite segments of labor and capital; and (3) liberalization based on a coalition between low-skilled and high-skilled workers. Here, her focus was on the vast differences of social coalitions. In addition, Thelen identifies these three trajectories as follows: (1) deregulatory liberalization; (2) dualizing liberalization; and (3) embedded flexibilization. The first group is characterized by the active political dismantling of coordinating capacities and a decline in the coverage of egalitalianism, which includes the LMEs. The second group continues strong coordination, but in the context of a distinct narrowing coverage. Germany is regarded as a representative example of this group. The last group pursues new forms of flexibility without sacrificing the encompassing framework that collectivizes risk. Examples of this group include the Nordic countries, especially Denmark. It is interesting that Denmark, not Sweden, is characterized as a typical case of embedded flexibilization. According to Thelen, the difference has arisen inside Northern European countries. Whereas Denmark has advanced “flexicurity,” such a triangular mutual agreement failed in Sweden for two main reasons.7 First, originally, a blue-collar trade union and a white-collar trade union existed independently in Sweden. Therefore, the Swedish government did not have the capacity to oppose decentralization pressure, which resulted in a movement towards labor-management negotiation at the industrial level in the 1980s. Second, whereas the decentralization of labor-management negotiations and the easing of dismissal regulations were negotiated as a trade-off for an increase in vocational training in Denmark, this was not true in Sweden. As we will see in detail later, flexibility has concentrated on temporary workers in Sweden in order to protect permanent workers’ employment. In short, Sweden is regarded as experiencing a process of dualization, even if such dualization is not as salient as in Germany. Without doubt, the decorporatization in the 1980s increased the insider-outsider divides. However, it was probably only the first step to recent dualization. “Dualization is often fueled by an intensification of cooperation between labor and management in core firms and industries to the extent that developments in the core leave other

The Swedish model since the 1990s 107 firms and workers behind or outside” (Thelen 2014, 14). The 1990 economic crisis and the subsequent party politics appear to have largely decided this new Swedish trajectory. Dualization through institutional drift Then, why and how has the dualization process been developing in Sweden? Thelen (2014) again explained the three liberalization trajectories along with her previous theory of incremental institutional change: (1) deregulation through institutional displacement; (2) dualization through institutional drift; and (3) embedded flexibilization through institutional conversion. Streeck and Thelen (2005) were pioneers who argued “incremental change with transformative results.” They pointed out five mechanisms of such a change: displacement, layering, drift, conversion, and exhaustion. In terms of this study on recent Sweden, we should especially pay attention to the mechanism of drift. Drift was defined as “neglect of institutional maintenance in spite of external change resulting in slippage in institutional practice on the ground” (Streeck and Thelen 2005, 31). On the politics of welfare retrenchment in the United States, Hacker (2005), in the same book with Streeck and Thelen (2005), focused on drift. Hacker insisted that public social programs in the US had been radically scaled back, but such a change was not brought by large-scale legislative reforms. He focused on drift as a hidden form of retrenchment, and as the most important mechanism for understanding recent development of social policies. Furthermore, he discussed how the five types of institutional change are conditioned by two characters of the system: barriers to internal change, and the status-quo bias of the political environment. Drift is to be progressed in the situation with both high levels of the two. More recently, Mahoney and Thelen (2010) added their consideration of how institutional change is determined by the type of agents, not just by the character of the political system. According to them, drift is brought about by “symbionts” who seek to preserve existing institution, but not follow its rules.8 Mahoney and Thelen also argued that the behaviors of such symbionts relate to a formation of socio-political coalitional alignments: Symbionts tend to ally not with institutional challengers, but with institutional supporters. The mechanism of drift appears to explain the recent transformation of the Swedish model to a considerable degree. As we will see later, the institutional change in Sweden since the 1990 economic crisis has been incremental. For instance, a radical “system shift” was pursued at first, but failed. Political support for the traditional collective bargaining with labor-management cooperation and a welfare state with still relatively high social expenditure had been maintained in Sweden even after the collapse of Rehn-Meidner model in the 1980s. Therefore, political parties were not able to disregard such people’s interests. Nevertheless, as global economic competition became severe, more flexibility of labor came to be needed. “Confronted with severe economic difficulties in the 1990s

108 N. Fujita and non-cooperative employers, the political Left increasingly faced difficulties to defend the status quo in social protection” (Obinger et al. 2012, 195). While preserving the previous protection framework for existing insiders, arbitrary political inaction and decreasing the level of protection for new outsiders occurred. Social coalitions and political strategies However, the mechanism of drift does not fully explain the transformation of the Swedish model since the 1990s. We can further obtain the following suggestions from the regulation approach, which provides further research topics for integrating theories of institutional change. First, the transformation of the Swedish model should be interpreted within the longer time span of economic growth and decline. The regulation approach regards a structural crisis as being brought about after a long period of relative stability, and as a failure of the mode of regulation. Based on this view, we observe that Sweden since the 1990s has been experiencing such a structural crisis. The near-full employment society suddenly turned into the mass unemployment society. The encompassing trade union and the Rehn-Meidner model had already collapsed. In the era of labor saving, the goal of full employment became harder to be accomplished. Economic resources for generous social expenditure became less than the Swedish golden age of the 1960s. Political parties had to seek a way to adjust these new economic circumstances. The change of macroeconomic situation urged to accept neoliberal reforms. The economic crisis, without a new effective mode of regulation like the previous Rehn-Meidner model, linked to the political crisis with frequent changes of government. Second, we should examine the theorem of “reversal of the institutional hierarchy.” Generally speaking, regulationists argue that the wage-labor nexus used to be the top of the hierarchy during the period of Fordism, in other words, Keynesian policy regime, but the competition regime or monetary regime now shares its position. This theorem must relate to the change of policy regime from Keynesian to neoliberal. However, as far as Sweden is concerned, the wage-labor nexus is still quite significant especially for regular workers, though there are increasing irregular workers. In short, dualization is developing within the same institutional field. We might observe divergent trajectories brought about by the reversal of the institutional hierarchy. Third, in the regulation approach, institutions are in essence considered to be a result of compromise of political conflict. From this viewpoint, not everyone necessarily is a uniform “symbiont” even if the drift is progressing, because such conflict is generated by social groups composed of heterogeneous agents with common interests and preferences for institutional change. Amable and Palombarini (2009) supposed “a neo-realist approach” to comparative political economy. According to them, this approach states that “social (e.g. economic) differentiation explains agents’ conflicting interests and social

The Swedish model since the 1990s 109 demands,” and “the specific function of politics is to select among all social demands those that will be satisfied” (Amable and Palombarini 2009, 129). They require to link theoretically between institutional change and political change. The State can initiate institutional reforms by deliberate political actions or political strategies. “The main criterion that political actors take into account is the ability of the different social groups to supply electoral and more generally political support in exchange for the satisfaction of their demands” (ibid. 131). Institutional change has a political aspect. In this regard, we have to pay attention to changes to social coalitions and political strategies which are strongly divergent among countries. In the next section, we will develop the empirical analysis of Swedish political economy since the 1990s.

The empirical analysis: Swedish political economy since the 1990s The economic crisis in the early 1990s The economic crisis in Sweden at the end of 1990 was largely a domestic crisis caused by the collapse of the economic bubble of the excess growth in demand and the tightness of the labor market that prevailed during the second half of the 1980s. Through the financial deregulation following the “Third Way” policies, the SAP and the central bank had firmly committed themselves to preserving a fixed foreign exchange regime and no accommodating policy had been adopted. The unemployment rate in Sweden had been traditionally very low. The figure was 1~3 percent during the 1960–1980s. In 1990, before the crisis, the unemployment rate was only 1.6 percent. However, the economic bubble burst at the end of the same year, causing the unemployment rate to climb to over 8 percent. This high rate has continued ever since. At the same time, the employment rate fell from 83.1 to 73 percent, and the number of participants in ALMPs increased considerably. The fiscal deficit swelled to about 14 percent of GNP. The recession in Sweden intensified in late 2008 and early 2009, following the bankruptcy of Lehman Brothers. This caused a decline in output of around 7.5 percent, from peak to trough, which was a deeper and sharper recession than in most OECD economies, although still much lighter and shorter than that of the early 1990s (OECD 2011, 70). In the wake of the 1990 economic crisis, a political debate ensued questioning the ideological foundations of the Swedish model. Since the “Third Way,” neoliberal norms had permeated state management circles, particularly in the Ministry of Finance and the central bank. By the end of the 1980s, the dominant message was that the Swedish model was hindering Sweden’s international economic competitiveness (Agius 2007, 591). In the aftermath of the 1990 economic crisis, the traditional notions of both the “People’s Home” and the “Swedish model” had become hopelessly obsolete (Andersson 2009, 229–230, 237).

110 N. Fujita Bildt’s center-right administration began in 1991. Bildt advocated a “New Start” package that aimed to reduce taxation, privatize and liberalize the Swedish economy, and curb government spending. He claimed that reducing the welfare state was “the only way policy.” His reforms aimed at a system change or system shift that would wean Sweden away from the state (Larsson et al. 2012, 3). However, it is difficult to say whether this attempt was a success. The SAP returned to political power as early as 1994, with its best result since the 1970s (45.3 percent, Moderates 22.4 percent). “The SAP’s quick return to power in 1994 is perhaps indicative of the persistence of support for the welfare state in Swedish thinking, despite Bildt’s attempt to change public attitudes” (Agius 2007, 592). Rebuilding the Swedish model After 1994, the economy recovered under the SAP government. Nevertheless, the SAP more or less completed the neoliberal economic policies initiated by the center-right government of 1991: deregulations, deficit reduction, inflation control, benefit cuts, and balanced budgets, rather than full employment and redistribution of income. The reforms also included an individualization/privatization of public companies and the pension system, as well as opening the door to private providers of public services, particularly in education and healthcare. However, this period also witnessed the rebuilding of the Swedish model. Anxo and Niklasson (2006) argued that the functions of the Rehn-Meidner model came to be pursued by the new, alternative institutions. The two main aims of the Rehn-Meidner model were inflation control and full employment. In Anxo and Niklasson’s view, while inflation was now under control with inflation target by the central bank, full employment has yet to be accomplished, though the government responded to the problem by putting more people on employment programs. In 1994, beneficiaries accounted for almost 6 percent, an unprecedented participation rate, of the economically active population. Rather than measures focusing on labor demand, the emphasis of ALMPs was again on improving efficiency and developing occupational capability and geographic mobility, including temporary public employment and recruitment subsidies. According to Anxo and Niklasson, this new division of roles and responsibilities between the central bank and government represented a strengthening of the traditional Swedish model, rather than a deviation from it. Furthermore, the reorientation of ALMPs towards more supply-oriented programs was a return to the model’s initial conception. Other researchers studied the “Industry Agreement.” Previously, the RehnMeidner model had been supported by highly centralized tripartite wage bargaining. Although this formal system fully collapsed at the beginning of the 1990s, moves to rebuild the system were evident in the latter half of the 1990s. Immediately after the 1990 economic crisis, a large number of strikes and other forms of industrial dispute occurred. Most of the industrial action was the

The Swedish model since the 1990s 111 result of the three largest blue- and white-collar manufacturing unions forming a common front to oppose employer demands for greater decentralization and the individualization of the employment relationship. In response to this situation, the government negotiated with the social partners, resulting in the Industry Agreement on Cooperation on Industrial Development and Salary Formation in 1997. The arrangements established by the Agreement currently apply to about 130 of the 580 collective agreements that exist in the country. These affect about 600,000 workers, or approximately 17 percent of the gainfully employed population. The collective agreements covered by the Agreement are negotiated first, which tends to set the pattern for subsequent agreements. Thus, the Industry Agreement came to be an important aspect of the current wage-setting process. However, there are two views on this Industry Agreement. On the one hand, Teague (2009, 511–516) maintained that industrial relations had adjusted after some early turbulence. For their part, trade unions consider the Agreement a way of maintaining the collectivist ethos of Swedish industrial relations. Employers saw it as a way of locking trade unions into industrial stability without reentering corporatist wage bargaining, even though it meant limiting their plans for decentralization and individualization. Although the system has undergone significant changes, its traditional values, namely collectivism and self-regulation, remain largely intact. On the other hand, Baccaro and Howell (2011, 544, 551) argued that the Agreement involved a decentralization and individualization of wage bargaining. They reasoned that central collective agreements became thinner and more minimalist. This established a set of principles and procedures for predominantly local bargaining and permitted wide discretion at the firm level, even though a large portion of the Swedish economy has returned to coordinated bargaining. According to them, there is still variety in the institutional physiognomy of national industrial relations systems, although these systems have modified their functions in a convergent neoliberal direction towards greater employer discretion. In this period, the Swedish people showed their insistent demand for full employment and coordinated wage bargaining having been achieved by the Swedish model, and actually searched for its new alternative system. However, as we have already seen, the unemployment rate has been high ever since the economic crisis in the early 1990s. Rather, the SAP has played an active role in carrying out various neoliberal reforms. The SAP even cooperated with the Center party, traditionally regarded as a right party. As a matter of fact, the 1998 election results communicated an important message to the SAP. The percent of the vote for the SAP dropped from 43.4 in 1994 to 36.4 in 1998. This was the party’s worst result since the introduction of general suffrage in the early 1920s. Meanwhile, the big winner among the left-wing parties was the Left party. There was a big flow of voters from Social Democrats. Not a few supporters of the SAP were disappointed with the neoliberalized SAP. The Left Party marked a quite high percent of the vote, 12.0.

112 N. Fujita Lindvall and Rueda (2012) analyzed the result of the 1998 election from the viewpoint of labor market insider-outsider divide: There are strong indications that the Social Democrats were unable to reconcile the demands of labor market outsiders, who were more concerned with the problem of unemployment, and labor market insiders, who were concerned with public services. Faced with these competing demands, the Social Democrats concentrated on winning over middle class voters. Consequently, “in 1998, outsiders were much more likely than insiders not to vote. … Support for the Left Party also increased dramatically among outsiders” (Lindvall and Rueda 2012, 292). The 2006 government change to the “New Moderate” In 2006, the center-right alliance – the Moderate Party, the Center Party, and the Christian Democrats – narrowly won, gaining 48.2 percent of the vote against the red-green – SAP, the Green Party, and the Left Party – tally of 46 percent of the vote. The SAP’s share of the vote slipped to 35 percent, whereas the main opposition party, the Moderates, recorded its strongest share of the vote (26.2 percent) since 1928. However, for the Moderates, this victory had a quite different meaning to that in 1991. The Moderates won by campaigning to maintain the welfare state, while re-shaping it to make it more efficient in order to survive the pressures of globalization. For some decades, a “battle of ideas” had developed over the Swedish model in an effort to realign the public attitude towards a greater acceptance of individualism and a free-market economy. The key election issue in 2006 was unemployment. Despite strong economic growth and robust public finances, the SAP failed to reach its target of 4 percent unemployment. As a result, Reinfeldt, the Moderate party leader, claimed that immigrants and the youth were excluded from the labor market, and that Sweden lacked a business climate in which individuals create their own security through work. The Alliance’s August 2006 election manifesto was “more people at work – more to share” (Agius 2007, 585–587). After only one period of administration, from 1991 to 1993, the Moderates appeared to learn how to obtain widespread public support. Corporatist labor relations and the welfare state were deeply rooted in Sweden. Therefore, several efforts to adjust public opinion had not gone well. In the 1994 election, the Moderates gained 22.4 percent of the vote (the SAP: 45.2 percent), but this figure dropped to 15.3 percent in the 2002 election. In the following year, they renamed themselves the “New Moderate” or “New Worker’s Party.” Since then, they have withdrawn some of their previous neoliberal rhetoric of privatization, deregulation, and a “system shift.” The party publicly accepted the welfare state, concentrating their campaign on what they claimed to be the SAP’s inability to manage the Swedish model efficiently within a global economy

The Swedish model since the 1990s 113 (ibid., 592). Meanwhile, “the Social Democrats lost issue ownership of employment policy for the first time ever” (Lindvall and Rueda, 2012, 294). Many post-election analyses have declared that the 2006 election was a victory for the Swedish model. However, neoliberal reforms have continued, and the center-right alliance’s emphasis on individualism in its adjustments to the welfare state may pave the way for a more substantial revision. There has been an increasing gap between the political rhetoric used at the election and the subsequent reality. Nevertheless, we should not forget that Sweden remains a relatively high tax welfare state. Bergh (2008) explained the main reason for this persistence by claiming that policymakers’ strategies involved gradually adapting the welfare state to new circumstances. The adaptation methods included changes to the tax structure, increased work incentives, accepting private topping up of public benefits, and the use of vouchers to combine freedom of choice, private provision, and public funding. As a result, high-income, highly educated, and relatively mobile groups have benefited from several reforms, maintaining political support for the welfare state (Bergh 2008, 246). Current Swedish labor and welfare In this segment, we first consider the current Swedish political economy, along with the three main policies of the original Swedish model: solidaristic wage policy, active labor market policy, and universal welfare policy. Then, we briefly review the overall situation in the country. Solidaristic wage policy Wage setting has become increasingly decentralized. In several cases, the determination of average wage increases still takes place at the sector level, and most workers are still covered by collective agreements. However, the decision on how to distribute wage increases among employees is left to firm-level bargaining. As a result, wages have become more individualized, though still within a collective framework (OECD 2012, 66). The Swedish labor market has been divided between blue-collar workers and white-collar workers, but also between permanent workers and temporary workers in recent years. Furthermore, the percentage of temporary workers has been increasing. In 1990, temporary workers accounted for 10 percent of the workforce, which was nearly equal to OECD average level. In 2009, this became 15 percent, while the OECD average was 11 percent. The youth and immigrants are more likely to be involuntary temporary workers, because they tend to be hit particularly hard by economic shocks. The youth unemployment rate in 2011 was 22.8 percent which was above the EU average of 21.3 percent (OECD 2012, Fig. 1.7). The NEET rate has been also increasing (a NEET is a young person who is “not in education, employment, or training”). With regard to immigrants, in 2008, Sweden

114 N. Fujita reverted to a more open labor migration policy by allowing employers to recruit workers from abroad for any occupation, as long as wages and other working conditions fulfilled those prevailing in collective agreements. This boosted the number of non-EU migrants coming in through the labor channel (OECD 2012, 58). In 2013, the foreign-born population rate reached 15.9 percent. However, the gap in the unemployment rates between the foreign-born and the native population has remained high. The current flexibility of the Swedish labor market stems mainly from the use of temporary contracts. In fact, Sweden is the OECD country with the starkest asymmetry in employment protection legislation (EPL) between regular and temporary contracts, reflecting a high level of protection for workers with regular contracts, and low protection for those on temporary contracts (OECD 2012, Fig. 1.19). This is a result of several reforms aimed at lowering EPL on temporary contracts since the 1990s. In contrast, legislation on permanent contracts has remained strict, with heavy notification procedures in the case of dismissal, stringent regulations with regard to layoffs in the case of redundancy, relatively broad definitions of unfair dismissals, and sizeable compensation following unfair dismissal. As a result, more duality and inequality have emerged in the Swedish labor market. Active labor market policy Sweden was among the countries that increased ALMP expenditure the most after the 2008 recession. This came on top of a level that was already among the highest in the OECD before the crisis. However, ALMP expenditure in Sweden is heavily linked to subsidized employment measures. These have a share of 59 percent, as compared to an OECD average of 31 percent and an average of 40 percent in Denmark, Finland, and Norway. On the other hand, the share of expenditure used on training is only 7 percent, which is significantly lower than the average in the OECD (25 percent) and in the other Nordic countries (30 percent). The volume of labor market training programs has been scaled down markedly since the 1990s. By 2008, Sweden was among the OECD countries with the lowest use of labor market training, although this should be seen in the light of the decision to scale up volumes in the education system (OECD 2011, 80). Although Swedish ALMPs have often been characterized as “activation,” there is currently a lack of activation. Furthermore, welfare has been increasingly tied to labor. Participation in ALMPs used to be optional, and the income replacement rate of the unemployment benefit used to be high. Recently, participation in ALMPs has become obligatory, and unemployment benefits have decreased. The work-first principle has been strengthened. The number of unemployed receiving unemployment insurance benefits has been decreasing, because the eligibility criteria concerning past work have become stricter. The unemployed now need to have attempted to find work for a certain period, and to be registered at the Public Employment Service (PES).

The Swedish model since the 1990s 115 Facing increased heterogeneity of the unemployed, the PES is now more customized to individual needs. A special labor market program (“Step-In Jobs”) was introduced in 2007 to promote the integration of newly arrived immigrants into the labor market. In 2010, the “Introduction Act” was enacted to formalize the various forms of support proposed for new immigrants. Another new policy was the earned-income tax credit (EITC), first introduced in 2007 and expanded subsequently. Individuals below the age of sixtyfive all face the same tax formula, while older individuals benefit from a more generous formula. This provides stronger incentives to participate in the labor market.9 Universal welfare policy Since the Swedish universal welfare policy originated in the population debate in the 1930s,10 it is worth considering recent Swedish family policies. Tunberger and Sigle-Rushton (2011) examined three recent family policies: (1) an equality bonus for shared parental leave (introduced in 2008); (2) a cash benefit for home childcare (introduced in 2008); and (3) a tax deduction for the purchase of domestic services (expanded in 2009 to services supplied by individuals). The first policy is most logically consistent with the traditional Swedish model. The second had been criticized by the SAP since the 1970s, but was introduced based on similar policies in France, Norway, and Finland. A cash benefit represents a change in direction from traditional social democratic ideology. The third policy obviously deviates from the previous Swedish approach in that it supports universal breadwinning but with a shift from a state provision of care service towards greater commodification of unpaid work via market mechanisms. Tunberger and Sigle-Rushton simulated how these three policies would influence Swedish family behaviors. Their conclusions varied, depending on the families’ income strata, structures, and choices on how to raise their children. The three policies include contradictory effects, especially for the problem of women’s work-life balance. Roughly speaking, the policies have undermined traditional incentives for dual, full-time breadwinning and public childcare. More market-oriented and less gender-equalizing effects have been emerging. With regard to education, the enrolment rates for early childhood and primary education in Sweden has traditionally been high. Yet, graduation rates for upper secondary education are below the OECD average. The 2011 “Education Act” was a reform of this educational level, aiming to limit dropouts and to ease the transition to tertiary education and the labor market, because the risk of becoming unemployed is much higher for those who have not completed their education. Lastly, a serious problem has been emerging with regard to the scope of universalism. The much-publicized demise of the nation state in the wake of globalization seems to have triggered new cultural and political expressions, that is, welfare chauvinism. There has been a remarkable resurgence of belief in the idea

116 N. Fujita of the Swedish model, and today, “Swedishness” is a concept increasingly claimed by the Swedish extreme-right (Andersson 2009, 239–240). Despite a new integration policy targeting the development of an integrated society in order to build a new Swedish identity and a re-negotiated national community, based on shared democratic values rather than common historical provenance, citizens and denizens are not yet integrated (Schierup and Ålund 2011). The result of the most recent 2014 election clearly confirmed this. While the SAP maintained their number of seats (from 112 to 113), the former largest center-right party of the Moderates lost seats (dropping from 107 to 84). In contrast, the extreme-right Swedish Democratic Party more than doubled their number of seats, from 20 to 49. After more than 20 years of neoliberal reforms, the Swedish political economy has reached a relatively new situation. Public social expenditure is still considerably above the OECD average, and Sweden is a still relatively equal society. However, inequality has been gradually increasing. The Gini coefficient and the top 1 percent income share have clearly been increasing since the 1990s.11 The unemployment rate has also been increasing, especially for the youth and immigrants, many of whom occupy temporary jobs with relatively low EPL. At the same time, job training programs have been scaled down. Welfare chauvinism has been growing, and immigration has come to be a new political issue. The most recent result of the national election in 2014 showed a rapid progress for the Swedish Democrats.

Conclusion Changes to the Swedish model have been incremental. The Swedish identity has not been fully lost, although its identity is not as clear as it used to be. Public opinion mostly still supports full employment, coordinated wage bargaining, and a welfare state. Therefore, Bildt’s trial of “system change” or “system shift” in the early 1990s did not go well, which made the Moderates change their basic political strategy in the early 2000s. The result of the 2006 election was a victory for the “New Moderates,” but not for the previous Moderates. The gradual adaptation of a neoliberal policy regime became an effective political strategy. Since the 1990 economic crisis, the Swedish model has evolved under the neoliberal policy regime. However, even supporting that the overall world economy is neoliberalized, not all countries necessarily moved in the same direction. The outcome in Sweden was probably more egalitarian than the counterfactual radical “system shift,” but the Swedish model has been transformed considerably. Inequality in Sweden is still very low, but is increasing at the steepest rate of most OECD countries. Previous varieties of capitalism are changing. As Thelen (2014) pointed out, we can even find varieties within Nordic countries today, most noticeably between Sweden and Denmark. Dualization through incremental institutional change of “drift” is the key concept when interpreting the transformation of the Swedish model since the

The Swedish model since the 1990s 117 1990s. Two kinds of dualization are salient. One is the dualization between regular and temporary workers, and the other is the dualization between citizens and denizens. These two dualizations relate to each other. Under the current neoliberal policy regime, the main values of Swedish labor and welfare – workers’ solidarity and welfare universalism – are both facing the dualization problem. The values of the Swedish model, like labor-management cooperation and generous welfare, are preserved, but the range has been relatively limited. In this situation, new social coalition is gathering beyond a traditional left/ right division. Insider-outsider divide is becoming the political issue. Both the Moderate party and the SAP have followed the neoliberal policy regime, and their political strategies are mainly for previous or existing insiders. The increasing outsiders began to support new political parties like the Swedish Democratic Party.

Notes 1 In order to improve the profit margins of big Swedish enterprises, the Swedish krona was devalued and financial deregulations occurred under the SAP administration from 1982. 2 Deregulations occurred in the aviation industry in 1992, and in the telecommunications, telephone, and postal services industries in 1993. 3 For instance, a new budget system, with expenditure ceilings for three years, was introduced in 1997. In addition, the pension system changed from a pay-as-you-go system to a funding system in 1999. 4 This notion of a “policy regime” is based on the work of Przeworski (2014). Przeworski defined a policy regime as “an equilibrium in which different parties offer and implement the same policies.” He further argued that a policy regime means “a set of policies pursued by the incumbent government, such that all parties seeking to win office in the next election would pursue the same set of policies.” In addition, policy regimes constitute an equilibrium in the sense that the best response of electoral challengers to the policy of the incumbent is to implement the same policies, while the best response of the incumbent to the proposals of challengers is to continue the same policies. (Przeworski 2014, 36–37) 5 The gift and inheritance taxes were abolished to help small owner-run firms to be passed on to the next generation. The motivation for abolishing the wealth tax was that it was no longer being paid by the very wealthy, and that removing it may encourage those who had moved funds abroad to bring them back to Sweden (Freeman et al. 2010, 21). 6 Thelen (2014, 5) maintains that while the VoC approach emphasizes the efficiency of institutions, that is, the “Williamsonian” function of institutions, the VoC critique emphasizes the effect of improving solidarity of “Durkheimian” or “Polanyian” functions. 7 For the details of the Danish case, see Kvist and Greve (2011). However, they point out that flexicurity is gradually transforming into a work-first policy, though the ALMPs still fulfill the historical ambition of having equal access to the labor market for men and women and a low level of unemployment. 8 Mahoney and Thelen (2010) believe displacement is brought about by “insurrectionaries,” layering by “subversives,” and conversion by “opportunists.”

118 N. Fujita 9 According to the OECD (2014), Sweden in 2014 has three people of working age for every person aged 65 years or more, the fourth lowest in the OECD, and much lower than the OECD average of 4.2 workers. 10 Gunnar Myrdal insisted on the necessity of a “prophylactic” social policy in 1932. Alva and Gunnar Myrdal published a book titled Crisis of the Population Problem in 1934, in which they criticized the existing attitudes towards population issues: conservative pro-natalism and neo-Malthusianism. Their idea embraced Scandinavian universal welfare policies. The book became a bestseller, and influential in terms of public opinion. For more detail, see Fujita (2014, 340–341). 11 For detail, see OECD (2012, 48–54).

References Agius, Christine (2007) Sweden’s 2006 Parliamentary Election and After: Contesting or Consolidating the Swedish Model? Parliamentary Affairs, 60(4), 585–600. Amable, Bruno and Stefano Palombarini (2009) A Neorealist Approach to Institutional Change and the Diversity of Capitalism, Socio-Economic Review, 7, 123–143. Andersson, Jenny (2009) Nordic Nostalgia and Nordic Light: The Swedish Model as Utopia 1930–2007, Scandinavian Journal of History, 34(3), 229–245. Anxo, Dominique and Harald Niklasson (2006) The Swedish Model in Turbulent Times: Decline or Renaissance? International Labour Review, 145(4), 339–371. Baccaro, Lucio and Chris Howell (2011) A Common Neoliberal Trajectory: The Transformation of Industrial Relations in Advanced Capitalism, Politics and Society, 39(4), 521–563. Bergh, Andreas (2008) Explaining the Survival of the Swedish Welfare State: Maintaining Political Support through Incremental Change, Financial Theory and Practice, 32(3), 233–254. Freeman, Richard B., Birgitta Swedenborg, and Robert H. Topel (eds.) (2010) Reforming the Welfare State: Recovery and Beyond in Sweden, A National Bureau of Economic Research Conference Report, The University of Chicago Press. Fujita, Nanako (2014) Historical Evolution of Welfare Policy Ideas: The Scandinavian Perspective, in Magara, H. (ed.), Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Edward Elgar. Hacker, Jacob (2005) Policy Drift: The Hidden Politics of US Welfare State Retrenchment, in Streeck, W. and K. Thelen (eds.), Beyond Continuity: Institutional Change in Advanced Political Economies, Oxford University Press. Hall, Peter A. and David Soskice (2001) Varieties of Capitalism: The Institutional Foundation of Comparative Advantage, Oxford University Press. Kvist, Jon and Bent Greve (2011) Has the Nordic Welfare Model Been Transformed? Social Policy and Administration, 45(2), 146–160. Larsson, Bengt, Martin Letell, and Håkan Thörn (eds.) (2012) Transformations of the Swedish Welfare State: From Social Engineering to Governance? Palgrave Macmillan. Lindvall, Johaness and David Rueda (2012) Insider-Outsider Politics: Party Strategies and Political Behavior in Sweden, in Emmenegger, Patrick, Silja Häusermann, Bruno Palier, and Martin Seeleib-Kaiser (eds.), The Age of Dualization: The Changing Face of Inequality in Deindustrializing Societies, Oxford University Press. Mahoney, James and Kathleen Thelen (2010) A Theory of Gradual Institutional Change, in Mahoney, J. and K. Thelen (eds.), Explaining Institutional Change: Ambiguity, Agency, and Power, Cambridge University Press.

The Swedish model since the 1990s 119 Obinger, Herbert, Peter Starke, and Alexandra Kaasch (2012) Responses to Labor Market Divides in Small States since the 1990s, in Emmenegger, Patrick, Silja Häusermann, Bruno Palier, and Martin Seeleib-Kaiser (eds.), The Age of Dualization: The Changing Face of Inequality in Deindustrializing Societies, Oxford University Press. OECD (2011) OECD Economic Surveys: Sweden 2011, OECD Publishing. OECD (2012) OECD Economic Surveys: Sweden 2012, OECD Publishing. OECD (2014) Society at a Glance 2014, Highlights: Sweden, OECD Social Indicators, www.oecd.org/social/societyataglance.htm (accessed July, 2014). Przeworski, Adam (2014) Choices and Echoes: Stability and Change of Policy Regimes, in Magara, H. (ed.), Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Edward Elgar. Schierup, Carl-Ulrik and Aleksandra Ålund (2011) The End of Swedish Exceptionalism? Citizenship, Neoliberalism, and the Politics of Exclusion, Race & Class, 53(1), 45–64. Schneider, Martin R. and Mihai Paunescu (2012) Changing Varieties of Capitalism and Revealed Comparative Advantages from 1990 to 2005: A Test of the Hall and Soskice Claims, Socio-Economic Review, 10, 731–753. Schröder, Martin (2013) Integrating Varieties of Capitalism and Welfare State Research: A Unified Typology of Capitalism, Palgrave Macmillan. Streeck, Wolfgang and Kathleen Thelen (2005) Introduction: Institutional Change in Advanced Political Economies, in Streeck, W. and K. Thelen (eds.), Beyond Continuity: Institutional Change in Advanced Political Economies, Oxford University Press. Teague, Paul (2009) Path Dependency and Comparative Industrial Relations: The Case of Conflict Resolution Systems in Ireland and Sweden, British Journal of Industrial Relations, 47(3), 499–520. Thelen, Kathleen (2014) Varieties of Liberalization and the New Politics of Social Solidarity, Cambridge University Press. Tunberger, Pernilla and Wendy Sigle-Rushton (2011) Continuity and Change in Swedish Family Policy Reform, Journal of European Social Policy, 2(3), 225–237.

6

The EU neoliberal policy regime and main political alternatives Alberto Martinelli

The policy regime change approach: strengths and weaknesses The global financial crisis of 2008 and the related recession in the advanced economies have revitalized long-term analyses of capitalism and the role of power relations and cognitive frameworks in economic processes. The crisis has a systemic nature, it is the traumatic expression of the contradictions of globalization: first, the contradiction between the unprecedented growth of global finance and the erosion of national sovereignty that has made government controls rather ineffective (with no new system of international regulation and global governance superseding them); second, the increased structural power of highly mobile capital with regard to labour; third, the greater competitiveness of low-wage emerging economies vis-à-vis the advanced ones. The driving force of contemporary capitalism and the key actor of its dominant social bloc is global finance, which deeply influences the policy decisions of central banks and international economic organizations. The economic crisis has shaken the certainties of the still hegemonic neoliberal ideology (the theory of the market as a spontaneous order, the predominance of virtual economy over real economy) and opened new prospects for alternative political economy approaches, such as policy regime change (PRC). PRC assumes that a dominant social bloc – which is composed of a coalition of different social groups capable of compromising strategically on their different interests and is legitimized by a specific ideology – is capable of influencing consensus formation (through winning elections), institutional arrangements (by forming a friendly government) and policy-making (by implementing a specific economic model), in order to foster its own interests and reduce internal conflicts (institutions and policies are actually designed to solve conflicts among actors with heterogeneous interests). Policies that have succeeded in one country (usually the hegemonic country) will be imitated by others, leading to policy synchronization (Przeworski, 2014). However, when social conflicts within the dominant social bloc cannot be resolved under the existing rules of the game and/or external social actors succeed in changing the power relations with the dominant bloc, possibilities emerge for a paradigmatic change in the model (Amable, 2003; Boyer, 2014; Magara, 2014; Yamada, 2014).

The EU neoliberal policy regime 121 The policy regime change approach has the merit of restoring to political economy the key variables of interest, power and culture, which are neglected both by mainstream economics and institutionalist approaches as the varieties of capitalism (VoC). PRC presents similarities with other interest-based approaches to political economy which focus on the shifting interests and power coalitions of economic actors (Gourevitch, 1986), as well as with political economy approaches which emphasize the role of dominant ideas in influencing both policy makers and business leaders (Schmidt and Thatcher, 2013). PRC complements the VoC approach which rejects the idea of a single model of capitalist development by arguing that country-specific political and social institutions provide different regulatory frameworks for economic activity – which through incentives and constraints influence actors’ choices and economic outcomes. The VoC approach (Soskice, 1999) is a serious attempt to solve the epistemological problem of micro-macro relations in social analysis by giving to different macroeconomic outcomes the microfoundation provided by the behaviour of economic actors. But, this approach neglects the role played by interest-based power relations and hegemonic cognitive frameworks in influencing strategic decisions and policies, whereas these aspects are well considered by PRC. PRC has, however, some weak points too that I will briefly discuss, making three critical remarks and suggestions for improvement. The first concerns the composition and internal dynamics of the dominant social coalition. The view that opposes a small financial elite to the rest of the population (1 per cent against 99 per cent, Wall Street vs Main Street) widely popularized by collective movements like Occupy Wall Street or Indignados, is an oversimplification. The key research question is not the assessment of the relative size of the haves and have nots, which varies in different studies of inequality (just to mention the most famous recent one, Piketty (2013) argues that to the 1 per cent dominant social class one should add the 10 per cent of ‘well to dos’), but the ways in which class and group interests, legitimized by alternative ideologies, are converted into support for competing political coalitions. As I argue in my interpretation of the global financial crisis (Martinelli, 2014), in the United States the neoliberal policy regime can still rely on a powerful coalition of interests where the financial industry is central, but by no means alone. The components of such a coalition are numerous and form a structure of concentric circles. In the core is the new finance, first of all the big American investment banks and their highly paid employees, but also a good number of commercial banks and hedge fund managers, financial analysts and brokers. A second circle consists of highly paid corporate chief executives, auditing firms (which are at the same time consultants of the corporations they audit), rating firms with evident conflicts of interests, lobbyists, lawyers, business and government consultants. In a third circle are members of legislative and executive bodies and federal and state bureaucracies. In a fourth circle are academic think-tanks, opinion makers and the media. Thanks to their resources of wealth, power and prestige, these financial, business, cultural and political elites

122 A. Martinelli have effectively lobbied and influenced policy-making in order to weaken the regulatory systems. The still powerful coalition of interests behind the neoliberal policy regime and its crisis is, however, not limited to a few rich and influential social groups, which are capable, because of their wealth and power, of lobbying for their interests in American politics. The dominant social bloc is not only powerful but also wide. This large consensus cannot be fully understood without considering that this bloc includes large numbers of investors and consumers, although with quite different types of benefits. These people form the most external circle; they participated in the financial boom and later became the victims of the financial crisis. Most of the investors and rentiers (big pension funds as well the multitude of small investors) who bought the products of the shadow finance did not understand the mathematical models and bundling techniques behind them, but were persuaded of their validity as clever tools for getting high returns while transferring the risk to others. The coalition backing the explosion of shadow finance included large numbers of heavily indebted American consumers ‘who lived above their possibilities’, low income families of the ‘ninja’ type (no income, no job, no assets) who could get loans at a subprime rate and run the risk of losing their homes because they could not pay the mortgages. Reich’s thesis (2007) that the ordinary American is schizophrenic since, as a consumer and an investor, he strongly favours the economic system (‘super-capitalism’), while as a citizen he fears – or should fear – the risk such a system raises for democracy, contains some truth. Acknowledging that the dominant social bloc is not only powerful but wide does not neglect, however, the asymmetry of power within the bloc, nor obscure the fact that there are winners and losers in global capitalism. The most significant winners are chief executives and successful speculators in the domestic and international financial markets (although they are not winners once for all since they compete in a very uncertain and unregulated market). The losers are workers whose jobs, working conditions and pensions are put at risk, and investors not in the loop (Glyn, 2006). Wealth and income distribution in the United States and in other societies with financial capital economies had become more unequal already before the crisis (Martinelli, 2007) and has worsened after it. The power of capital in the globalized economy increases because entrepreneurs can not only threaten a ‘capital strike’, but can delocalize their activities (offshoring) and play one state against the other, one fiscal policy against the other. Moreover, business lobbies are very real, as is the influence of neoliberal ideology, which is hegemonic (in Gramsci’s original sense) insofar as it succeeds in portraying the interests of the dominant class as compatible with the interests of the society as a whole. My second critique of the PRC approach and suggestion for improvement concerns the fact that the asymmetry of power between capital and labour should not induce us to see them as monolithic classes, nor to neglect the vast archipelago of middle classes, which have been impoverished by the crisis. Both working and middle classes have responded to the crisis with very diverse political choices – from right-wing neo-nationalist parties to radical leftist

The EU neoliberal policy regime 123 parties. To get a better picture of the dialectic between interests, ideologies and political preferences we must deepen our analysis of relevant social groups and business sectors: besides workers, managers, savers and investors, we should consider self-employed, state employees and welfare recipients; besides real and monetary economy, manufacturing industry and finance, we should assess differences between indigenous and foreign workers, autonomous and government-supported sectors, domestic market and global market-oriented industries. Even the financial elite itself is not a cohesive social class, but an aggregate of individual actors playing a zero-sum game in an atomized market; they uphold the present regime not because they form a cohesive globally organized class, but because their power stems from the rules of the neoliberal game and from the fact that indebted sovereign states cannot do without global finance. With this perspective we can appreciate the variety of actors who resist change (groups with veto powers, inefficient bureaucrats, rentiers of the status quo), thus contributing to explain why the policy regime weakened by the crisis has not been substituted and an alternative regime should by no means be taken for granted. My third critical remark is that we must acknowledge that class analysis, which greatly helps in interpreting the post-war historic compromise, has much less heuristic power in the neoliberal global market phase and in the contemporary multipolar world, in which conflicts among states are more important than conflicts among classes (at least within the EU). If this is the case, we should, first of all, distinguish among dominant social coalitions at the global level and in the various nation states, whereas the PRC approach does not often specify at what level it applies. At the global level, international finance plays almost unchecked, favoured by the political fragmentation and difficult and/or unwilling regulation by national governments (even the most powerful ones), whereas at the national level financial power, although helped by the hegemonic neoliberal cognitive framework and the successful lobbying of financial interest groups, can be counterbalanced by other organized groups. Fully sovereign nation states, like the US, Japan, Brazil or China, can implement regulation policies, which are however only partially effective given the high mobility of financial capital. Smaller countries are almost impotent. The EU and the Eurozone within it, with strongly interdependent economies and common institutions, can display regulatory and control powers, but here too chances for an alternative class-based coalition are low because a pan-European polity does not yet exist and EU supranational governance is skewed in favour of the intergovernmental Council where national interests prevail, with the result of delegating relevant decisions to technocratic elites which are subject to insufficient democratic control by the EU parliament. With these critical qualifications the PRC approach, which inspires this volume, provides a valuable framework for inquiring why the traumatic experience of the long crisis has not produced a paradigmatic change through policy innovations (i.e. a post-neoliberal alternative) and financial interest groups are still hegemonic in global capitalism. I address these questions by exposing the

124 A. Martinelli key features of the neoliberal policy regime and the global crisis, by analysing the neoliberal economic governance in the European Union and the Eurozone, and by discussing the two main alternatives and potential regime changes: the re-nationalization of economic policy and the development of a supranational democratic polity.

The neoliberal policy regime and the global crisis The regime change from the ‘post-Second World War settlement’ between capital and labour to the hegemony of financial capital in the global economy and the ensuing 2008 global financial crisis have been widely analysed. I gave elsewhere my own interpretation, framed in a political economy approach and focused on the role plaid by the neoliberal cognitive framework and finance’s pressure politics in the crisis (Martinelli, 2014); I will only briefly repeat it here. The key features of les trente glorieuses (between the end of the Second World War and the 1970s) were the historic compromise between capital and labour (moderating wage demands relative to productivity increases in exchange for stronger welfare policies) and the balance between free market and state policies (‘Smith abroad and Keynes at home’), i.e. foreign trade liberalization and national economic and social policies like anti-cyclical deficit spending aiming at full employment, welfare state expansion, and collective bargaining by strong organized interest associations empowered by Fordist production models. The critical juncture that favoured the regime change from les trente glorieuses and the following thirty years neoliberal regime was the stagflation of the 1970s. Causal factors were structural changes: high energy and raw material cost increases and rising wages, which caused a shift in the perspective of decisionmakers from problems of aggregate demand and employment to problems of supply of production factors – with related technological innovation; shifts in the relative competitiveness and world trade shares; huge increase in the volume of money looking for profitable investment; and, last but not least, China’s shift to the so-called ‘market socialism’. All these factors contributed to corroding the oligopolistic assets of the previous phase. But the assault from below, from the new aggressive entrepreneurial ‘animal spirits’, would not have been so successful without a dramatic change from above, in the cultural climate and the government economic policies of developed countries. Keynesian theory was replaced by Hayek and the supply-side economics of the Chicago School, which seemed more fit to cope with the stagflation and rising public debts of the 1970s. The Reagan administration in the United States and the Thatcher government in the United Kingdom – followed by the governments of several other developed and developing countries – adopted supply-side economic policies of extensive deregulation, privatization, tax cuts and expansive monetary policy. A new policy regime and within it a new growth model prevailed. The other major varieties of capitalism moved in the direction of the hegemonic neoliberal, market-driven model (although not completely converging on it), on the

The EU neoliberal policy regime 125 assumption that the latter was the most competitive. A similar path was followed to some extent by emerging developmentalist economies like the BRICS. The ICT revolution and global interdependence fostered a staggering growth of the GDP and improved living conditions in several emerging countries, but caused a growing asymmetry of power between capital and labour (through offshoring, international supply chains, etc.) and between global market actors and national governments (which consciously reduced their regulatory powers or were unable to implement them). The decision-making power of technocrats at the head of international organizations like the IMF, World Bank, GATT/WTO, OECD and central banks significantly increased and coagulated around the socalled ‘Washington consensus’, whereas democratic control was strongly reduced. The core of the cognitive framework that legitimized the new policy regime was the neoliberal economic theory of the self-regulating market, according to which markets are capable of restoring their equilibrium whenever either rigorously exogenous factors or statistically unlikely events create imbalances. In terms of class analysis, a shift took place from the Fordist compromise between managers and wage earners to an alliance between top managers and financiers (Boyer, 2012). With the opening of the world economy, foreign competition disciplined labour. The majority of wage earners were expelled from the dominant bloc and reintroduced only as consumers. With long-term wage stagnation, living standards could only be sustained by working more hours and relying more on credit. Conversely, as regulations were removed, the financial system, fostered by an excess of wealth looking for increasingly higher financial returns and by its unchallenged mobility, has overexpanded and imposed its logic on labour and government policies. The global economy grew with the increasing involvement of the big ‘emerging economies’ of China, India, Brazil, and with the injection of large quantities of money into the advanced economies. In these countries, social expenditure kept growing to compensate for the harsh effects of market discipline, resulting in ever increasing public debts and making states even more dependent on the confidence of the market actors who bought their bonds and thus indirectly could dictate national economic policies. A parallel expansion of private debt took place – a ‘privatised Keynesianism’ (Crouch, 2008) – which was justified with the need to sustain consumption. The hyperfinancialization – together with the other factors I highlighted at the start of this chapter and the lack of regulation and supervision by government institutions (US Congress, 2011) – caused the 2008 global financial crisis and big banks failures and bail-outs. Then, national governments poured a great deal of money into failing banks, thus increasing their debt (and the crisis jump from financial crisis to sovereign debt). But this huge state intervention was not seen as contradictory with the orthodoxy of market self-regulation. Global finance had become the key actor and the prosperity itself of the 1990s for developed economies almost entirely derived from a global growth of public and private finance and credit, helped by deregulation and justified by neoliberal economic doctrine.

126 A. Martinelli The power of capital – especially financial capital – helps to explain the resilience of the neoliberal policy regime, contrary to Stiglitz’s prediction that the failure of Lehman Brothers would play a role equivalent to the fall of the Berlin Wall (2008). In fact, in market economies the influence of capital in policymaking is inherently greater than that of labour, in whatever form it is exercised, in the market or in the political arena, as individual or collective actors, the latter being usually a second best choice (Martinelli, 1991; Martinelli et al., 1981, Culpepper, 2012). In the global economy this asymmetry of power increases because entrepreneurs can not only threaten a ‘capital strike’, but can delocalize their activities and play one state against the other, or one tax policy against the other, in order to attract investments, thus curtailing the counter-power of unions and severely limiting the regulatory powers of governments. Since growing economic interdependence goes together with continuing political fragmentation, the democratic process of consensus formation that could limit the structural power of the business class and force it to accept some kind of class compromise is also limited. Global finance and to a less extent transnational corporations do not need to strike a class compromise, being very mobile and acting at a higher level than parties and voters who still act at the national level. TNCs and global finance are part of the dominant social coalition in several countries, first of all in the US; but even governments, which have a political base that does not explicitly include these actors, cannot neglect them. The range of policy options for national governments, central banks and international organizations is constrained by the interests of these dominant coalitions, and neoliberal policies are generally dominant. Is this hegemony going to continue, or can a different social bloc emerge? I will discuss this question with relation to the European Union, focusing on the basic problem of which is the most appropriate level for an opposition to develop: the nation state or the supranational union.

The EU neoliberal policy regime and its response to the global crisis The neoliberal policy regime has been dominant in the EU economy as well, although in the tempered version of the European variety of capitalism, and it has influenced the response to the 2008 global crisis. The crisis has been longer and more severe in the EU than in the other advanced economies. The global crisis was actually a sequence of crises which took the form of sovereign debt, economic stagnation, rising unemployment, welfare reduction and hit with different intensity the EU member states, more the Eurozone and the Southern countries within it. In 2012, five years after the outburst of the global crisis, the Eurozone GDP still declined 0.7 per cent and a further 0.4 per cent in 2013, to recover a meagre 0.3 per cent in 2014. Only in 2015 was economic stagnation over, but GDP growth is much lower than in the US, sovereign debt crises are under control but there is a risk of deflation and imbalances among member states are growing.

The EU neoliberal policy regime 127 The EU neoliberal policy regime has been defined in various ways as ‘technocratic governance’ (Habermas, 2013a), ‘elitist policy-making’ (Offe, 2014), ‘consolidated state’ (Streeck, 2013) or even, in an exaggerated way, as a coup d’etat against the European democracy (Gallino, 2013). It is actually both the expression of a specific social coalition organized around financial and corporate interests, and the outcome of the partial and unbalanced transfer of decisionmaking powers by national governments to the supranational Eurozone institutions. The most important instance of this process is the decision taken by some EU member states to share a single currency and a single central bank, while keeping eighteen different tax systems and public debts. This helps to explain why the eurozone has been more affected by the crisis than the rest of the EU and has brought a new discussion about its costs and benefits and its very survival. All these connected crises have been managed and the Eurozone economy is slowly but steadily recovering, but through a strategy that prioritized fiscal austerity over pro-growth and employment policies, and finance over manufacturing, and increased the inequalities among member states and social classes and groups. Member states’ policies have become more and more marketconforming, while technocratic governance and elitist policy-making prevailed at the supranational level. In 2015 the Eurozone economy is still second in the world in terms of GDP: 13,611 billion US dollars, almost 20 per cent of the world’s $73,507 billion GDP, after the USA’s $17,968 billion and ahead of China’s $11,385 billion (but China’s GDP is almost twice as much with data based on purchasing power parity, PPP). The EU internal market (Eurozone plus) is equivalent to that of Nafta and the European economy is competing with the American in terms of technological innovation and capitalization. However, in recent years, the Eurozone growth rate increase (0.9 per cent in 2014 and 1.5 per cent in 2015) has been comparatively lower not only than the world average (3.4 per cent in 2014 and 3.1 per cent in 2015) and the emerging market and developing economies’ average (4.6 per cent in 2014 and 4.0 per cent in 2015), but also lower than the USA (2.4 per cent in 2014 and 2.5 per cent in 2015) and the advanced economies’ average (1.8 per cent in 2014 and 1.9 per cent the following year) [IMF, January 2016]. The EU economy has actually become increasingly interdependent in terms of trade, free capital movement, policy coordination and supranational policy steering, but at the same time more unequal; just to give a couple of examples, in the first decade of this century the difference in productivity among the Eurozone countries has increased 30 per cent, and the unemployment rate in Greece and Spain is three to four times the Eurozone average. The creation of the Eurozone of the nineteen countries sharing a single currency and central bank fostered interdependence, but also inequalities, which are less tolerable in years of economic recession because they prolong and worsen the effects of the global crisis. The main reasons for the introduction of the euro were both economic and political. The economic argument runs as follows: since the common market

128 A. Martinelli established with the Single European Act required a stable rate of exchange in order to have greater efficiency and lower transaction costs, the only solution was pooling together the monetary policies of member states (Talani, 2004); the single currency would foster the rapid integration of financial markets, more efficient allocation of investments, greater mobility of factors of production, more rapid trade exchanges and growing Europe-wide infrastructural investments. Financial markets have actually become more integrated in the Eurozone, but the other envisaged benefits have been either absent or offset by growing trade imbalances between Germany trade surpluses and the trade deficits of most other countries. But the main reason was political: the euro stems, first of all, from the convergence of interests between Germany and France in the context of exceptional political events like the collapse of the USSR; the German government wanted a European consensus for reunification, the French wanted to assure a European anchorage for the unified Germany and recuperate some control over monetary policy which was German-dominated, while other EU member states favoured an anti-inflationary policy imposed by EU institutions in order to overcome domestic opposition (Sandholz, 1993). At the start, the euro was widely appreciated; it gave a competitive advantage to the more productive economies and prevented a damaging devaluationinflation spiral in the less productive. However, with the outbreak of the global financial crisis, a single currency and a single monetary policy did not avoid the sovereign debt crises of the weakest ‘Southern’ countries and the costly rescue operations – both in social terms (wage reductions, layoffs, cuts of welfare programmes) and in financial terms, fuelling economic recession and rising unemployment. That is why opinions became more sharply divided: on the one hand, those who continue to praise the introduction of the single currency as a leap forward to greater economic and political integration, a safety net for the most indebted member states and a pressure on their governments to decide longneeded reforms (pension, labour market, bureaucratic modernization, public spending review, monopolies’ breaking). According to them the decision was correct at the time it was taken, and the problems that have later arisen are due to the global crisis changing the whole situation. On the other hand, critics argue that the euro was a mistake from the start, since less competitive Eurozone economies, forbidden from devaluing their currency, could only compensate for their large trade deficits with internal adjustment and, since the high mobility of capital and the variety of fiscal regimes in the EU would not allow tax increases, adjustment could only take place through pressures on wages, pensions, labour market deregulation, cuts in public services and privatization of state-owned assets. There is some truth in both views: the monetary union has been a major step in the construction of the European political union, but it was a mistake not to decide complementary measures, i.e. a single banking regulation authority and common fiscal and economic policies, which, in their turn, would require common legitimate institutions. Those who claimed that the euro could not work without a political union were proven wrong since the euro survived and,

The EU neoliberal policy regime 129 as we will see later, European leaders were capable of managing the crisis through a series of pragmatic compromises and institutional innovations. But the management of the crisis was more costly and time consuming than it could have been if a deeper union had been already in place; the distribution of economic and social costs among member states and social classes was uneven; and the weakness of supranational democratic institutions empowered technocratic elites who take decisions with little democratic control. Whatever opinion we may have about the creation of the single currency, however, one should acknowledge that abandoning the euro now would have very negative consequences – much worse than keeping it – not only for the Eurozone economy, but for the European Union as a whole. The renationalization of monetary policy would allow the most indebted countries to devalue their currency, but would also expose them to high inflation and much higher cost for servicing the accumulated debt. Dismantling the euro is not advisable, but on the other hand, keeping a single currency with nineteen different economic and fiscal policies of economically diverse countries creates contradictions that are not easy to solve. That is why Claus Offe (2014) affirms that Europe is entrapped, its road forward blocked by one core contradiction: what is necessary is democratically virtually impossible to do. Large-scale and longterm debt mutualization – which would result in massive redistributive measures both among member states and social classes – is rejected by the majority of citizens of Northern ‘core’ member states that have been so far less affected by the crisis than those of the South; whereas enhancing competitiveness of Southern ‘peripheral’ countries and adjusting their unit cost of labour (the ratio between real wages and labour productivity) is rejected by most voters there. In this situation a deep divorce occurs between politics and policy: on the one hand, a populist mass politics that has no perceptible implication for policymaking on core issues propagates a distorted, simplified picture of complex problems like those of the eurozone; on the other, there is an elitist policymaking that has no roots in, no links to, nor legitimation through politics. According to Offe the EU integration crisis is the final stage of the crisis that started with the US subprime crisis, and it consists in a process of renationalization, with the rich countries of Europe dictating the poorer ones the austerity cure in order for them to regain the trust of the financial industry; but austerity does not stimulate growth, nor expand the tax base (which makes the weakest Eurozone members become even more dependent on lenders). I share some aspects of Offe’s analysis, such as the EU elitist policy-making and the link between the euro crisis and EU integration crisis, but not his thesis that the crisis cannot be managed and that the road forward is blocked. As I remarked, the EU has survived 2009–2012 sovereign debt crisis and the Eurozone has not dissolved. What is difficult is the replacement of the present hegemonic neoliberal, finance-dominated coalition with an alternative class-based one, due to the divergent interests of different groups of EU member states. There are three major cleavages in today’s EU: the cleavage between pro-fiscal austerity ‘Northern’ states and pro-growth ‘Southern’ states, the cleavage

130 A. Martinelli between old ‘Western’ members and new ‘Eastern’ members of the EU; third the cleavage between continental Europe and the UK (has ended with Brexit). National interests (and the related conflicts) are more important than class interests and conflicts. In the tripartite EU governance, the European Council enjoys greater power than the Commission and the Parliament, and there government heads and their ministers defend their national interests and negotiate intergovernmental compromises, while European MPs who view problems in a broader European perspective play a secondary role. But, as with any intergovernmental organization, the European Council suffers from a legitimacy deficit, while the secrecy of its debates runs against democratic accountability. It is therefore no surprise that many EU citizens feel that their fate is largely decided by foreign governments which defend foreign interests and by technocratic bodies which are not subject to democratic control. However, even when an alternative social coalition wins the elections, as with Syriza in Greece, the government has a restricted room for manoeuvre (given the transfer of significant portions of sovereignty to the European Commission and the ECB) and has to comply to their demands; moreover, the government and those citizens who continue to support it in spite of the heavy social costs of fiscal austerity, think that the dismissal of the euro is a greater evil than keeping it, since it implies being left alone to face the speculation of financial markets. At the other end of the spectrum, in the more competitive states, even voters of leftist parties favour keeping the euro and adopting EU and Eurozone policies because, given the high degree of interdependence of their economies, the end of the single currency would have a highly destructive domino effect and the re-nationalization of policies would imply a high political cost. That is why EU and Eurozone decision-makers are not blocked and an effective exit strategy from the crisis has been implemented, but this took place with negative implications for European democracy and social cohesion. Hence, the widespread discontent with fiscal austerity and EU technocratic governance which, although does not go so far as to form an electoral majority in favour of dismantling the euro and ending the Union, has fostered political alternatives. I will discuss the two main, opposite, responses to the hegemonic neoliberal policy regime with the related power of financial capital within the EU: 1

2

the retrenchment within the nation-state borders and the re-nationalization of policy-making, which is called for by nationalist-populist parties and movements, and by euro-sceptic intellectuals like Wolfgang Streeck; the development of a deeper union with greater democratic control and accountability alternative and a less unequal distribution of costs and benefits among and within EU member states, which is called for by pro-EU political actors and intellectuals like Jürgen Habermas.

The EU neoliberal policy regime 131

The first response to the EU neoliberal policy regime: nationalist-populist parties New nationalist parties and movements want to regain sovereign power relinquished to the European Union and restore national borders. Using a populist rhetoric in their opposition to the EU, they scored significant successes in national and European elections. The greatest success was Brexit, but they scored well also in the May 2014 elections for the European Parliament. In France, Marine Le Pen’s National Front was first with 25 per cent of the vote, beating both the governing Socialist Party and the main opposition party (MRP). The same happened in the UK, with UKIP getting more votes than the two governing parties (Conservative and Liberal) and the opposition Labour Party. National-populist hopes for victory were not fulfilled in other countries, such as Italy and the Netherlands, but on the whole, their success confirmed ongoing trends of europhobia and eurosceptisism. Their position in the next EU Parliament has been strengthened (although only one new parliamentary group, headed by the UKIP and the Italian Five Stars Movement, could be formed). Nationalist-populist parties mostly use the EU Parliament as a stage for voicing their protest against the oppressive Brussels bureaucracy and their opposition to EU policies, first of all migration policy. They can hardly reverse the course of European integration, nor to prevent decisions taken by the grand coalition formed by pro-EU parties (Peoples Party, Socialists, Liberals and, on some issues, Greens), but they could make the already complex and lengthy policy-making even more muddled and time-consuming. National-populist parties revitalize the myth of the nation as a the only collective identity and source of solidaristic action, putting national interest above any other interest. Their populist propaganda reduces complex problems to commonplaces and looks for easy scapegoats as targets of popular indignation (Martinelli, 2013). The three basic claims of the nationalist ideology are: identity claims that postulate a clear-cut division of the world between ‘us and them’, friends and foes, positing a rigid and homogeneous identity on both sides; time-related claims that propagate the ‘authentic’ version of national history, establishing meaningful links with the past and fostering a collective amnesia regarding problematic aspects that do not fit the official narrative; and space-related claims that stress the inextricable link between the nation and its territory, which is often seen as shaping the national character and bearing the indelible signs of a continuing national presence. In the early twenty-first century nation states are subject to the two-fold pressure of growing global interconnectedness from above, and new claims of local autonomy from below. In the post-bipolar world, national sovereignty has been eroded, but the nation state is not withering away, it still is the institutional embodiment of legitimate political authority, the key actor in international relations, and the taken-for-granted context of everyday life in most societies. It is no surprise, then, that its related ideology, nationalism, is alive and well, a powerful discourse that fosters collective identities and mobilizes people.

132 A. Martinelli Populism is a weaker ideology than nationalism, but has a few distinctive features too, that are related to the various meanings of the word ‘people’: as the sovereign demos, which is the legitimate foundation of the political order; as the mass of ordinary citizens who are opposed to the dominant elite; as the ethnically homogeneous nation (Volk). According to these various meanings, populist claims encompass distrust for the power elite and demand direct democracy, defending small producers and atomized consumers against the power of global firms and international finance, stressing the authentic social relations that can develop within ‘organic’ communities (an attitude that often goes together with hostility against the stranger, the immigrant, the believer of a different religion). With the exception of a few extreme right-wing parties like Jobbik in Hungary and Golden Dawn in Greece, contemporary populist movements are not antidemocratic, on the contrary they pretend to be the true expression of the will of the people. But they are against constitutional democracy, and its constitutive features: division of powers, respect for minority rights, rule of law (Meny and Surel, 2000). At the core of contemporary national-populism are the questions of identity and citizenship, of the criteria for exclusion from/inclusion into the community, which make European integration the key target of criticism. The common ground between nationalism and populism is provided by anti-Europe feelings, the defence of the various homelands against the EU super-state, the opposition to the transfer of sovereignty and to the ‘expropriation’ of ordinary people’s rights by eurocrats in Brussels and Frankfurt, as well as the hostility toward immigrants who are perceived as threatening domestic jobs, wages and welfare provisions (welfare chauvinism). The successful propaganda for Brexit was a summa of all this. National-populist parties are on the rise in contemporary Europe due to a variety of causal factors, that provide opportunities to gain consensus (Kitschelt and McGann, 1995). A first set of causes-opportunities, which specifically refer to Eastern European countries, is the collapse of the USSR. The ethnic, national, religious and geopolitical cleavages and conflicts, which during the Cold War years had been absorbed into the overarching antagonism between the two alternative systems and Weltanschauungen, were defrosted and updated in the new world political context. A second set of causal factors (mostly in the Western European countries) is the combined effect of globalization and European integration. Three decades of market and financial globalization and the development of the single European market have eroded national sovereignty, limited the margins of manoeuvre and the effectiveness of autonomous economic policies, and reduced welfare state provisions. Besides the reaction to global de-territorialization there has been a growing need to reaffirm local roots in real or virtual communities (instances of this are the apparently distant UKIP’s anti-metropolitan ‘local pub’ culture and Five Stars Movement’s web community). As long as economic growth was steady, neither global constraints nor European rules fed widespread neo-protest, but the long crisis, economic stagnation, rising unemployment and

The EU neoliberal policy regime 133 welfare cuts fostered insecurity and precariousness, territorial fragmentation and social inequalities, modifying the traditional equilibria of European politics and paving the way for the new nationalism. When society fails, the nation appears as the only source of solidarity. Jobless youth, non-competitive artisans and entrepreneurs, mature workers with obsolete skills and other ‘losers’ of globalization form the backbone of nationalist-populist parties. Not all nationalpopulist parties are anti-global, but all are anti-EU. For Marine Le Pen’s National Front, mondialisation is contemporary slavery and the new slave traders are the anonymous and vagrant chiefs of international finance, who want to destroy nations. The euro is part of the plot, since it is not only a betrayal of France but of Europe as well, perpetrated through the forced integration of European economies into a US-dominated world market. A third set of causes of the revival of national-populism is the crisis of party democracy. Established political parties have become bureaucratized, sclerotic and oligarchic, and seem less and less capable of implementing credible reformist projects also because the erosion of sovereignty caused by global interdependence and voluntary transfer of power to EU supranational institutions have reduced their decision-making power. The symptoms of parties’ crisis are numerous and predate the economic recession and euro crisis: growing abstention in elections, declining membership, lack of trust in elected officials and bureaucrats. On top of that is the democratic deficit in EU governance that national-populist parties rightly denounce: in the baroque institutional architecture of the EU, the European Council is the most powerful actor, but enjoys only a derived legitimacy, since decisions are taken in opaque negotiations by the heads of member states and their ministers, all upholding their national interests at the expense of a Europe-wide perspective. Greater participation and control by citizens and greater transparency and accountability by leaders are lacking and badly needed in EU decision-making. Joining the EU requires not only a viable market economy (as for the WTO), but also a fully democratic political system. But the EU does not itself practise this type of democracy; as Philippe Schmitter ironically remarked, if the EU were to apply to join itself, it would be rejected (2013). National-populist parties and movements are, however, mistaken both in their diagnosis of the causes of the current crisis and in the therapies they suggest. The diagnosis that the present economic recession and high unemployment are caused by the euro is wrong; the problems of the Eurozone economy stem from the global crisis and would be much worse without the euro for most member states. The prescribed therapy is wrong too, since it is not by retrenching within national borders that the various European states – even the most powerful ones – could meet global challenges and compete with the great powers. To the contrary, only the development of an ever greater and more democratic union can do that.

134 A. Martinelli

Capitalism buying time and the re-nationalization of policy in Streeck’s analysis An intellectually sophisticated version of the nationalist critique of neoliberal capitalism is provided by Streeck’s book Gekaufte Zeit and related essays (2013). For Streeck, the Golden Age of post-war capitalist development, the 1950s and 1960s, were an exception in the course of history, unlikely to be repeated. The four decades following this unique achievement were a continuous crisis in various stages that culminated in the 2008 global financial crisis: ‘the fiscal state’ (in which inflationary policies ultimately resulted in fiscal crisis and stagnation); ‘the debtor state’ (in which, after successful monetary stabilization, rising unemployment and increasing tax resistance caused growing deficits in public finances that were met by larger sovereign debts in a context of widely expanded international finance); ‘the consolidated state’ (with private indebtedness growing alongside sovereign debt and with the EU technocracy imposing its rules to indebted governments). Streeck portrays a capitalism in need of oxygen, in conflict with citizens’ aspirations and its own growth needs, trying ‘to buy time’ through a sequence of temporary remedies. These remedies may only postpone the outburst of major economic and socio-political crises, because they do not go to the heart of the matter and the system just reaches another critical juncture where new remedies are frantically sought and found. Through these various phases there are remarkable continuities: a secular decline of growth rates in the developed economies, the increased aggregate debt of governments, households and businesses, the quasi disappearance of trade unions. The present fourth phase reinforces these trends (lower growth, higher unemployment, greater inequality), while the decision-making arena becomes even more remote, out of reach for ordinary citizens and their collective organizations, moving to international financial diplomacy and a few leading central banks. In Streeck’s words, ‘the present stage of the long departure from the postwar settlement features a technocratic dictatorship of the most mysterious and elitist institutions of modern capitalism, the central banks’ (2014, p. 51). There is some flavour of conspiracy here, that might convey the ideas, widely held among supporters of neo-populism, that all key decisions are taken by a few hyper-powerful actors, while most EU government leaders are ‘useful idiots’ at the service of finance. In this gloomy scenario Streeck sees one great danger and only one hope. ‘The greatest danger in today’s Western Europe is not nationalism, and certainly not German nationalism, but Hayek’s market liberalism.’ The completion of the monetary union would mean the end of national democracy in Europe, and with it the end of the only institution that could serve to defend us from the consolidated state. Since differences among the European peoples are too great to be integrated into a common democracy, then, faut de mieux, we can resort to the institutions that represent those (national) differences and use them as brakes on a car launched at high speed toward a single, undemocratic, marketbased state (2013, p. 217). I disagree. Streeck’s suggestion runs against the very

The EU neoliberal policy regime 135 principle on which the political integration of Europe is based: the formation of a supranational union while keeping national differences or, in other words, the achievement of unity through diversity (Martinelli, 2007; Cavalli and Martinelli, 2015). Streeck’s theses are well argued, but not very convincing. They are open to two main critiques: first, Streeck asserts that he provides a satisfactory answer to the question of why the four stages of the forty-year crisis will lead to an irreversible crisis, but he does not provide a satisfactory proof for it. Streeck admits that capitalism is inherently conflict-ridden and periodically goes through processes of creative destruction, but tries to apply the metaphor of ageing in order to show the irreversible collapse of the system: the continuous accumulation of small, and increasingly not so small dysfunctions, none of them deadly as such, but most of them beyond repair, certainly as they occur at the same time and become too many for individual to address. As time passes … the elements of the system will be more and more out-of-joint, frictions of all kinds will multiply, unanticipated consequences will spread … equilibrium will become the exception instead of the rule. (2014, p. 55) However, the metaphor is not appropriate: capitalism, as any complex system in the history of mankind, will ultimately pass away, but without the strict temporary limitations of human beings, and contrary to the life-cycle of all living creatures, change and crisis are not irreversible for social systems and institutional arrangements. Streeck differs from Marxists and other theorists of imperialism when he affirms that no utopian vision of an alternative future should be required anymore to validate a claim that capitalism is on its way out; but makes the same error of underevaluating the intrinsic dynamics of market capitalism and the continuous role of innovation (the first and second industrial revolution, and the current scientific and technological advances in ICT, biomedicine, nanotechnologies, green economy), an error that stems also from his focus on OECD countries and neglect of capitalist expansion in China, India and other emerging economies. The second critique concerns Streeck’s underestimation of the strength of democratic institutions, which, although at times seem incapable of containing the dynamism of market forces, can enforce regulation and implement policies aimed at coping with market failures. Streeck fails to explain why most EU government leaders backing a technocratic oligarchy continue to have the support of the majority of the population in a context that, although problematic, is still democratic. His account is, however, not entirely pessimistic about political action: Streeck affirms that, although the post-war settlement was an absolute exception, it is possible a less unstable capitalist world with radical-reformist policies at the nation state level could build an alternative, more solidaristic way of life. In the last pages of Gekaufte Zeit he urges a repair what is left of the fully

136 A. Martinelli sovereign, pre-EU, nation state, in order to slow down the rapid advancement of capitalist colonization. But it is somehow contradictory to argue, on the one hand, that neoliberal capitalism has become dominant everywhere and the varieties analysed by the VoC literature are disappearing, and, on the other, that the dismantling of the Eurozone and the retrenchment within national borders can counter the power of capital and make democracy work.

The second alternative to the EU policy regime: upgrading democracy The second response to the EU financial oligarchy and neoliberal policy regime suggests a quite different alternative strategy: the development of a more accomplished union with greater democratic control and political accountability. A significant amount of reports, manifestos, appeals, blueprints have been produced by political actors (the Socialists and other EU parties, the Spinelli Group in the European Parliament, the European Trade Union Council, the European Federalist Movement), reputed scholars and leaders (Duff, Fisher, Habermas, Offe, Beck), intellectual networks (Glienicker Group, Piketty Manifesto, UniversityforEurope), that analyse the governance of the EU and the Eurozone and make proposals for this kind of alternative course. I will concentrate my discussion on Habermas’ theses and the Piketty Manifesto and conclude with my own proposals for a deeper European union. A well articulated formulation of this alternative view can be found in recent Habermas writings (2012, 2013a, 2013b). Habermas criticizes the growing tension between capitalism and democracy, the excessive power of financial capital and the ‘directive federalism’ of the EU, which works in an almost totally separated way from the traditional mechanisms of democratic representation. But for him the only way to save democracy and reconcile it with the market is not a nostalgic return to the past, a retrenchment within national borders, but the deepening of the European political process, the creation of an authentic political union as a community of states, one that is capable of giving every European citizen a Wir Perspektive, so that he/she can take account of the interests of all and not only those of his/her homeland fellows. In order to overcome the present status quo and achieve this goal, Habermas suggests some key institutional reforms: dethroning the European Council, revitalizing the communitarian method, attributing to the EU an autonomous fiscal capacity, increasing the EU budget, implementing policies of effective redistribution among member states, mutualizing the debt through the issue of eurobonds, creating a banking union. Habermas seems aware that some of these reforms are not realistic, at least in the short term – since they require a revision of the Treaties – and discusses at length the official Blueprint for a Deep and Genuine Economic and Monetary Union (European Commission, 2012), which has been revised in the more recent Five Presidents’ Report (European Commission, 2015). The Blueprint suggests a further transfer of decision-making power from the national to the supranational level in a quiet and gradual way (setting

The EU neoliberal policy regime 137 integrated guidelines for coordinating economic, fiscal and budget policies of member states, strengthening the EU budget in order to increase resources for public investments, and issuing eurobonds for the partial mutualization of the debt of the most indebted member states). Habermas agrees with the content of the suggested measures, but criticizes the temptation to solve in a technocratic way the gap between what is economically necessary (the consolidation of regulatory powers) and what is politically feasible (popular consensus) and warns that in so doing the EU tends to become a market-conforming democracy, even more exposed to market imperatives because it lacks a solid anchorage in a European civil society. The steering capacity, that is necessary in a monetary union, could and should be centralized, but only in the context of an equally supranational political community. I agree that the question of democratic control is a fundamental one. The problem is not that EU member states’ leaders and their ministers do not act, nor that European technocrats make the ‘wrong’ decisions because they are the ‘instruments’ of international finance and completely disregard popular demands (as the neo-nationalists accuse), and even less that they are incompetent and made no advancement in solving the economic/financial crisis, and in coordinating, harmonizing and regulating member states’ policies. The ECB and the European heads of government proved capable of avoiding the crisis getting out of control and provoking the dismantling of the Eurozone and of the entire EU. The problem is that their decision-making power is not adequately counterbalanced by democratic institutions in a system of checks and balances. Since 2010, the Eurozone government leaders have taken relevant decisions, often extended to the other EU member states by the European Council’s approval. In May 2010 the Ecofin (the European Council of finance ministers) adopted a regulation creating the European Financial Stability Mechanism (EFSM). Then, the members of the Council from the Eurozone countries (seventeen at that time) ‘switched hats’, transformed themselves into representatives of their states at an intergovernmental conference, and decided to establish the European Financial Stability Facility (EFSF ) outside the EU legal framework. The EFSF established a private company under Luxembourg law, authorized to negotiate with its seventeen shareholders. In the Ecofin Council of September 2010 the European semester was approved (which came into force in January 2011), a complex procedure by which member states’ yearly budgets have to be submitted to Ecofin and Commission scrutiny and must act according to their recommendations. The Semester’s aim is to prevent crises through the coordination ex ante of the budgetary and economic policies of member states. In March 2011, the European Council signed the Euro-plus Pact among the Eurozone states (but open to some non-euro ones), which committed themselves to adopt measures as the abolition of nationwide labour contracts, the introduction of flex-security in the labour market, and the thorough assessment of the financial sustainability of pensions systems. In December 2010 the European Council approved an amendment to Art. 136 of the Treaty on the Functioning of the European Union (TFEU,

138 A. Martinelli which is the amended 1957 Rome Treaty Establishing the European Community), which allowed the Eurozone states to establish the European Stability Mechanism that replaced the two existing temporary EU funding programmes – the EFSM and the EFSF. It was finally signed in March 2012 by all Eurozone member states’ ambassadors, and came into force only in September of the same year, after the German constitutional Court decided that it was congruent with the German Grund Gesetz. The ESM has the aim of providing financial help under very strict conditionality to member states in trouble. In December 2011, an updated version of the late 1990s Stability and Growth Pact, the so-called Six Pack was proposed by the Commission and approved by the Parliament with the aim of reinforcing the economic and fiscal surveillance of member states. Then in March 2012 the Treaty on Stability, Coordination and Governance of the Economic and Monetary Union was approved by twenty-five of twenty-seven member states, which was neither an amendment to the Lisbon Treaty (because of British opposition to include fiscal integration in the EU Treaty as Germany and France suggested), nor an instance of enhanced cooperation (because this procedure would have required the approval and support of EU supranational institutions), but a new intergovernmental treaty, with its own governance structure. The Treaty includes the well known Fiscal Compact (Title III, article 3 and 4) which requires ratifying member states to enact laws guaranteeing national budgets to be in balance or surplus, defining a balanced budget as one that has a general budget deficit of less than 3 per cent of GDP and a structural deficit of less than either 0.5 per cent or 1 per cent depending on a country’s debt/GDP ratio. The Fiscal Compact also requires that when the ratio of national debt to GDP exceeds 60 per cent the contracting party must reduce it at an average of one-twentieth per year under strict supervision by the European Commission (according to the excessive deficit procedure); if the member state fails to comply with these budgetary requirements and other connected obligations, it can be fined up to 1 per cent of its GDP. All these measures produced an effective exit strategy from the crisis, but with negative consequences for growth and employment and with an uneven distribution of costs and benefits among member states and different components of the European society. It is not true that some countries could go on uncontrolled with their preferred policies, while others had to comply to EU requirements and/or that some got only the benefits and some others only the costs; the Irish, Greek, Spanish, Italian, French governments had to introduce relevant reforms in fiscal, labour, pension policies, but the German government had to accept a basic policy change too, first of all abandoning its contractionary fiscal policy. However, the costs of compliance in terms of unemployment increases and welfare cuts were higher for some countries and social groups than for others. The declared aim of these measures was not only to resolve the crisis – which they did – but also to foster convergence among the European economies and to enhance productivity and growth; and in this latter respect the record is negative, since these measures had the opposite effects of increasing

The EU neoliberal policy regime 139 inequalities among member states and making the recovery of the Eurozone economy weaker and slower. Moreover, the technocratic institutions of the European governance are more open to the influence of financial interests. The ECB played a key role in avoiding the worsening of the sovereign debt crisis with a very assertive policy toward international speculation (Draghi’s July 2012 statement that ‘the ECB is ready to do whatever it takes to preserve the euro’, the ECB Outright Monetary Transactions programme, the increasing surveillance of European banks, the policy of quantitative easing), but it has often given huge sums of money to banks without obtaining their clear commitment to use those funds to finance firms (first of all SMEs) and households. The exit strategy has been effective, but decision-making has been technocratic; and, as Habermas remarks, a technocracy without democratic roots would not be motivated enough to listen to voters’ demands for social security, redistributive policy, quality public goods, whenever they conflict with systemic needs of competitiveness and productivity. A political union ‘for the people’ but not ‘by the people’ could not achieve a socially compatible capitalism. The present model of executive federalism should therefore be replaced by the creation of a supranational democratic community. But how? Habermas and Offe, aware that the road is full of hurdles, give a similar answer: both attribute to Germany the primary responsibility for resolving the European crisis. Germany should take the initiative toward revising the Treaties and accept in return the mutualization of the sovereign debt of indebted states and the implementation of investment programmes for relaunching growth. But why should Germany accept this role? Offe argues that German elites and the German public should consider their long-term interests in preserving an arrangement that has yielded so many benefits at comparatively low cost and sacrifices, and act according to a notion of ‘remedial responsibility’ which postulates that the less an agent (a member state and its economy) has suffered as a consequence of the mistakes collectively made, the greater the share of the burdens the agent must shoulder in compensating others for adverse consequences resulting from the original mistake (2014). Habermas develops a broader historical argument: accepting this role Germany should take the lead in changing the EU policy regime because in so doing it can solve the semihegemonic syndrome that has plagued its modern history, i.e. the condition of being too weak to rule the continent and too strong to accept the status quo. The dilemma of semi-hegemony has been solved only by the European unification that allowed the institutionalization of democracy and the assimilation of the liberal-democratic culture by the German people and that restored the international reputation of the country after the moral catastrophe of Nazism. I think that a united EU is even more important for Germany than for the other European countries. Great democratic German leaders, from Adenauer to Erhard, from Brandt to Kohl, have always made very clear that a strong Germany can exist only within a greater Europe, in close connection with other European nations. The existence of a European Germany is the best antidote to the temptation of a German Europe.

140 A. Martinelli Offe agrees with Habermas on the need of democratic legitimation, since key policy decisions (fiscal compact, inter-state and inter-class redistribution, etc.) must be endowed with the authority and validity provided by European citizens who express their will as shaped and organized by political parties, in general elections and referenda, a political will that the expertise of technocrats cannot possibly substitute for through output legitimacy (2014). However, he also recognizes that the nature of the liberal-democratic process (information gathering and dissemination, will-formation through public debate and deliberation, coalition building, electoral campaigning, etc.) is highly time-consuming compared to decision-making in de-politicized technocratic committees. Expert bodies are necessary because viable response to emergency situations in financial markets must come in a couple of days, but their members must be held democratically accountable, or at least be able to claim legitimacy on the basis of a fiduciary mission democratically granted to them. The role of Germany is certainly crucial as Habermas and Offe argue, but European peoples of all member countries should cooperate toward this end. In this regard, a key role in achieving this project should be played by the intermediate bodies of civil society (political parties, non-governmental organizations, trade unions, epistemic communities) as well as public intellectuals and old and new media. Trade unions can be a key component of a possible alternative policy regime, if they develop an authentic supranational perspective. A significant step in this direction is the resolution A New Path for Europe (ETUC, 2013) which outlines a more solidaristic policy regime for the EU. The document, after denouncing the alarming economic and social situation (increasing inequalities and geographical imbalances, rising unemployment, reduced consumption and collapse of local markets, jeopardized social cohesion, greater political instability, the rise of anti-Euroscepticism) affirms the urgent need to take a new direction for the future, a long-term recovery plan with a set of measures for greater cooperation, such as investing an additional 2 per cent of the EU GDP per year over a ten-year period in direct investments, low interest loans and project bonds, that should kick-start additional private investment and foster growth and employment with a consequent increase in tax revenue and budgeting sustainability. The EU budget and structural funds, and the European Investment Bank (to which unions contribute with their pension funds) should have a central role. The rich and economically stronger countries and groups should contribute more to financing future investments. Another proposal worth considering for upgrading policy effectiveness and supranational democracy in the EU is the Manifesto signed by a group of Paris intellectuals, including Thomas Piketty and Piezze Rosanvallon (Piketty et al., 2014). For the authors the central issue is simple: democracy and public authorities must regain control of and effectively regulate 21st century globalized financial capitalism. A single currency with eighteen different public debts on which the markets can freely speculate, and eighteen tax benefit systems in unbridled

The EU neoliberal policy regime 141 rivalry with each other is not working, and will never work. The Eurozone countries have chosen to share their monetary sovereignty, and hence to give up the weapon of unilateral devaluation, but without developing new common economic, fiscal and budgetary instruments. This no man’s island is the worst of all worlds. Three main proposals are advanced. The first is that the Eurozone countries share their corporate income tax (besides other fiscal measures like establishing a concerted policy to make taxation of income and wealth more progressive and generalizing the automatic exchange of banking information in order to fight tax evasion and havens outside the eurozone). A sovereign European authority should be given the power to establish a common tax base with a minimum rate around 20 per cent and with an additional rate on the order of 10 per cent to be levied and strictly regulated at the federal level. To critics who defend national fiscal sovereignty they answer, first, that they do not propose to pool all member states’ taxes and that, in any case, each country is already not sovereign, since multinationals of every country can pursue ‘fiscal optimization’ by playing on the loopholes and differences between national legislations. This budget capacity would allow the Eurozone to carry out stimulus and investment programmes, with particular attention to infrastructures, research and training, and environment. I consider this a better proposal than the one advanced by the German economists, jurists and political scientists of the Glienicker Gruppe, who suggest the financing of this kind of pro-growth programmes with states’ contributions, since the Manifesto tries to form a transversal social coalition, avoiding an inter-state conflict of interests. A second proposal is the pooling of the debts of Eurozone countries as the best way to conduct an effective and responsible monetary policy, since otherwise speculation on interest rates will occur again and again. The pooling of debt has already de facto begun with the European Stability Mechanism, the emerging banking union, and the ECB Outright Monetary Transactions Programme, which already affect the taxpayers of the Eurozone. Related to this proposal is that of relaunching the ‘European Debt Redemption Fund’, made in late 2011 by the Council of economic experts of the German Chancellor, which called for pooling all debts exceeding the limit of 60 per cent of a country. A necessary requirement is that all these technically appropriate decisions are taken with adequate democratic control. Here we come to the most important proposal: the creation of a Eurozone parliamentary chamber to provide a democratic legitimation for these policy decisions. The debate over EU political institutions has all too often been pushed aside ‘as technical or secondary’; refusing to discuss the ways democracy is organized at the supranational level ultimately means accepting the omnipotence of market forces and abandoning all hope that democracy can regain control of twenty-first century capitalism. The two solutions considered in the Manifesto and in the Glienicker Group are: a) establishing a new Eurozone chamber composed of fractions of the national parliaments of member states

142 A. Martinelli related to the population of each country; and b) forming a sub-unit of the existing European parliament consisting of the members elected in the Eurozone states. In both versions the new chamber would include only representatives from Eurozone countries, but it would be open to all other member states that want to move towards greater political, fiscal and budgetary union. The latter proposal is preferable because it does not further complicate the already overly complex governance of the EU, but whatever form it takes the Eurozone parliament should allow it to surmount the impasse of the unanimous vote, still predominant in EU institutions.

Conclusion Is an alternative policy regime possible in the EU today? And what kind of alternative? I think that policy re-nationalization is a dead-end and that the only way out of the present crisis is the development of a democratic community of states. When I argue for an alternative to the neoliberal policy regime, I mean what Crouch calls critical neoliberalism (2013). This alternative policy regime can and should grow within market capitalism, rejecting, on the one hand, state planning and protectionism in the light of their historical failures and, on the other, oligarchic neoliberalism and market fundamentalism. It can be defined as critical neoliberalism, since it goes together with the essential components of contemporary liberal-democratic polities (political liberalism of rights, constitutional guarantees, separation of powers, competitive elections, media pluralism and a robust public sphere). Critical neoliberalism, while accepting the value and priority of markets in the economy, is aware of their limitations and deficiencies, their failures and inadequacies, such as imperfect competition and asymmetry of information, inability to cope with externalities (growing inequality, environmental damages) and public goods. Critical liberalism is close to regulated capitalism, and it should not be confused with the policy regime of neoliberalism and its ideological justification, i.e. the theory of self-regulating markets in all areas of life. The abstract theory of perfect competitive markets actually goes together with the reality of oligopoly capitalism, the deployment of corporate power (with its threats of ‘capital strike’ and offshoring production), the pervasiveness of global finance, the influence of business lobbying that fosters the policies of the neoliberal policy agenda. In contemporary Europe what kind of social coalition can support the alternative regime of critical neoliberalism, rejecting market fundamentalism but also state planning, opposing supranational technocratic governance but also national protectionism? Since interstate conflicts are equally, or even more, important than class conflicts, what is needed is a ‘multi-speed Europe’ or ‘at variable geometry’ at the EU level and in the various member states an alliance among progressive governments, reformist parties, trade unions, consumers and other interest organizations, environmental NGOs and intellectual communities. The combined effect of the global economic crisis (low growth, high unemployment, huge sovereign debt) and Middle Eastern wars (massive immigration

The EU neoliberal policy regime 143 of asylums-seekers, terrorist attacks of fundamentalist groups in European cities) exacerbate the cleavages within the EU and create a feeding ground for neonationalist parties and movements. The alternative coalition should deploy an effective capacity of consensus formation both at the national and supranational level to counteract the trend of neo-nationalist parties and governments toward the re-nationalization of policies, the restoring of the frontiers (suspending, or even abolishing, the Schengen Treaty) and the restriction of welfare policies. This political alternative must argue that no single European state, however economically strong and/or politically influential, can cope with the problems of the global agenda (economic stagnation, financial turmoil, regional wars, migrations, climate change) more effectively than a developed political union; and that restoring the eroded sovereignty of national governments is an illusion and engaging in inter-state conflicts of interest is a dangerous game, since it destroys trust and cooperation and wastes resources which could be effectively pooled together to face the most urgent problems. If we agree that the best solution is to move toward a deeper integration, how can this be achieved? The most coherent way to build a real union would be a revision of the treaties along the lines of the proposals made by the Duff Committee and the Spinelli Group, first of all, the extension of the co-decisionmaking procedure between the EU Council and Parliament for the whole legislative activity and the abolition of the veto power of member governments (through the substitution of the unanimity principle and with a superqualified majority in the European Council). But the revision of the treaties is an ambitious programme and a long and complex process, which requires a strong generalized consensus of member states (the proposal of the ad hoc Intergovernmental Conference must, in fact, be unanimously approved by all member states and their national parliaments), a consensus that does not presently exist. It is therefore more realistic to envisage a series of incremental steps toward a deeper union, by developing, on the one hand, the potentialities of the 2010 Lisbon Treaty, with special reference to strengthening the powers of the EU Parliament (on budget matters and in promoting common policies on energy, environment, immigration, technological development and security policies); and by adopting, on the other hand, the method of enhanced cooperation by the member states wishing a greater political integration, thus creating a multi-speed Europe. The nineteen member states of the Eurozone already form a monetary union and live the contradiction between a single currency and nineteen sovereign debts and fiscal policies. In order to solve this contradiction the Eurozone member states should add a common macroeconomic policy to the common monetary policy. This aim can be achieved gradually through a series of measures, such as appointing a finance minister who could rely on a certain degree of fiscal sovereignty and budget capacity, completing the banking union and creating a European guarantee on bank deposits, issuing eurobonds for targeted transnational investments, pooling together part of the sovereign debt of member countries. Besides, this common macroeconomic strategy should be matched by a macrosocial strategy, which defines shared rules and minimal

144 A. Martinelli standards for welfare policies and implements common measures like a European unemployment subsidy. This ambitious programme based on enhanced cooperation will lead to a European Union ‘at variable geometry’ or ‘multi-speed’, with a majority of member states engaged into a deeper political integration and a minority refusing to relinquish further portions of their national sovereignty but remaining well entrenched in the single market. Since this programme implies the pragmatic recognition of the key role of the intergovernmental method (the enhanced cooperation can only be decided by national governments), it becomes even more necessary to strengthen, as a counterweight, the communitarian method in the Parliament and in the Commission and to create a Parliament of the Eurozone where decisions are taken by accountable representatives of the European citizens with a transparent definition of rights and duties, costs and benefits. It could evolve into a chamber directly elected by the European citizens in truly pan-European elections on the principle of one person/one vote, and in due time replace the existing parliament altogether with new fiscal and budget powers (according to the historical root of parliamentary democracy). A functioning supranational democracy with a vibrant pan-European public sphere is a crucial requisite for implementing not only effective but also legitimate economic, financial and fiscal policies, and for sustaining and updating the common good of the European ‘social model’. For the people and states of the EU, which are now conflicting over fiscal austerity and inadequate growth, asylum seekers and national borders’ security, the programme I have outlined is ambitious and difficult, but is the only way for Europeans to leave peacefully and compete successfully in a globalized world.

References Amable, B. 2003, The Diversity of Modern Capitalism, Oxford, Oxford University Press. Boyer, R. 2012, The Present Crisis: A Trump for a Renewed Political Economy, Paris, Institut des Ameriques. Boyer, R. 2014, ‘How do polity and economy interact within Regulation Theory? Consequences for policy regimes and reform strategies’, in Magara, H., ed. Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Cheltenham, Edward Elgar. Cavalli, A. and A. Martinelli, 2015, La società europea, Bologna, Il Mulino. Crouch, C. 2008, ‘What will follow the demise of privatised Keynesianism?’ The Political Quarterly, 79(4): 302–315. Crouch, C. 2013, Making Capitalism Fit for Society, London, Polity Press. Culpepper, P.D. 2012, Quiet Politics and Business Power, Cambridge, Cambridge University Press. Eichengreen, B.J. 2007, The European Economy since 1945, Princeton, Princeton University Press. ETUC. 2013, A New Path for Europe. ETUC plan for investment, sustainable growth and quality.

The EU neoliberal policy regime 145 European Commission. 2012, A Blueprint for a Deep and Genuine Economic and Monetary Union: Launching a European Debate, Brussels, European Commission. European Commission. 2015, Completing Europe (The Five Presidents’ Report), Brussels, European Commission. European Union. 2015, Complete the Economic and Monetary Union. Report by the Five Presidents of the European Commission, the European Council, the European Parliament, the European Central Bank and the Eurozone. Gallino, L. 2013, Il colpo di stato di banche e governi. L’attacco alla democrazia in Europa, Turin, Einaudi. Glienicker Group. 2013, ‘Towards a Euro Union. Without more integration, further crises are looming’, Bruegel.org, 18 October. Glyn, Andrew. 2006, Capitalism Unleashed: Finance, Globalization and Welfare, Oxford, Oxford University Press. Gourevitch, P. 1986, Politics in Hard Times, Ithaca, NY, Cornell University Press. Habermas, J. 2012, The Crisis of the European Union, London, Polity Press. Habermas, J. 2013a, ‘Democracy, Solidarity and the European Crisis’, Conference at the University of Leuven, April 26. Habermas, J. 2013b, ‘Demokratie oder Kapitalismus. Von Elend der nationalstaatlichen Fragmentierung in einer kapitalistisch integrieren Weltgesellschaft’, Blatter fur deutsche und internationale Politik, May: 59–70. Hobsbawm, E. 1990, Nations and Nationalism since 1780: A Psychology and Sociology of National Sentiment and Character, London, Kegan Paul. International Monetary Fund. 2016, IMF January 2016 World Economic Outlook, New York. Kitschelt, H. with A.J. McGann. 1995, The Radical Right in Western Europe, Ann Arbor, Michigan University Press. Magara, H., ed. 2014, Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Cheltenham, Edward Elgar. Martinelli, A. 1991, L’azione collettiva degli imprenditori italiani, Milan, Comunità. Martinelli, A. 2007, Transatlantic Divide: Comparing American and European Society, Oxford, Oxford University Press. Martinelli, A. 2013, Mal di nazione. Contro la deriva populista, Milano, Università Bocconi Editore. A synthesis of the book is ‘Nationalism in the 21st Century: A European and United States Comparison’, Quaderni di Scienza politica, XIX, Third Series, VI(3), December 2012: 409–443. Martinelli, A. 2014, ‘A political analysis of the global financial crisis: implications for crisis governance’, in Magara, H., ed. Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Cheltenham, Edward Elgar. Martinelli, A, P. Schmitter and W. Streeck, 1981, ‘L’organizzazione degli ingeressi imprenditoriali’, Stato e mercato, I(3), December: 423–445. Meny, Y. and Y. Surel, 2000, Par le peuple, pour le peuple, Paris, Fayard. OECD Report. 2015, ‘Economic challenges and policy recommendations for the Euro area’. Offe, C. 2014, ‘Europe entrapped: Does the EU have the political capacity to overcome the current crisis?’, European Law Journal, 19(5): 595–611. Offe, C. and H. Wiesenthal, 1980, ‘Two logics of collective action’, in Zeitlin, M., ed. Political Power and Social Theory, Greenwich, CT, JAI Press. Piketty, T. 2013, Le capital au XXI siècle, Paris, Editions du Seuil.

146 A. Martinelli Piketty, T., F. Autret, A. Bozio et al., 2014, ‘Our manifesto for Europe. European Union institutions no longer work. A radical financial and democratic settlement is needed’, The Guardian, May 2. Przeworski, A. 2014, ‘Choices and echoes: stability and change of policy regimes’, in Magara, H., ed. Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Cheltenham, Edward Elgar. Reich, R.B. 2007, Supercapitalism: The Transformation of Business, Democracy and Everyday Life, New York, Alfred A. Knopf. Sandholtz, W. 1993, ‘Choosing union: monetary policy and Maastricht’, International Organization, 47. Schmidt, V. and M. Thatcher, eds. 2013, Resilient Liberalism in Europe’s Political Economy, Cambridge, Cambridge University Press. Schmitter, P. 2013, ‘The crisis of the euro, the crisis of the European Union and the crisis of democracy’, Waseda 1st International Symposium, Growth, Crisis, Democracy. Soskice, D. 1999, ‘Divergent production regimes: coordinated and uncoordinated market economies in the 1980s and 1990s’, in Kitschelt, H., P. Lange, G. Marks and J. Stephens, eds. Continuity and Change in Contemporary Capitalism, Cambridge, Cambridge University Press. Stiglitz, J. 2008, ‘Interview with N. Gardels’, The Huffington Post, 16 September. Streeck, W. 2013, Gekaufte Zeit, Die vertagte Krise des demokratischen Kapitalismus, Berlin, Suhrkamp. Streeck, W. 2014, ‘Taking crisis seriously: capitalism on its way out’, Stato e mercato, 100, April: 45–67. Talani, L.S. 2004, European Political Economy, A Political Science Perspective, London, Ashgate. US Congress. 2011, The Financial Crisis Inquiry Report, Washington, US Government Printing Office. Yamada, T. 2014, ‘Economic crises and growth regimes’, in Magara, H., ed. Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, Cheltenham, Edward Elgar.

7

Political reformation of social coalitions for elections Yuki Yanai

Introduction The decline of political parties has been observed for more than three decades. Studies of political parties have given much evidence and many reasons for the decline. The future of political parties will not be bright unless some drastic changes are made. How can political parties regain popularity and survive in the twenty-first century and thereafter? In the world of politics, governments care about and frequently check (or are forced to care about and check) their popularity. The popularity or approval rating of the government, whether “the government” means a president, a prime minister, or the cabinet as a whole, is frequently surveyed by a variety of news media and research institutes. When its popularity is declining, the government tries to increase it or at least maintain it. One common maneuver to regain popularity is reshuffling the cabinet: the chief of the executive branch sometimes changes the members of her cabinet within her party. However, whether parliamentary or presidential, coalition governments are a norm in democratic countries (Amorim Neto, 2006; Strøm et al., 2008). Accordingly, the executive can change cabinet members not only within the party but also across parties. That is, she can oust some partner parties from the coalition and form a new alliance with some other parties. Given that a new government tends to enjoy a honeymoon, reshuffling the coalition could be one effective measure to counter declining popularity. The term “coalition” most often describes a group of political parties formed to control the government, but each political party, which is usually viewed as a component of a coalition, is itself a coalition. A political party is a social coalition (Aldrich, 1995; Bawn, 1999).1 If a political party is a coalition and if a party can regain its popularity by reshuffling the coalition, political parties as social coalitions should change their constituent members in order to increase their popularity and survive longer. This chapter investigates such possible coalition reshuffling within a political party. It is argued that some political parties are given a chance to reform the social coalition at a time of crisis. I will demonstrate this by examining the survey data compiled by the Comparative Study of Electoral Systems (CSES).

148 Y. Yanai The remainder of this chapter proceeds as follows. The next section discusses the decline of political parties and shows that political parties are in crisis. The third section will consider why an economic crisis can be a good opportunity for political parties to overcome decline. We then examine the survey data and present a few pieces of evidence for the reform of social coalitions by political parties. Finally, we conclude.

Political parties in crisis Political parties have been in decline for almost half a century. In the 1960s, Dennis (1966) found that the American public’s support for political parties was unstable. Since then, a number of studies have shown that political parties are in decline not only in the US but also in Europe (see, e.g., Drummond, 2006; Katz et al., 1992; Mair and van Biezen, 2001; van Biezen et al., 2012).2 A few different aspects of the decline of political parties have been confirmed. First, it is evident that party membership has been dropping at least in some European democracies. Mair and van Biezen (2001) revealed that political parties had lost many members in the 1990s. The average decrease of party membership was about 35 percent in twenty countries over the approximately two decades they examined.3 Van Biezen et al. (2012) extended that research and found that membership decline had continued in the 2000s. As a result, political parties in many European democracies lost a huge number of members in three to four decades. In the United Kingdom, for example, the number of members dropped 68 percent between 1980 and 2008 (van Biezen et al., 2012, p. 34).4 Whiteley and Seyd (1998) presented evidence suggesting that party activism was in decline in the UK, especially among Labour members. A decline in activities and mobilization has been observed in other countries too (Gray and Caul, 2000; Rosenstone and Hansen, 1993; Wattenberg, 2000). Therefore, it is probably safe to say that partisan membership and activism are in decline. Second, at the polls, voters become less constrained by their partisanship than before. The Michigan model of vote choice asserted that most voters cast their votes primarily on the basis of party identification, which is psychological attachment to a political party (Campbell et al., 1960; Lewis-Beck et al., 2008). Even though the main scope of the Michigan model was the US national elections, partisan identification or party ID has been widely used as a main explanatory variable for vote choice at national elections in democracies.5 Even in rational-choice explanations of voting behavior, which have been developed partly to refute the Michigan model,6 hypotheses are normally tested by at the very least controlling for the effects of partisan identification, which means these effects are widely acknowledged. This party ID is, however, weakening (Dalton, 2000; Wattenberg, 2002). Clarke et al. (2009) show that British voters’ partisan identification is highly unstable.7 In other words, it has become harder for political parties to count on the safe votes of their partisan supporters at an election than before. They have to attract more non-partisan or independent voters to win an election and the office. As a consequence, the space where political parties manipulate partisan policies

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has shrunk. Assuming parties would like to set partisan agendas and achieve partisan goals, we can consider this situation to be one of partisan corrosion. In addition to these pieces of direct evidence for party decline, many countries have been experiencing a non-negligible level of decreasing turnout for a long time. Studies of declining turnout have picked out several possible causes of the phenomenon. The most studied factors among them are political, especially electoral, institutions (e.g., Jackman, 1987; Jackman and Miller, 1995; Powell, 1986), education (e.g., Blais et al., 2004; Gallego, 2009; Nagler, 1991; Tenn, 2005), generational change (e.g., Blais et al., 2004; Clarke et al., 2004; Franklin, 2004; Gallego et al., 2009; Miller, 1992; Wattenberg, 2002), and decline of political parties (e.g., Dalton, 2000; Gray and Caul, 2000; Heath, 2007; Rosenstone and Hansen, 1993). Political parties are considered to affect the level of turnout through less active mobilization and weakened partisan attachment among voters. Therefore, the falling level of voter turnout can be seen as indirect evidence of the decline of political parties. Figure 7.1 presents the percentage of respondents who switched their choice of parties between two consecutive elections, based on the three modules of surveys conducted by the Comparative Study of Electoral Systems (2003b, 2013, 2015). The changes shown here were observed between the two lower house elections. That is, vote switching between different kinds of elections,

URY_2009 " GBR_2005 " PRT_2002 * GRC_2009 " PRT_2005 " FIN_2003 *

Source: CSES (2003b, 2013, 2015).

Figure 7.1 Swing voters in the recent lower house elections. Each bar shows the percentage of respondents who voted for different parties in two consecutive elections investigated by CSES Modules 2 through 4 (N = 71,220 in total). The overall mean of the swing is 39 percent.

Vote choice changed (%)

150 Y. Yanai such as between national and local elections or between lower house and upper house elections, was not presented.8 The average vote change among the surveyed elections was 39 percent. In most countries examined, more than a fifth of respondents changed their choice of vote between elections.9 This ratio might not seem large in absolute numbers, but it could be more than enough to change electoral outcomes. At least, it should give a good reason for parties to choose policies that would please not only their partisan core supporters but also swing voters. This could be interpreted as a constraint placed on parties.10 These situations show that political parties are in crisis.11 Consequently, representative democracy, which has functioned as “party democracy” (Dalton et al., 2011; Katz, 1980), might be in crisis. If political parties’ ability, influence, or presence continues declining and eventually parties become defunct, representative democracy will have a hard time maintaining itself.12 Nevertheless, political parties would like to survive. Like any other organizations, political parties have an incentive to maintain themselves. For some people, existence of political parties is itself a benefit. Otherwise, the political parties would not have been created in the first place (Aldrich, 1995). To maintain themselves, political parties need to convince some people to join the party and run for elected office as their candidates. To attract and recruit the people who have both the will and competence to serve as agents or delegates of the electorate, parties should prepare incentives for them. One such incentive is the benefit that stems from an elected office itself; the other is the power to implement desirable, partisan policies. Since the latter incentive comes in only when the government office is secured,13 parties seek to win elections. After all, political parties’ desire for electoral victories persists until they finally die. Therefore, political parties must be waiting for their chance to get over the crisis. How they return to safe ground, if at all possible, is the question.

Where the electorate meets political parties again The current financial crisis, which broke out in the US in 2008 and spread across the advanced industrialized democracies, has affected many ordinary people. In the developed world, most countries experienced a relatively long economic downturn on one level or another. Consequently, people living in these countries were or have been affected by the financial crisis. As is always the case with depression, the number of the unemployed increased. Some even report that the number of suicides significantly increased due to the economic shock (Barr et al., 2012; Reeves et al., 2012; Sawada et al., 2013). In short, the financial crises have devastated the lives of quite a few people. That is, the electorate faces a crisis different from the one that aggravates political parties. The electorate and parties might take appreciably different views of these two types of crises. Most of the electorate, on the one hand, does not care about the political party crisis. The people do not mind whether political parties prosper or die, given the fact that fewer and fewer people belong to or have psychological attachment to a political party. Even if they admire representative

/ /

Political reformation of social coalitions 151

f

democracy, the crisis of political parties, which could eventually shorten the life of indirect, representative democracy, is not highly visible. This notion of widespread ignorance about declining political parties might seem to be an exaggeration, for the left-wing parties and right-wing parties are respectively believed to help different groups of people, and weakening of parties could negatively affect people’s lives. Thus, people should care, at least from a theoretical point of view. However, a fundamental problem underlying the political party crisis is that fewer and fewer voters identify themselves as partisans. Many can no longer decide which party represents their interests. If people apprehended the political party crisis, political parties would not have to struggle in the first place. On the other hand, political parties give thought to the electorate because they can gain by doing so. The literature on economic voting provides strong evidence that the voters reward (punish) the government that improves (worsens) the economy at election time in many different countries.14 Accordingly, the economic crisis facing the people could bare its fangs against the government, and unlike the political party crisis, an economic crisis is readily visible to the electorate. Figure 7.2 shows evidence of how the electorate reacts to the economic outcome. The horizontal axis is GDP growth (%) in the election year, and the

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Figure 7.2 Survey respondents’ retrospective evaluation of the economy and GDP growth (percent). Each point represents an election investigated by CSES Modules 1 and 4. The vertical axis shows the percentage of respondents who thought the economy had gotten worse. The dashed line is the OLS line. The shaded area around the line shows 95 percent confidence interval. The LOESS is shown by the solid curve.

Economy got worse (%)

152 Y. Yanai vertical is the percentage of respondents who thought that the national economy had worsened during the period before the election. As shown by the downward slope and curve in the figure, the retrospective sociotropic evaluation of the national economy correctly reflects the state of the economy measured by GDP growth. More people feel the depression when they are indeed in a depression, and fewer people do so when they are in a growth period. Economic voting theory demonstrates that the incumbent government’s electoral performance hinges on the electorate’s evaluation of its economic record at the time of election. The figure presented shows that that evaluation rightly depends on the economic situation immediately before the election. Hence, an economy worsened by the financial crisis – an external shock – could be a reason to kick the government out of office if the voters think the government is responsible, even though it is actually not. As a result, governing political parties that try to be re-elected are almost forced to please the electorate, and parties in opposition that aim to control the government should appear capable of satisfying voters, especially economically. As just described, the relationship between political parties and the electorate regarding two different crises is asymmetric. The parties, which did not necessarily cause a crisis, are expected to act in a rapid and efficient manner, while the electorate, which was the main cause of another crisis, is concerned only with the crisis that could damage it. Yet political parties have not been disadvantaged. Rather, some parties may have a great opportunity to reform themselves and get through the crisis. Despite their long-term slump, political parties are still alive. In fact, evidence suggests that they still play a central role in democratic nations. Figure 7.3 shows the voters’ opinions about political parties. The CSES survey asked if respondents thought political parties were necessary or not. The figure shows that in almost all countries examined, people tend to think political parties are necessary. While more than a quarter of the respondents strongly believe parties are necessary, up to a fifth of respondents in some countries have strong attitudes against parties.15 This might suggest that people rely on political parties in some sense, though the degree of reliance may have weakened. It is likely that party politics is still the only game in town for modern electoral democracy (Dalton et al., 2011). Even though the electorate generally needs political parties, that may not always be the case. The electorate may want to rely on political parties only in certain circumstances. Such a situation does not likely emerge in a peaceful, prosperous time. In good times, ordinary people do not care about politics much. As long as its society is in good shape, the electorate can be rationally ignorant. It is in a crisis that the electorate raises its political awareness and more likely needs to depend on political parties. Given this perspective, an economic crisis can provide political parties with a chance to reconnect themselves with the electorate.

Political reformation of social coalitions 153 USA 1996UKFT1998TWN-1996 THA"2001 SWE-1998 ÿ

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Figure 7.3 Peoples’ opinion about political parties. Answers to the survey question asking if political parties are necessary. Each respondent was asked to choose one of five possible answers (or “Don’t know”): 1 (necessary) through 5 (not needed). Source: CSES (2003a).

At the same time, political parties cannot count on partisan votes or voters to win an election any more, as described above. Instead of choosing a party based on partisanship or party ID, more and more voters are said to cast ballots based on valence issues, the issues on which most voters agree (Clarke et al., 2004, 2009; Green, 2007; Stokes, 1963). A good economy is an example of a valence issue because it is welcomed by (almost) all voters, whatever a good economy means. The studies of economic voting support this by showing that people reward (punish) the incumbent who made the national economy better (worse). Therefore, political parties have to make an effort to provide the people with a good economy, if they would like to increase their vote share in an election. The key for an electoral victory is whether they can make voters believe that they will deliver the outcome the voters want.

154 Y. Yanai Here is where the effect of the financial crisis comes in. The financial crisis that hit the world in 2008 did not just lead to a very bad economy (Yanai, 2014). Unlike a normal bad economy, which dooms the government’s desire for another tenure, the crisis hinted that the problem stemmed not merely from incompetent governments or governing parties but from malfunctioning of the broader political-economic systems.16 Facing the situation, the voters should be more likely to choose political parties that did not create the status quo politicaleconomic institutions or system than parties that were in the driver’s seat of the failed regime. Therefore, the political parties that can benefit from the crisis should be relatively small parties that are not usually a part of the national government. According to Evans and Tilley (2012), the spread of valence-based voting behavior is not only caused by the weakened partisan attachment among voters, but is also the result of strategic ideological convergence by the main parties. Their argument implies that the policy space has already shrunk and that the main political parties are no longer willing to raise traditional partisan issues. It also confirms the expectation of the thesis of political party decline, although their reasoning does not agree. Since the main parties are getting closer to each other, it might not be ideal for some voters to punish the incumbent for a bad economy by casting a ballot for another main party, because such a vote switch will lead only to a simple government turnover but not to a wide-ranging reform of the socio-economic system. In a non-crisis time, voting for a non-major (or marginal) party can be dangerous. For instance, the Liberal Democratic Party of Japan controlled both chambers of the Diet between 1956 and 1989 without interruption, partly because Japanese voters did not like the alternative Japan Socialist Party, which they feared might overturn the economic system and employ socialist policies. That is, people did not want a radical change when the economy worked well. People are likely to worry about any sort of social revolution and support one of the main parties when society is prosperous and peaceful. However, in a crisis, voters’ perceived risk of casting a ballot for a small party should be lower than usual. It is the socio-economic system (or the policy regime) that causes the economic crisis, and the main political parties are responsible for the malfunctioning system. To change the system, the voters have to push some small parties into government.17 Therefore, the threshold for deviating from the main parties should be lower in a crisis, given that minor parties have an incentive to destroy the old system and create a new one. Based on these considerations, I argue that relatively small parties gain some electoral benefits from an economic crisis. They obtain them by strategically changing their policy positions toward voters who do not cast partisan votes. In other words, these parties try to form or reform their social coalitions by moving their ideal positions in order to win more votes at elections. On the basis of these theoretical considerations, the following hypotheses can be offered:

Political reformation of social coalitions 155 Hypothesis 1: In an economic crisis, voters are more likely to vote for small, third parties than in a non-crisis time. Hypothesis 2: In a given country, relatively small third parties attract the votes of those who move away from the main political parties. The next section tries to find empirical evidence supporting these hypotheses.

Empirical evidence Data In this section, I try to find evidence to support the aforementioned hypotheses. I examine the survey data gathered by the Comparative Study of Electoral Systems (CSES, 2003a, 2003b, 2013, 2015). CSES has so far released full data sets for three modules and a partial data set for one. Module 1 of the survey covers the period 1996–2001; Module 2, 2001–2006; Module 3, 2006–2011; and Module 4, 2011–2016.18 The survey data are examined because we are interested in individual voting behavior and how the voters react to the crisis given the double-sided crises of political parties and the people. CSES is chosen to cover as many countries as possible.19 CSES covers many countries, and it repeats many of the questions over the modules.20 The downside of using the survey data here is that it is hard to make a strong argument about how we measure the parties’ strategic ideological convergence or reform of social coalitions based on the people’s answers. Therefore, I focus on the voter-side behavior and conduct exploratory data analysis here rather than fit a series of parametric regression models. Exploratory analysis of the CSES data To begin, let us consider which swing voters the political parties should target when they strategically shift their policy positions. As shown in Figure 7.1, about 40 percent of voters changed their choice of vote between elections. Figure 7.4 displays what kinds of vote change we observed among voters. Asking which party is closest to each respondent, if any, I classify the vote switchers into three different categories. The first category, shown in the darkest color in the figure, consists of the voters who switched from a party that was not ideologically closest to the party closest to them. We call this shift a to-the-closest switch (or move to in some figures). The second, lightest color in the figure, is those who switched from the party closest to them to another party that was not the closest. This shift is called a from-the-closest switch (or move from in some figures). Lastly, the remaining grey is the voters who switched from a party that was not the closest to another party that was not the closest either or who did

URY 2009TWN 2012TUR"2011 THA 2011 THA 2007SWE 2006SWE 2002-

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Figure 7.4 Decomposition of respondents who changed vote choice. Source: CSES (2003a, 2013, 2015).

Political reformation of social coalitions 157 not have closest parties at all. We call it a nonpartisan swing.21 As shown in Figure 7.4, the majority of shifts in most countries are nonpartisan swings. With a few exceptions, we observe all three types of switches among voters. Assuming that voters did not change their ideological positions,22 one reason we observe “to-the-closest” switches is that some political parties approached the voters and allowed them to cast ballots for the parties that became the closest.23 Therefore, we can detect partial evidence of political parties’ strategic position shifts in “to-the-closest” switches. By contrast, “from-the-closest” switches do not reveal a trace of such behavior. Rather, they would supply an additional piece of evidence for the decline of parties. Furthermore, nonpartisan swings do not help us understand the parties’ policy changes partly because true nonpartisans cannot be target members of a new social coalition, even if they have power to attract parties as predicted by Downsian models. Therefore, we will focus on the “to-the-closest” switchers. To help us understand who are “to-the-closest” switchers, Table 7.1 shows the socio-economic status of the respondents by switch type. Only four main categories, white collar, worker, farmer, and the self-employed, are shown in the table.24 Seemingly, it shows that the “to-the-closest” switchers are mainly white collar. That is true, but it merely reflects the fact that the respondents of the CSES survey, or more generally the voters, are mainly white collar at present. Compared to the other types, more workers belong to the to-the-closest type. The distribution of socio-economic status does not significantly differ from that of the whole sample. Next we will check the distribution of income among the “to-the-closest” switchers. Table 7.2 presents the quintiles of household income by voter type. If the “to-the-closest” switchers are completely randomly assigned, the length of each quintile should be the same 20 percent on average. In fact, it is very close to the random distribution. That is, “to-the-closest” switchers do not come from specific economic groups. Overall, the probability of becoming a “to-theclosest” switcher does not seem to be significantly different whether one is poor or wealthy. It is probably the case that the voters who were attracted by the political parties’ policy changes do not differ from the others. In other words, anyone who does not have strong party identification can be a member of a reformed social coalition. Table 7.1 Socio-economic status by vote-switch type (%) Switch type

Socio-economic status White collar

Worker

Farmer

Self-employed

To-the-closest No switch From-the-closest

47 58 54

35 25 25

6 5 8

13 13 13

Total

56

26

6

13

Source: CSES (2003a, 2013, 2015).

158 Y. Yanai Table 7.2 Household income by vote-switch type (%) Switch type

To-the-closest No switch From-the-closest

Income quintile (%) Bottom 20% 20–40%

40–60%

60–80%

Top 20%

16 17 17

20 22 22

20 20 20

22 20 20

20 21 22

Source: CSES (2003a, 2013, 2015).

Similarly, Table 7.3 shows the respondents’ self-evaluation on the left-right ideological spectrum by voter type. It is evident that people who moved toward their closest parties are slightly more right wing than left wing. This makes us expect that the small parties that enjoy vote swings are mainly on the right. In contrast, people who moved away from their closest parties are more concentrated in the center on the left-right dimension. This implies that the parties that suffer the most when voters change the parties they support between elections are the parties in the center, which includes the main political parties in examined countries.25 Now let us investigate which parties are popular picks to move to. Figure 7.5 presents the relationship between the parties’ vote share among the “to-theclosest” switchers (the vertical axis) and their total vote share (the horizontal axis). The open circles represent the observations before the crisis, and the black triangles during or after the crisis. The gray line is the 45-degree line, and the dotted and solid black lines are the OLS lines for before and during/after the financial crisis, respectively.26 If the parties’ strategic move, which is proxied by the existence of the “to-the-closest” switchers, does not help political parties’ electoral fortunes, we should observe that the points gather around the 45-degree line on average. In fact, they do. Furthermore, the lines for before and during/after the crisis do not differ from each other, up to the range of total vote share. This suggests that policy shifts do not allow the parties to benefit from the crisis at the polls in general. However, we have hypothesized that relatively small parties should gain from such strategic behavior. Figure 7.6 shows the relationship between the parties’ Table 7.3 Self-evaluated left-right position by vote-switch type (%) Switch type

Left-right spectrum Left

Right

To-the-closest No switch From-the-closest

4 4 3

7 7 6

10 10 9

9 10 11

20 23 29

10 10 12

13 13 13

12 12 9

6 4 3

9 7 5

Total

4

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24

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4

7

Source: CSES (2003a, 2013, 2015).

before the crisis

during/after the crisis

Figure 7.5 Political parties’ vote share among the to-the-closest switchers vs. their total vote share for all parties. Source: CSES (2003a, 2013, 2015).

before the crisis during/after the crisis

Figure 7.6 Political parties’ vote share among the to-the-closest switchers vs. their total vote share for the third to fifth largest parties in each election. Source: CSES (2003a, 2013, 2015).

160 Y. Yanai vote share among the “to-the-closest” switchers (the vertical axis) and their total vote share (the horizontal axis) for the parties that won the third- to fifthlargest vote shares in each election. Again, the gray line is the 45-degree line, and the dotted and solid black are the OLS lines for before and during/after the financial crisis, respectively. This figure also shows that the points generally spread around the 45-degree line. However, the post-crisis OLS line is now above the 45-degree line for almost all values of the horizontal axis presented. The 95-percent confidence interval, shown as the shaded area around the OLS line, is well above the dashed line except the area where the total vote share is less than about 7−8 percent. This means that these relatively small, but not very small, parties achieved the levels of vote share by incorporating the “to-theclosest” switchers more than other parties since the financial crisis happened in 2008. In other words, the relatively small parties succeed in forming a coalition that encompasses some swing voters in a time of crisis. Note that this does not necessarily mean that relatively small parties can outperform the larger, main parties in a crisis. Rather, it implies that small parties can take advantage of the double crises and stabilize their support bases by reforming social coalitions through strategic policy shifts. Lastly, Table 7.4 presents the ten political parties that gained the most from “to-the-closest” switchers. Among them, center-left parties are shown to outnumber the parties with other ideological characteristics. It could mean that “to-the-closest” switchers prefer moving to the left to shifting to the right. One possible reason is that those who can no longer trust the current socio-economic systems, which are based on the neoliberal policy regime, would like to have a new policy regime, which should be left or center-left to counter the status quo regime. This evidence suggests that people would like to change policy regimes in a time of crisis, although it is far from conclusive. Table 7.4 Political parties who gained the most from to-the-closest switchers Country

Year

Party

To-the-closest Total (%) (%)

Ratio Ideology

Turkey Poland Germany Mexico Estonia Uruguay New Zealand Germany Montenegro Greece

2011 2011 2009 2012 2011 2009 2011 2013 2012 2012

Nationalist Movement Palikots Movement Left PRD Social Democrat Colorado Party Green Party Alliance90/Green Positive Montenegro Panhellenic Socialist Movement

24 28 40 56 50 29 25 21 13 21

2.93 2.86 2.68 2.39 2.18 2.12 1.96 1.70 1.66 1.63

8 10 15 23 23 13 13 12 8 13

Source: CSES (2013, 2015). Note This table shows only the ten most benefitted parties in the election in and after 2009.

extreme right center right left center left center left center left center left left center left center left

Political reformation of social coalitions 161

Conclusions People living in democracies were strongly hit by the financial crisis, while political parties had been in long-term decline. The financial crisis had many consequences for people’s lives, devastating many people across continents. Naturally, the most important tasks for politicians were to tackle the problem and overcome the crisis. Since it was an urgent task and the electorate could find no agent but political parties, some political parties managed to ride the wave of the financial crisis, treating it as a chance to get through their long-term decline. To achieve this, some parties might have changed their strategic policies. This chapter has provided some evidence for such strategic policy shifts of political parties by analyzing survey data and looking at the behavior of the electorate. It shows that some relatively small parties attracted swing voters and achieved the level of vote shares. Examining the survey data reveals that the swing voters are not different from the core or loyal voters in terms of socioeconomic status or household incomes. Therefore, the possibility of reconstructing the social coalition, which is the support base of the party, is open to many different political parties. Reformation of social coalitions by some small parties should be expected in a crisis. The evidence presented in this chapter suggests that the crisis benefits only relatively small parties. It is indeed a benefit for small parties in the short run. The electorate has an incentive to betray the main, traditional parties in a given country in order to change not only the governing parties but also the socioeconomic system or policy regime of the country. However, in the long run, this could benefit the main political parties too. The worst case scenario for political parties is that people try to and in fact do maintain democracies without political parties. Technological innovation might enable us to have direct democracy where all issues are resolved by popular vote. Small political parties are, after all, political parties. In a time of crisis, the existence of alternatives stops people from running away from political parties. A time of crisis could be an opportunity because voters could pay attention to new, innovative policy ideas provided by small parties, which they might almost completely ignore in a good time. As long as people rely on political parties, whether mainstream or marginal, political parties will survive.

Notes 1 Bawn (1999) calls a political party a “long coalition” as opposed to a coalition government, which is a “short coalition” of political parties. 2 However, evidence against the decline has also been found. For instance, Reiter (1989) argues that political parties are in decline in some countries, but not in others, and that the party-in-decline thesis is an overgeneralization. 3 In order of membership loss, these countries are France, Italy, the UK, Norway, the Czech Republic, Finland, the Netherlands, Austria, Switzerland, Sweden, Denmark, Ireland, Belgium, Germany, Hungary, Portugal, Slovakia, Greece, Spain, and Poland.

162 Y. Yanai

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New democracies, such as Spain and Greece, are shown to have increased party members, while parties in old democracies suffered. The raw number of lost members is 1,158,492, according to van Biezen et al. (2012, p. 34, Table 4). Miller (2010) writes, “Party identification has become one of the ubiquitous concepts in national and cross-national electoral analysis” (p. 21). Another explanation to beat was a sociological one, a.k.a. the Columbia model of vote choice, which had already been undermined or absorbed by the Michigan model. Note that their finding itself was not novel. Unstable partisanship was already found in the 1980s (see, e.g., Särlvik and Crewe, 1983). Vote switching between different kinds of elections is more widespread and far less surprising (see, e.g., Carrubba and Timpone, 2005). This does not show that party switching between elections is more popular now than before. According to the model proposed by Dixit and Londregan (1996), political parties should always weigh the swing voters more than the core voters. However, empirical evidence does not necessarily support that prediction (see, e.g., Stokes et al., 2013), so we do not take the swing voter model as our baseline. Another factor weakening traditional or national political parties might be the EU or Europeanization, for it reduces the national government’s (hence the national parties’) ability to control economic policies independently. The emerging possibility of direct democracy, probably through the Internet and social networking systems, could also be a driving force. We can evaluate it not as a diagnostic of democracy’s decline but as a sign of democracy’s transition, as Schmitter (2015) argues. Either way, democracy as we know it today (or knew it yesterday?) seems to be fading. Or at least when the probability of winning government office is positive. For a summary of the literature, see Lewis-Beck and Stegmaier (2000). Since the data presented here were collected more than a decade ago, it is possible that the voters’ opinion is now distributed differently. Unfortunately, CSES did not ask the same question thereafter, so we cannot examine opinion changes over time, though it might be possible to use other survey results. However, considering that the decline of political parties had already been widely recognized at the time of survey, it is suspected that the decrease of “Necessary” (or increase of “Not Needed”) should not be large. At the very least, it is shown that some people lost their ideological attachment to a party (or parties), while they still thought political parties were an essential element of a democratic society. Hence, the possibility of policy regime changes has been investigated (Magara, this volume). It does not necessarily mean that the government should be formed only with small parties in order to change the status quo political-economic systems. A government consisting of a main party and some small parties could be enough, if the small parties included are those that have not been a part of the government for a certain time and are willing to change the system or regime. Unfortunately, the fourth module of the CSES surveys, which covers the period after the 2008 financial crisis, is only partially released at the time of this writing. Therefore, to obtain more accurate information on the effects of the financial crisis on voting behavior, we should wait for the full release of the data set. It is ideal that we also examine the evidence focusing on political parties’ behavior, but it has to be left for future research because we have yet to construct the data set of party behavior that allows us to compare a large number of countries. Yet some important questions, such as sociotropic evaluation of the economy, do not appear in all modules. People who took nonpartisan swings are not necessarily nonpartisan. Even if a person

Political reformation of social coalitions 163

22

23 24 25 26

has a partisan ideology, he can swing in a nonpartisan way. That is, the adjective nonpartisan qualifies a switch, not a person who switches parties to support. This is not an empirical fact at all. Since it is doubtful that voters fully understand their own policy preferences, it would be safer to assume that each voter’s ideal position has probability distribution. However, we stick to the assumption for simplicity. This is, of course, one of many possibilities. Another obvious reason is that some people voted based on valence against their party IDs and came back to the party of the IDs also because of valence. CSES provides us with the more detailed category variable of socio-economic status, but we focus on only four main categories because other categories differ across countries. The differences are statistically significant based on χ2 test (p < 0.001), but the statistical significance was due mainly to the large sample size (N = 58,493). The largest vote share of one election, the 2002 election in the Czech Republic, looks like an outlier. The similar graph without the outliers is available upon request.

References Aldrich, John H. 1995. Why Parties: The Origin and Transformation of Political Parties in America. Chicago: University of Chicago Press. Amorim Neto, Octavio. 2006. “The Presidential Calculus: Executive Policy Making and Cabinet Formation in the Americas.” Comparative Political Studies 39(May): 415–440. Barr, Ben, David Taylor-Robinson, Alex Scott-Samuel, Martin McKee, and David Stuckler. 2012. “Suicides Associated with the 2008–10 Economic Recession in England: Time Trend Analysis.” BMJ 345(January): e5142. Bawn, Kathleen. 1999. “Constructing ‘Us’: Ideology, Coalition Politics, and False Consciousness.” American Journal of Political Science 43(April): 303–334. Blais, André, Elisabeth Gidengil, Neil Nevitte, and Richard Nadeau. 2004. “Where Does Turnout Decline Come from?” European Journal of Political Research 43: 221–236. Campbell, Angus, Philip E. Converse, Warren E. Miller, and Donald E. Stokes. 1960. The American Voter. New York: John Wiley and Sons. Carrubba, Cliff, and Richard J. Timpone. 2005. “Explaining Vote Switching Across Firstand Second-Order Elections: Evidence From Europe.” Comparative Political Studies 38(April): 260–281. Clarke, Harold D., David Sanders, Marianne C. Stewart, and Paul F. Whiteley. 2004. Political Choice in Britain. Oxford: Oxford University Press. Clarke, Harold D., David Sanders, Marianne C. Stewart, and Paul F. Whiteley. 2009. Performance Politics and the British Voters. Cambridge: Cambridge University Press. Comparative Study of Electoral Systems (CSES; www.cses.org). 2003a. CSES Module 1 Full Release [dataset]. Ann Arbor, MI: University of Michigan, Center for Political Studies. August 4, 2003 version. Comparative Study of Electoral Systems (CSES; www.cses.org). 2003b. CSES Module 2 Full Release [dataset]. June 27, 2003 version. Comparative Study of Electoral Systems (CSES; www.cses.org). 2013. CSES Module 3 Full Release [dataset]. March 27, 2013 version. Comparative Study of Electoral Systems (CSES; www.cses.org). 2015. CSES Module 4 Second Advance Release [dataset]. March 20, 2015 version. Dalton, Russell J. 2000. “The Decline of Party Identification.” In Parties without Parti-

164 Y. Yanai sans: Political Change in Advanced Industrial Democracies, eds. Russell J. Dalton and Martin P. Wattenberg. Oxford: Oxford University Press, pp. 19–36. Dalton, Russell J., David M. Farrell, and Ian McAllister. 2011. Political Parties and Democratic Linkage: How Parties Organize Democracy. Oxford: Oxford University Press. Dennis, Jack. 1966. “Support for the Party System by the Mass Public.” American Political Science Review 60(3): 600–615. Dixit, Avinash, and John Londregan. 1996. “The Determinants of Success of Special Interests in Redistributed Politics.” Journal of Politics 58(4): 1132–1155. Drummond, Andrew J. 2006. “Electoral Volatility and Party Decline in Western Democracies: 1970–1995.” Political Studies 54: 628–647. Evans, Geoffrey, and James Tilley. 2012. “How Parties Shape Class Politics: Explaining the Decline of the Class Basis of Party Support.” British Journal of Political Science 42(July): 137–161. Franklin, Mark N. 2004. Voter Turnout and the Dynamics of Electoral Competition in Established Democracies Since 1945. New York: Cambridge University Press. Gallego, Aina. 2009. “Where Else Does Turnout Decline Come From? Education, Age, Generation and Period Effects in Three European Countries.” Scandinavian Political Studies 32(March): 23–44. Gallego, Aina, Eva Anduiza, Joan Font, and Guillem Rico. 2009. “Number of Parties and Voter Turnout: Evidence from Spain.” Paper presented at the Annual Meeting of the Midwest Political Science Association, Chicago, IL, 2–5 April 2009. Gray, Mark, and Miki Caul. 2000. “Declining Voter Turnout in Advanced Industrial Democracies, 1950 to 1997: The Effects of Declining Group Mobilization.” Comparative Political Studies 33(November): 1091–1122. Green, Jane. 2007. “When Voters and Parties Agree: Valence Issues and Party Competition.” Political Studies 55(October): 629–655. Heath, Oliver. 2007. “Explaining Turnout Decline in Britain, 1964−2005: Party Identification and the Political Context.” Political Behavior 29(August): 493–516. Jackman, Robert W. 1987. “Political Institutions and Voter Turnout in the Industrial Democracies.” American Political Science Review 81(2): 405–423. Jackman, Robert W., and Ross A. Miller. 1995. “Voter Turnout in the Industrial Democracies during the 1980s.” Comparative Political Studies 27(4): 467–492. Katz, Richard S. 1980. A Theory of Political Parties and Electoral Systems. Baltimore: Johns Hopkins University Press. Katz, Richard S., Peter Mair, Luciano Bardi, Lars Bille, Kris Deschouwer, David Farrell, Ruud Koole, Leonardo Morlino, Wolfgang Muller, Jon Pierre, Thomas Poguntke, Jan Sundberg, Lars Svasand, Hella Velde, Paul Webb, and Anders Widfeldt. 1992. “The Membership of Political Parties in European Democracies, 1960–1990.” European Journal of Political Research 22(October): 329–345. Lewis-Beck, Michael S., and Mary Stegmaier. 2000. “Economic Determinants of Electoral Outcomes.” Annual Review of Political Science 3: 183–219. Lewis-Beck, Michael S., William G. Jacoby, Helmut Norpoth, and Herbert F. Weisberg. 2008. The American Voter Revisited. Ann Arbor: University of Michigan Press. Mair, Peter, and Ingrid van Biezen. 2001. “Party Membership in Twenty European Democracies, 1980–2000.” Party Politics 7(January): 5–21. Miller, Warren E. 1992. “The Puzzle Transformed: Explaining Declining Turnout.” Political Behavior 14(March): 1–43. Miller, Warren E. 2010. “The Cross-National Use of Party Identification as a Stimulus to

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8

Developmental class coalitions Historical experiences and prospects1 Luiz Carlos Bresser-Pereira and Marcus Ianoni

Since the 2008 global financial collapse, neoliberal capitalism and its associated class coalition – the rentier–financier coalition – have been in crisis, because economic liberalism has proved to be a highly unstable form of organizing capitalism, unable to provide high rates of growth, and also generating increasing inequality. Given that the historical alternative to economic liberalism is developmentalism, and that the political capability of a given developmental state depends on the existence of a developmental class coalition supporting and legitimizing it, will rich countries be able to rebuild a developmental class coalition and resume satisfactory rates of growth, or will they just muddle through and grow slowly in the first part of the twenty-first century? In responding to this question, we assume that the economic and social organization of modern societies can vary on a spectrum from statism to economic liberalism, with developmentalism in between these two points.2 Capitalism is statist when the state attempts to coordinate the whole economy; it is developmental when the state adopts moderate economic nationalism, coordinates the non-competitive part of the economy and pursues an active macroeconomic policy, while the market coordinates the competitive part of the economy; and capitalism is liberal when the state limits itself to guaranteeing property rights and contracts and keeping the public budget balanced, and leaves everything else to be coordinated by the market.3 In light of these definitions and the historical experience that we discuss in this chapter, our response to the question is a positive one: there is a possibility that the more developed countries will move again from economic liberalism to developmentalism, but this developmentalism will not simply reproduce the social democratic and developmental class coalition which was dominant in the 30 years after World War II; it may well be developmental and conservative. Historically, in the initial stage of development – the stage when each nationstate undergoes its national and industrial revolution – the class coalition is invariably developmental. Britain, Belgium and France made their industrial revolutions under mercantilist coalitions, which were the first historical expression of a developmental class coalition. Yet, once the Industrial Revolution had completed the capitalist revolution in each country, economic liberalism took over as a reaction against the privileges and economic distortions that plagued

Developmental class coalitions 167 mercantilism. Economic growth is also consistent with a liberal state and liberal capitalism (liberal in economic terms), but, given that investment in the infrastructure will be impaired by lack of the required planning, that modern capitalist economies are extraordinarily complex, and that growth will necessarily be subjected to high financial instability, economic liberalism will ultimately result in lower rates of growth than could be achieved by a capably managed developmental coalition. Besides, there is in capitalism a tendency to increasing inequality, which only the state is able to neutralize. Thus, it is reasonable to say that economic liberalism is not the default form of political and economic organization of capitalism; rather, a developmental form of state, which is also democratic, social and environmental, plays this role. In sum, in the historical periods in which economic liberalism was dominant, its distinctive characteristics included frequent financial crises, low growth rates and increasing inequality. Developmental coalitions may be authoritarian or democratic, conservative or progressive, narrow or broad, successful or unsuccessful. As the developmental class coalition comprises entrepreneurs and workers it is a wide-ranging one, and it implies a social compromise or, more than that, a corporatist social agreement among business entrepreneurs, the technobureaucratic class (particularly the public bureaucracy) and the working class, which includes employees and, more broadly, the relatively poor. The alternative liberal class coalition usually comprises rentier capitalists, including the rentier middle class or the traditional middle class, the financiers who manage their wealth, and the top management of large business enterprises; it is, by definition, a narrow coalition. Note that we are using here a broad concept of ‘workers’ or ‘working class’. This is necessary partly because in contemporary capitalism workers have lost the relative political unity that they had in the past, and partly because it is service employees in particular who form the bulk of the relatively poor in each society. In the complex technobureaucratic societies of today, the political consciousness of the workers is not formed simply by their subordinate position in the social and technical relations of production, both of which are private and controlled by either capitalists or technobureaucrats; other factors, such as hostility to immigrants, also play a role. But technobureaucratic capitalism continues to be divided between the poor and the rich, between the workers on the one hand and the owners of capital and the managers of organizations on the other.4 In the development process, class coalitions are an alternative as well as complementary to class struggle. Class struggles are inherent to capitalism, but they are never resolved in so far as the classless society that they would ideally lead to remains a distant utopia. It is impossible to understand modern societies without reference to the class struggle that is always present, but developmental class coalitions usually play a key role in moments of great change in the history of capitalism. In every country they presided over the formation of the nationstate and the Industrial Revolution, and they were present in most periods of rapid economic growth such as the period just after World War II, when social and developmental class coalitions led to a social democratic political

168 L. C. Bresser-Pereira and M. Ianoni compromise. In these key moments, the productive or entrepreneurial capitalists were in command in association with the public bureaucracy and the workers; the participation of business entrepreneurs is necessary because developmental coalitions are subject to the logic of capitalist development: it is impossible to govern capitalism without the consent of the capitalists. In the early history of capitalism, beginning with the absolutist state, developmental class coalitions were narrow and authoritarian, but today, when modern societies are democratic, only increasingly broad developmental class coalitions will be able to guarantee the legitimacy of the state and its government. This means that the industrialists or, more broadly, the business entrepreneurs must share the economic surplus with the technobureaucratic class, whose importance in modern societies is today impossible to deny, and with the working class, whose wages can no longer be viewed simply as the cost of the reproduction of manpower. In other words, as the process of democratization advances in each national society, the social compromise that characterizes the developmental class coalition must become broader. In the early phases of development it is narrow and conservative, because it includes only the industrialists and the public bureaucracy; when it becomes more complex and democratic, the class coalition encompasses a wide spectrum of social demands and interests because, besides the productive (not just industrial) capitalists and the public bureaucracy, it embraces sections of the technobureaucratic or professional middle class, the employees and the workers. Yet, if the hegemonic coalition is liberal rather than developmental, as it was in the neoliberal years (from around 1979 to 2008), the political compromise will be much narrower, essentially limited to the top rentier capitalists, the financiers and the heads of major business enterprises, even though the complex structure of modern society requires a broad political compromise. To developmental class coalitions correspond a developmental state and developmental capitalism, which combine state and market coordination of the economy. The first challenge that a developmental class coalition faces in each country is to form the nation-state and to industrialize the economy: in other words, to achieve its capitalist revolution.5 At first the class coalition is necessarily developmental, since what we learn from history is that no industrial revolution has been achieved without the active support of the state. History presents us with four paradigmatic cases of capitalist revolutions: Britain’s in the second part of the eighteenth century; Germany’s industrialization led by Bismarck and Japan’s industrial revolution after the Meiji Restoration in the second part of the nineteenth century; and Brazil’s national and industrial revolution under Vargas in the mid-twentieth century. In all these industrial revolutions the state played a strategic economic role. The initial coalitions were narrow and authoritarian. Britain’s Industrial Revolution was the paradigmatic case of a mercantilist class coalition, led by the absolute monarch and comprising the courtesan and patrimonial aristocracy living from the treasury of the state and the emerging merchant bourgeoisie.6 Bismarck’s Germany was the classical case of late development in the core of capitalism. Japan after the Meiji Restoration

Developmental class coalitions 169 was the first case of a country industrializing while confronting the modern imperialism of the countries that developed first, particularly Britain and France; and Brazil’s capitalist revolution between 1930 and 1980 was the paradigmatic case of an industrial revolution on the periphery of world capitalism. In the United Kingdom, France and Belgium, which have experienced all the phases of capitalism, after their developmental industrial revolution a liberal class coalition and a liberal state were dominant for the hundred years or so after 1830. In this period, the ruling class and its liberal economists believed that a novel institution – the emerging national markets – would be able to fully coordinate the economy, whereas the gold standard would guarantee stable economic relations among countries. The liberal coalition was still narrow, embracing the bourgeoisie and the declining aristocracy, and it was authoritarian because it was based on a limited suffrage; but it assured the rule of law.7 The first liberal democracies materialized at the end of the nineteenth century, when the workers and socialist political parties finally secured the universal suffrage (Przeworski 1985: ch. 1). But, as Schumpeter (1942) acutely observed, liberal democracy was a minimal form of representative democracy, where the voters were active only during the elections. Nevertheless, the guarantee of universal suffrage was a major and subversive historical change, because it empowered the people. Thus, the era of pure liberal democracy was over. Just as the guarantee of civil rights and constitutionalism marked the transition from the absolute to the liberal state, universal suffrage signified the transition from the liberal to the democratic state. And it opened the way for a further transition, that from liberal democracy to social democracy and the welfare state, to the type of democracy that has characterized the rich European countries since World War II. Principally in Western and Northern Europe, progressive or social democracy emerged because voters required from the state better standards of living, which soon were associated with free and substantial social services provided by the state.8 In the 1930s, after a century of economic liberalism whose economic outcomes had been modest to say the least (in the period 1830–1929 per capita income in Britain and France grew on average by 1.2 per cent per annum), the liberal economic arrangements fell into a deep crisis, which presented a new challenge to the political and business elites and to the trade unions. It was clear by now that, on the one hand, the state should have a bigger say in the growth process, and, on the other hand, wages should and could grow along with productivity – should, because this was what organized labour eventually demanded, and could, because, given neutral technical progress (a constant output–capital ratio), wages growing along with productivity were consistent with a profit rate that allowed business enterprises to continue investing. The joint objective of business industrialists and workers was therefore to achieve growth with financial stability by combining moderate state intervention with the market. In consequence, the new class coalition or the new class compromise that emerged from the Great Depression and World War II was not only social democratic but also developmental. The Fordist regime encompassed

170 L. C. Bresser-Pereira and M. Ianoni the New Deal, in the US, and the Golden Years of Capitalism; it was the time of a second developmental class coalition and of a new policy regime. The high point in time of each class coalition corresponds to a ‘policy regime’, a concept that was introduced by Adam Przeworski (2001) to identify circumstances in which it seems to most that there is only one way to run capitalism; in which political parties adopt similar policies in office regardless of their ideological leanings; and in which a given class coalition exercises full ideological hegemony, which means that it is able to set common political narratives and common assessments of reality. After World War II, the Golden Years of Capitalism was the time of a developmental and social democratic policy regime, whereas the Neoliberal Years of Capitalism between 1989 and 2008 (particularly the 1990s) were the time of a radical attempt to transform this socialdemocratic and developmental regime into economic liberalism. Our task in this chapter is to review the past experiences of developmental coalitions, to enquire whether there is room for a new developmental class coalition, and, if so, whether it will be progressive or conservative. Our first conclusion is that there is some room for a new developmental class coalition, but most likely it will be conservative, not progressive. Our second conclusion is that even this conservative developmental coalition may be not possible, because developmental class coalitions make sense only in the framework of the nationstate. Now, the elites of rich countries have lost most of their basic solidarity with the people, because their incomes have ceased to originate mainly in the domestic markets of the nation-states with which individual multinational enterprises are associated. This fact creates a contradiction between governments, which remain nationalist because they are elected by people whose lives depend on the growth of their domestic markets, and rentier capitalists and financiers, who depend ever less on their domestic markets and so are ever less committed to their nation-states. In this chapter, we do not discuss the political regression that neoliberalism represented, but we present in the first three sections three historical cases of developmental class coalitions: the case of mercantilist capitalism, which gave rise to the Industrial Revolution of Britain, Belgium and France; the case of Bismarck’s Germany; and the case of the social democratic and developmental class coalitions after World War II. Besides showing how these coalitions were successful, we underlie the role of the first two in starting the Industrial Revolution, and of the last one in being a more efficient and less unequal form of political and economic organization of capitalism than economic liberalism. Our assumption is that a developmental coalition makes the state more capable of performing its coordinating role together with the market, because in democratic societies economic growth depends on the articulation of the values and objectives of social actors, which only a meaningful historical narrative and a national development strategy provide, and these in turn can be elaborated only by a developmental class coalition. But the new developmental class coalition does not need to be progressive; a conservative one may be equally efficient. In the final section, we tentatively discuss the prospects of a new developmental

Developmental class coalitions 171 class coalition becoming hegemonic in rich and middle-income countries in the near future, and whether any such social agreement would be progressive or conservative.

The mercantilist coalition Since the early stage of Britain’s capitalist development, certain emerging rural and urban classes allied themselves with certain officials of the modern state that was coming into being, and together transformed the traditional agrarian and feudalistic society into a capitalist one. These class coalitions varied over time and space, and they experienced contradictions, compromises, conflicts and wars between ancient and modern forces. Europe was in the throes of a major transition from feudalism to capitalism that lasted for several centuries. The modern nation-state, first in an absolutist form and then in a constitutional and liberal form, was the major political creation of the capitalist revolution, while the Industrial Revolution, which was preceded by mercantilism, was the major economic achievement. This modernization process transformed the feudal economic and political system into a market economy, and the corresponding decentralized political system into a new, powerful and centralized institution, the capitalist state, and into sovereign nations-states each comprising a nation, a state and a territory. Once this double transition of the capitalist revolution was completed in each nation-state, the main features of capitalist society were present. Whereas the political form of organizing capitalism in this transition from feudalism to capitalism was the absolute state, the economic form was mercantilism.9 The class coalitions supporting these broad historical changes are often ignored by social scientists. A major exception is the late Barrington Moore Jr. (1966), who maintains that there were three historical routes to modernization, and that the respective political coalitions explain the results. The three routes were: bourgeois revolutions (Britain, France and the US), revolutions from above (Germany and Japan) and communist revolutions (Russia and China). These routes differ according to the coalition that supported each of them. In this section we are interested in the first route; in the next we will discuss the German or Bismarckian one. The first historical case of a developmental coalition and developmental state is the mercantilist coalition. It led the more successful absolute states to adopt developmental policies that drove economic growth. We consider here the British case. The mercantilist phase of capitalism started with the absolute state. Although the Glorious Revolution led England to adopt a constitutional monarchy, mercantilist policies continued until around 1830.10 They were a key factor in strengthening state capacity, in accelerating the primitive accumulation of capital, and in promoting the Industrial Revolution in that country. The British liberal economy strengthened only after the first decades of the nineteenth century. ‘It was the maturation of the DS [developmental state] that made a policy of free trade optimal for the British ruling classes. Without the

172 L. C. Bresser-Pereira and M. Ianoni success of the former, such an outcome might have remained highly problematic’ (Bagchi, 2000: 404). State power does not originate within the state apparatus in isolation from society. The state is a social relation (Poulantzas, 1978); its power depends on political legitimacy. Addressing the Puritan Revolution, Marx (1848) said that it was supported by a political alliance: ‘In 1648 the bourgeoisie was allied with the modern aristocracy against the monarchy, the feudal aristocracy and the established church.’ As for the Glorious Revolution, Marx (1867: 505) considered that it brought into power, along with William of Orange, the landlord and capitalist appropriators of surplus value … Besides, the new landed aristocracy was the natural ally of the new bankocracy, of the newly-hatched haute finance, and of the large manufacturers, then depending on protective duties. Addressing English mercantilism at the beginning of 1700s, Mokyr and Nye (2007: 6) identify a ‘grand coalition between big landowners and the emerging urban-commercial class (with particular prominence of the financial interests) as represented by the dominant Whig party’. After the Glorious Revolution, ‘the new unity of purpose between monarch and Parliament led to a search for new revenue and to a jump in duties on foreign trade’ (Thomas and McCloskey, 1981: 93). This grand coalition ‘divided the surpluses generated by the new economy’ (ibid.: 5). In mercantilist England, civil society was important in assuring state stability, starting with the self-organization of landowners, especially from the 1800s (McNally, 1990). In England, large landowners, many of them belonging to the nobility, became involved in capitalist land use. Actors who demanded and supported modernization had more to gain from the new economic arrangements than from maintaining the traditional status quo. The grand coalition was an alliance between Big Land and Big Commerce. At that time the bourgeoisie was a class essentially linked to commercial capital. At the beginning of the 1700s, 68 per cent of workers were in agriculture (Thomas and McCloskey, 1981). The mercantilist state supported the agricultural revolution of the sixteenth century, which, together with the dispossession of peasants from their land opened room for the emergence of the worker who owned no means of production, whereas labour laws guaranteed to capitalists low wage levels and prevented the emergence of trade unions.11 Simultaneously, the wars waged by monarchs, financed by taxes and by loans provided by the merchant class, combined with the end of feudal serfdom, the expropriation of small farmers and rise of manufacture, created the conditions for the formation and development of a large domestic market – an essential condition for the Industrial Revolution and the capitalist economic system that this revolution would eventually establish. In this historical process of the primitive accumulation of capital, there were both winners and losers. The losers were feudal lords

Developmental class coalitions 173 and the Church (the previous ruling coalition) and small farmers, small country gentlemen, workers in manufacturing industry, independent artisans, small merchants and producers who lacked the means to access the national and even less the international market. The different momenta of primitive accumulation distribute themselves now, more or less in chronological order, particularly over Spain, Portugal, Holland, France, and England. In England at the end of the 17th century, they arrive at a systematical combination, embracing the colonies, the national debt, the modern mode of taxation, and the protectionist system. These methods depend in part on brute force, e.g., the colonial system. But, they all employ the power of the state, the concentrated and organized force of society, to hasten, hot-house fashion, the process of transformation of the feudal mode of production into the capitalist mode, and to shorten the transition. (Marx, 1867: 528) The mercantilist state implemented key policies to meet the interests of the mercantile coalition. As the mercantile system was structured on trade, the mercantilist state implemented a commercial policy of promoting foreign and domestic trade.12 It also promoted manufacturing industry through a protectionist trade policy. The objective of the monarch and of the large traders was a positive trade balance. Given the importance of international trade and the protectionist policies implemented by the major European powers, mercantilism involved competition between firms, and mainly between nation-states, which, in some cases, resulted in wars, like the Anglo-Dutch Wars. During the Puritan Revolution, Cromwell and the Parliament soon took the initiative of boosting England’s foreign trade, which lagged behind that of the Dutch and the Spanish. Regulatory policies were adopted to ensure that English merchant fleet enjoyed a monopoly of English trade (exports and imports). The Navigation Acts were the main regulatory instruments of the protectionist trade policy. The merchant fleet was the fundamental means of commerce of the big English merchants. England had the most efficient merchant fleet in the world. The regulations were of four types: first, the nationality of the crews and the ownership of vessels in which foreign trade could be carried; second, the destinations to which certain colonial goods could be shipped; third, an elaborate system of rebates, drawbacks, import and export bounties and export taxes in aid of particular industries at home; and, fourth, the manufactures in which the colonies were allowed to engage. (Thomas and McCloskey 1981: 94) Mercantilism is inseparable from colonialism. The increase in England’s international trade depended on demand from continental Europe and on the

174 L. C. Bresser-Pereira and M. Ianoni colonial system that provided raw material at low cost and captive markets for the mother country’s goods. The high tariffs on European markets led England to seek new export markets in its colonial possessions. This resulted in a policy of colonial expansion through which the mercantilist state achieved control of international markets outside Europe. Once acquired, a colony was subjected to mercantilist trade with the mother country. The colonial system ripened, like a hot-house, trade and navigation. The ‘societies Monopolia’ of Luther were powerful levers for concentration of capital. The colonies secured a market for the budding manufactures, and, through the monopoly of the market, an increased accumulation. The treasures captured outside Europe by undisguised looting, enslavement, and murder, floated back to the mother-country and were there turned into capital. (Marx 1867: 529) Referring to the 1700s, Thomas and McCloskey (1981: 91) say: English combined exports to the North American colonies and the West Indies expanded by an astounding 2300 per cent over the century. The Atlantic colonies at the end of the century took over half of all the goods exported from the mother country. The mother country engaged in unfair or unbalanced trade with its colonies; she exported to continental Europe manufactured goods produced with raw materials imported from them. Once the positive trade balance policy required colonial expansion, the mercantilist states adopted a policy of warfare to achieve it. There was then a Hobbesian international military order. One of the main instruments of England’s military policy to achieve mercantilist gains was the Royal Navy. In 1664, for instance, the Royal Navy captured New Amsterdam, then a Dutch settlement in North America. The Royal Navy resulted from a program of warship building and fund-raising to finance it. The naval monopoly was not the only monopoly exercised by the mercantilist state. Referring to the history of the modern state, Marx (1871) writes, ‘its development remained clogged by all manner of medieval rubbish, seigniorial rights, local privileges, municipal and guild monopolies, and provincial constitutions’.13 With the growth of a nationally integrated economy, local monopolies disappeared or were acquired, but other monopolies expanded. The East India Company, which acquired monopoly from the British mercantilist state, resulted from the demands of rich merchants and aristocrats who shared this privilege; later it became a joint-stock enterprise.14 Furthermore, through The Statute of Monopolies the monarch granted to some industries and businessmen letters of protection to develop productive activities with usually new and foreign techniques. The mercantilist state developed a system of public credit and taxation

Developmental class coalitions 175 that provided the fiscal resources it needed to implement its interventions and military activities. Mercantilism was the setup period of ‘the world system’ (Wallerstein, 1980). The expansion of merchant capitalism occurred in tandem with technical innovations and changes in the structure and policies of the West European mercantilist states. The mercantilist state introduced innovations in administrative practices and the taxation system. An effective system of taxation was implemented in England; in 1760 it extracted around 20 per cent of the nation’s output. A financial system was also required. The Bank of England was set up in 1694; it was privately owned but, being close to the government, it made loans to the public sector, and was authorized to issue and trade in government bonds: in other words, it performed the roles of a central bank. ‘The Bank of England, the East India Company and the South Sea Company provided the bastion of public credit which allowed the British state to raise loans at a low rate during wars as well as in peacetime’ (Bagchi 2000: 407).15 We maintain that mercantilism was the first model of developmentalism in so far as it was based on a developmental class coalition. Originally, the mercantile bourgeoisie acquired its wealth from the long-distance trade in luxury goods, but soon, with the rise of manufactures, it became interested in forming a secure and large domestic market, which would make possible the Industrial Revolution in so far as it induced the mass production of cheap industrial goods. With this medium-term objective in mind, while reaping short-term gains from the mercantilist monopolies awarded by the monarch, the mercantile bourgeoisie financed with its taxes the wars led by the monarch that defined the territory of the first nation-states and opened the way for the Industrial Revolution. Was the mercantilist system as bad as liberal economists, following Adam Smith, insist it was? The simple fact that the mercantilist period was the lever of the Industrial Revolution for England, Belgium and France shows that it was highly successful.

The Bismarckian coalition Another important experience of developmental coalitions was the Bismarckian coalition, which supported the German Industrial Revolution in the nineteenth century (Veblen, 1915). Germany’s fast industrialization – which, starting from a condition of economic backwardness, by 1914 had made Germany the world’s second-largest industrial power – resulted from a complex process of change. We will highlight some explanatory factors of an economic, political, ideological and military nature. In 1834, the Zollverein was formed. This was a customs union that eliminated trade barriers among the German states and expanded the market for industrial products. Referring to this phase of national unification and industrialization, Veblen (ibid.: 70) wrote: The states that got their material means of life from the industry of the German people drew together into the Customs Union, presently after into

176 L. C. Bresser-Pereira and M. Ianoni the North-German Confederation, and finally into the Empire. The good effects of this move, in the way of heightened efficiency and therefore of material prosperity, are well enough known, and they have been shown with sufficient publicity and commendation by many writers competent to speak of such matters. The most striking item in the reform so wrought is the removal of tariff frontiers and similar interstitial obstacles to trade and communication. The Zollverein led to prosperity, and was an important step towards the unification of Germany which occurred in 1871, because, as well as being an economic alliance between the hitherto politically independent German states, it encouraged business entrepreneurs to provide political support for the formation of this new and powerful nation-state. In both the Zollverein and German unification, the Kingdom of Prussia played a leading political role in transforming the confederate form of the political superstructure into a federation, and an equally prominent economic role in achieving Germany’s Industrial Revolution. The wave of revolutions in 1848 Europe threw up popular and liberal demands, including in some German states, like Prussia, where they were successfully resisted by the conservatives. Among them was Otto von Bismarck, then a young Junker political leader. Although the King of Prussia did not implement the promised liberal reforms, the middle classes’ desire for national unification, as expressed in 1848, did not disappear. Bismarck orchestrated that unification with political skill and fostered the interests of Prussia. As Veblen (1915: 60) remarked, when Germany so comes into the complex of commercial and industrial Europe in the nineteenth century it is under the lead of the Prussian state, not under that of the south-German or Austrian peoples; and the lead of Prussia is wholly of a political character and is directed to political ends. Prussia contributed nothing else than a political (warlike) force and political ambitions. German cultural elements, other than warlike and political, come from the countries farther to the south and west. But this contribution from the Prussian side has been very consequential. In view of the strong political power of the large landowners and the labourrepressive agrarian system, Moore Jr. (1966: 433) dubbed the transformation of German agrarian society into an urban and industrial society a ‘conservative modernization’, which was, at first, ‘unfavourable to the growth of free institutions of the nineteenth-century Western variety’. Nationalism is the ideological source of the nation-state. German nationalism dates back to ‘Pan-Germanism’, a movement that aimed to unify in a nationstate the German-speaking peoples of Europe. It emerged in the context of the Napoleonic Wars, during which France invaded the German states in 1806 and established the Confederation of the Rhine. Another important moment in the history of Pan-Germanism was the Revolution of 1848, which enhanced liberal

Developmental class coalitions 177 nationalism in various states of the German Confederation, whose strongest members were the Kingdom of Prussia and the Austrian Empire. The Kulturkampf, an anti-Catholic policy implemented by Bismarck from 1872 on, has also been interpreted as an expression of German nationalism. On the other hand, according to Moore Jr. and Veblen, the political basis of militarism was the feudal nobility, which practised labour-repressive agriculture, and the centralized absolute monarchy under the control of the Hohenzollern dynasty, which traditionally wielded military force. According to Moore Jr. (1966: 436), in Prussia there was ‘a militarized fusion of Royal bureaucracy and landed aristocracy’. This Prussian militarism was present in the Second Schleswig War (1864), in which Bismarck, then Prime Minister of Prussia, joined Austria in a military alliance against Denmark in a dispute over the two counties of Schleswig and Holstein. After a brief war, Prussia controlled Schleswig and Austria controlled Holstein. In 1866, Prussia took bold military action against the Austrian Empire, which exerted political influence in the southern states of the German Confederation. Bismarck contrived a cunning pretext for war by provoking Austria on the issue of the administration of the two counties acquired in the war against Denmark. Austria responded to the provocation; Bismarck won the war against Prussia’s biggest rival in the German Confederation, and was able to proceed to unify the German states under Prussian hegemony and without the Austrians. The institutional expression of the economic development of Prussia and of the Austro-Prussian War was the dissolution of the German Confederation and the creation of the North German Confederation. The nationalist militarism of Prussia, institutionally supported by the National Liberal Party, the main party of the bourgeoisie, and the Landtag (the representative assembly) of Prussia, managed to complete its goal of unifying the German states, not only those in the north but also those in the south, which after the Austro-Prussian War of 1866 were left in a kind of geopolitical vacuum. This was achieved through the FrancoPrussian War (1870–1871), which Bismarck was able to win. Through this war he managed to attract the German states in the south into a military alliance with the North German Confederation against the Second French Empire, thus realizing the political unity of the German states, which supported national unification. This chapter addresses the developmental class coalitions that supported industrialization. Germany’s transformation into a modern industrial country was simultaneously progressive and conservative. The process of change mobilized nationalist ideology, and relied on shifting coalitions between bureaucratic and political state forces (mainly in the Kingdom of Prussia, and, after 1871, in the German Empire) on the one hand and the agrarian and industrial ruling classes on the other. Since it is impossible to recount here the complete history of coalitions in the nineteenth century, we refer only to the main structural trend, namely the coalition between business entrepreneurs in the emerging manufacturing industry and agricultural elites, and to one of its historical settings, namely the so-called ‘iron and rye coalition’ (Gerschenkron, 1943) which prevailed between 1879 and 1890.

178 L. C. Bresser-Pereira and M. Ianoni Moore Jr. (1966: 436) identified, in eighteenth and nineteenth century Prussia, a militarized coalition between the royal bureaucracy and the landed aristocracy. Throughout the nineteenth century, as modernization progressed, ‘a new and crucial factor is likely to appear in the form of a rough working coalition between influential sectors of the landed upper classes and the emerging commercial and manufacturing interests’. This coalition was the strongest structural socio-political trend in German modernization. Engels (1851/1852) had already observed it, and wrote on the events and developments of the 1848 revolutions in the German states: ‘the alliance between the bourgeoisie and the supporters of the overturned system was concluded upon the very barricades of Berlin’ (p. 51). Fearing a repetition in the German states of what had happened a few months before in Paris, where in February the monarchy of Louis Philippe was overthrown and in June there was a popular insurrection led by the workers, the bourgeoisie hesitated between committing itself to the aristocracy and joining the movement for radical reform, but chose the conservative option.16 It was Gerschenkron (1943) who analysed in depth one of the main cyclical manifestations on this structural class alliance (the ‘iron and rye coalition’). Institutionally, the coalition brought together the National Liberal Party and the German Conservative Party, both right-wing parties. He argues that, from 1865 to 1879, agriculture in Germany was largely based on free trade in grain. The Junker farmers, who were still feudal lords, exported their grain, primarily to the London market, and were strenuous opponents of protectionism. In 1873, this fraction of the feudal-capitalist agricultural class strongly opposed protection for iron production, and was victorious in defending free trade in that good. However, with the advent of the Long Depression, which seriously affected several countries around the world between 1873 and 1879, protectionism in Germany gained in strength as it allegedly served the interests of industrialists, landowners and peasants. In 1876 the Central Union of German Industry was founded, dominated by the iron and textile industries, and specifically dedicated to lobbying for protectionism. At that time, the Junkers still advocated free trade. Yet, less than a year later, the Union for Fiscal and Economic Reform, which was not specifically an organization of farmers but had advocated liberal economic reform, joined manufacturing industry in promoting protectionism. The Junkers’ position changed in response to intensifying competition in the grain market in Europe. Before long, the balance of trade in grain in Germany became negative, with imports surpassing exports. At this point the Junkers switched to protectionism. Bismarck played an active role in building the developmental coalition. According to Gerschenkron (1943: 44), Bismarck was eager to both increase the revenue of the Reich and, at the same time, to form a new Conservative majority in support of his government in order to supplant the majority which had helped to found the German Reich and of which the National Liberal party, the right-wing liberal middle-class group, had been the essential pillar.

Developmental class coalitions 179 The Liberal Party defended economic liberalism during the nineteenth century, but had come to represent the protectionist sentiments of heavy industry. In 1879 the tariff agreement was promulgated, which protected a number of industrial products and grains, especially, in the latter case, rye. Reviewing the deal in more detail, Gerschenkron (1943: 45) argues that, in fact, the coalition ‘was essentially a compromise between iron and rye’ or, more broadly, a compromise among iron, steel and grain. After all, if protection had involved the whole of agriculture, it would mean pressure from workers to raise industrial wages; and if it had covered the entire manufacturing industry, it would have the effect of raising production costs for farmers. On the other hand, Gerschenkron argues in relation to the coalition ‘its successful functioning was contingent upon the ability of both groups to impose this policy on the rest of the producers in industry and agriculture’. With the end of the Long Depression, economic pressures from international competition for consumer markets increased due to the shrinkage of sales of industrial and agricultural products. Under the Leo von Caprivi government (1891–1894), customs tariffs were being reduced and, in turn, gave way to trade agreements. However, by this time the Junkers had converted to protectionism and strongly resisted the new trade policy. But what is important to observe in Gerschenkron’s analysis of the iron and rye coalition is that it was a special case, arising in the Long Depression, of the socio-political coalition between manufacturing industry and agriculture, which was the basis of the conservative modernization that followed the Revolution of 1848 in Germany. This developmental coalition was a synthesis between liberalism and conservatism, feudal-capitalist agricultural development and industrial development, authoritarianism and restricted participation, tradition and change. It provided the basis for Germany’s emergence as a capitalist power on the political map of Europe. The historical context of the first decades of the German Empire included Bismarck’s political leadership as head of the executive power (he was later followed by other chancellors), the civilian and military bureaucratic elites, the landowning elites and the large industrial businesses. These political forces composed the class coalition between manufacturing industry and agriculture in a broader sense. That alliance, in addition to the economic challenge of developing the country, faced strong opposition from workers through the Social Democratic Party (SDP) and the unions. Bismarck implemented two major policies for the workers: the ‘anti-socialist laws’, which almost turned the SDP into a clandestine organization, and social reforms, which included provision for sick leave (1883), work accident insurance (1884) and old-age pensions (1889). At the time, this was the world’s most advanced social legislation and expressed the government’s belief that the fight against socialism required not only repressive measures but also concessions to workers, guaranteed by the authority of the state.

180 L. C. Bresser-Pereira and M. Ianoni

The social democratic coalition Scandinavian countries have enjoyed an international reputation for combining generous welfare state entitlements with rapid economic growth, low unemployment and very high levels of labour force participation, particularly among women. They seemed to have achieved the elusive combination of social equality and economic efficiency. (Stephens, 1995: 1) These achievements, which include economic growth, high employment and an effective set of social welfare policies, form the social democratic and developmental class coalition that reached its full or archetypal form of expression in the Scandinavian countries. Its origins date back to the electoral victories of social democratic parties and the Keynesian economic response to the Great Depression. While the mercantilist and Bismarckian developmental coalitions occurred in authoritarian contexts, the coexistence of democracy and capitalism is the main feature of the social democratic coalition. Przeworski (1985) undertook an empirical and theoretical analysis of this class compromise, which had a huge impact in the social sciences. His basic argument is on the structural dependency of the state in relation to capital. The state is structurally induced and constrained not to affect the relations of production in which the social classes are involved. State and society depend structurally on capital. Individuals and groups depend on the decisions of business enterprises, which affect levels of economic activity, employment and consumption. Thus, society as a whole depends on the investment decisions taken by the private sector (Przeworski and Wallerstein, 1985), which exercises a kind of veto power: if business entrepreneurs either lose confidence or the expected rate of profit is viewed as unsatisfactory, they stop investing, and the national economy falls into crisis. Without capital accumulation there is no employment, and no public revenues to finance the state. Although the electoral victories of social democratic parties in several countries of Europe have reconfigured the political relation of forces in favour of labour, there has been no change in the relations of production. Private ownership of the means of production has been preserved. The decision of social democratic organizations, taken over time, to participate in elections and seek to win them by presenting electorally competitive programmes led them to redesign their revolutionary approach and to adhere to a reformist strategy, not only because the manual workers did not amount to a majority of the electorate but also because it was not necessarily rational for workers to support political parties that were committed to a revolution whose consequences they could not foresee. The economic theory of Keynes contributed decisively to explaining and legitimizing the need for government intervention in the economy. Previously neoclassical theory had prevailed and influenced even the early experiences of social democratic political parties in governing. However, the countercyclical policies initially implemented instinctively by social democratic governments, for

Developmental class coalitions 181 example in Sweden in 1932, and, in the following decades, the intellectual impact of Keynes’s theories altered the perspectives of left-wing ruling coalitions. The Keynesian commitment to full employment served as a programmatic base for social democratic governments as early as the 1930s but mainly after 1945. Social policy proposals were the other face of the electoral programme that, when victorious, led to the formation of democratic governments in which workers’ organizations (political parties and unions) have enjoyed substantial weight. On the other hand, government decisions dialectically affected the power resources of the main political actors. These electoral victories were founded not on anti-capitalist revolutionary programmes but on a model of a mixed or developmental economy in which not only the market but also the state played important roles, especially designed to control the business cycle and prevent economic crises, and to promote social welfare policies, which, as T.H. Marshall (1950) classically demonstrated, raised the status of welfare benefits to that of citizenship rights. The reasons for the abandonment of revolutionary programmes were manifold. First, in all countries the proletariat was already in the 1950s a numerical minority; thus, once the decision to participate in elections and to seek to win them was made, it would be possible to achieve a majority only with the support of other classes, such as non-manual workers and peasants, which meant toning down classist rhetoric; and, once the election was won, by implementing the agreed policies.17 Second, certain practices and bourgeois values, such as competition and individualism, limited more radical socialist reforms. Third, it is impossible to govern capitalism without the participation of capitalists given the veto power that business entrepreneurs exercise. The class compromise between certain sections of the capitalist class and the workers is the basis of a class coalition. Przeworski (1985: 90–91) criticizes the model of irreconcilable class conflict in democratic capitalist societies. A class coalition can be a shared choice between sections of the proletariat and the bourgeoisie. Moreover, it is indeed in the interest of the workers, given again capitalist organization of social relations, that the largest possible share of surplus be retained by capitalists and allocated to accumulation, since in this way future total product is increased. Hence, there exist objective bases for a political alliance between the narrowly defined industrial proletariat and the modern, expansionist fraction of the bourgeoisie. This was true most likely for the 1924–28 alliance between the S.P.D. and the dynamic sector of German industry, not improbably for the Roosevelt’s New Deal coalition, and perhaps for the current alliance between the Communist Party and the Christian Democrats in Italy. This would also have been the nature of the often-rumoured agreements between the Communist Party and the Christian Democrats in Chile. In fact, as we argue here, the class coalition between capitalists and workers in democratic contexts is not limited to social democratic governments; the

182 L. C. Bresser-Pereira and M. Ianoni concept of class compromise can be extended to conservative governments, such as those in Germany and Italy that were involved in constructing the welfare state after World War II, and even the government that implemented the New Deal in the United States, a country in which, as we all know, there has never been a mass social democratic party with roots in the working class. It was under the New Deal that social security and the statutory minimum wage were introduced, with the political support of the New Deal Coalition, the broad class coalition which reigned in the US between 1932 and 1968 and which, with the exception of the election and re-election of President Eisenhower, a Republican, in 1952 and 1956, coincided with the electoral success of the Democratic Party. On the other hand, the concept of class compromise as extended to this historical period is consistent to what the French Regulation School called the Fordist class coalition; and it has a structural dimension that helps us to understand the argument that the reaction of the rich against the policies of full employment and welfare pursued during of the Golden Years is among the political causes of neoliberal class coalition that became dominant in the 1980s. According to Przeworski (1985: 202), ‘class compromise implies a particular organization of the state as an institution and the policies pursued by this institution constitute an expression of a specific class compromise’. Although this author does not address it, social corporatism is an important institutional arrangement that is more clearly developmental than the social democratic arrangement. Philippe Schmitter, in his classical paper of 1974 on corporatism, clearly demonstrated the role of the state in mediating the class compromise between the workers and business enterprises. The objective was mostly developmental because it involved full employment: while the unions agreed to restrain wages growth, business enterprises agreed not to dismiss their employees. Corporatist collective bargaining was most developed in the Nordic countries of Denmark, Norway and Sweden, and also in Germany, where social democratic capitalism was more successful in ‘combining social equality and economic efficiency’ – the watchword for this kind of social developmentalism. Coordination between trade unions and employers’ associations is a typical practice of social corporatism. But the incidence of corporatist arrangements in the context of the emergence of class compromise in democracies varies in importance and degree over time and across nations. In some situations partisan agreements achieve the class compromise; quite often both the institutions of social corporatism and partisan and parliamentary institutions engage in coordination. This occurred under the Moncloa Pact, which played a foundational role in the transition of Spain’s political regime to democracy in the 1970s.18 The political parties together initiated the return of democracy, but then various social and economic agreements were made under tripartite coordination bringing together government and the peak organizations of entrepreneurs and workers (Schmitter and Grote, 1997). In the 1980s and 1990s – in the Neoliberal Years – social developmental coalitions were almost forgotten. But in the early 2000s, under its so-called Agenda 2010, Germany returned to a ‘successful’ class coalition, which triggered

Developmental class coalitions 183 the euro crisis that broke in the following decade. With the goal of achieving greater competitiveness, the Chancellor, Gerhard Schröder, brokered an informal agreement between business industrialists and workers whereby productivity increases would be followed not by wage increases but, as a trade-off, by employment guarantees. The agreement was successful for Germany but disastrous for Ireland and south European member states of the Eurozone, which failed to strike similar agreements, lost competitiveness, and became highly indebted. In fact, as the European class compromise is a democratic political pact, its existence presupposes the entire institutional apparatus of representative democracy, in which political parties play a key role. Corporatism was associated in the past with authoritarian rule; but since the 1970s all West European countries have been democracies; when they achieve a corporatist social and developmental compromise, they do that according to the rules of social democracy. Another example that combines party coalition and tripartite agreement can be found in Austria, where social corporatism developed under the post-World War II coalition government of the Social Democratic Party and the Austrian People’s Party. Discussing the role of developmental lever that certain relations between state and social forces can play, in which the government has both the autonomy and the capacity to embed itself into various initiatives of interest to the productive activities, Evans (1995: 241–242) refers to Austria, which, he writes, exemplifies the way in which the state and classes mutually constitute each other. The existence of a coherent state apparatus helps call forth an internally organized entrepreneurial class in Austria just as it does in the developmental states. The existence of a comparably organized working class reinforces the process. If labour cannot be marginalized or ignored, a dependable arena for centralized bargaining between capital and labor is essential. A competent, corporately coherent state apparatus provides that arena. Far from making the state irrelevant, the comprehensive organization of class interests makes it essential. As actors in civil society become more organized, a solid and sophisticated state apparatus becomes more rather than less necessary.… The state’s independent influence depends on a balance of forces in civil society, but the balance is actively constructed rather than the result of exogenous stalemate. Analysis undertaken from the perspective of political coalitions is useful also for explaining the different types of welfare state. Esping-Andersen (1985 and 1990) identifies in the history of political class coalitions the most decisive cause of welfare-state variations. He writes, the origins of the Keynesian full-employment commitment and the social democratic welfare-state edifice have been traced to the capacity of (variably) strong working-class movements to forge a political alliance with farmer organizations.… Two nations, such as Austria and Sweden, may

184 L. C. Bresser-Pereira and M. Ianoni score similarly on working-class mobilization variables, and yet produce highly unequal policy results. This can be explained by differences in the history of coalition formation in two countries: the breakthrough of Swedish social democratic hegemony stems from its capacity to forge the famous ‘red-green’ alliance with the farmers; the comparative disadvantage of the Austrian socialists rests in the ‘ghetto’ status assigned to them by virtue of the rural classes being captured by a conservative coalition. (Esping-Andersen, 1990: 18) Over time, especially post-World War II, the consolidation of welfare states in several developed countries ‘came to depend fundamentally on the political alliances of the new middle classes. For social democracy, the challenge was to synthesize working-class and white-collar demands without sacrificing the commitment to solidarity’. Overall, and despite its peculiarities, the social democratic coalition generally promoted the marriage between growth, full employment and social welfare.

A new developmental class coalition? In the previous three sections we discussed three paradigmatic cases of developmental class coalitions: (a) mercantilism – the first developmentalism in the first countries to become rich; (b) social democracy in the Golden Years of Capitalism or under the Fordist policy regime – the second developmentalism in these countries; and (c) the Bismarckian class coalition – a classical case of late industrialization in today’s rich countries. We would have covered all the paradigmatic cases if we had included: (a) the case of Japan immediately after the Meiji Restoration – the first case of a country that in order to develop had to face modern imperialism; and (b) national-developmentalism in Brazil between 1930 and 1980 – the industrial revolution of a middle-income country in today’s world. We are now in a position to frame some generalizations and to conclude the chapter. Since the 1930s, as a result first of the Great Depression and US President F.D. Roosevelt’s New Deal, and then of World War II, the epicentre of the world economy moved from Europe to the US, and the Fordist or social democratic class coalition became dominant in the core capitalist countries, up to the mid-1970s. This new coalition was a broad, democratic and progressive class coalition. It was broad because it included the middle classes and the working class; democratic because at the turn of the twentieth century the achievement of universal suffrage was the radical political change that caused the transition in the more developed countries from the liberal but authoritarian regimes that characterized the previous century to the first regimes that could be considered minimally democratic; and progressive because, after World War II, the social democratic Golden Years of Capitalism opened the way for progressive taxation and a great increase in the tax burden to finance the welfare state, regardless of whether the political party in office was social democratic or conservative.

Developmental class coalitions 185 In the late 1960s this progressive coalition experienced a crisis characterized by a fall in the profit rate, and after a few years of uncertainty a new class coalition became dominant along with its associated policy regime, inaugurating the Neoliberal Years of Capitalism. Again, regardless of the political party in power, the policies were neoliberal – a radical attempt to restore the liberal capitalism of the nineteenth century. But after no more than 30 years, the neoliberal reactionary adventure collapsed in a terminal crisis. We do not intend to discuss these historical changes; rather, we will return to the original question posed in this chapter: is it really the case that neoliberalism is in a deep crisis and, if so, how likely is it that the rich countries will return to a developmental class coalition? We suppose that many readers will think this question is absurd, essentially because, despite the severity of the 2008 global financial crisis, almost everyone we talk to has difficulty in accepting our contention that the Neoliberal Years of Capitalism are over. Yet, provided that we don’t identify neoliberalism either with capitalism or with conservatism, we may conclude that there are good reasons to believe that the days of radical economic liberalism are over, and that some new form of developmental organization of capitalism is coming into being. Take, first, the confusion of neoliberalism with capitalism. This is clear in the ambitious essay by Pierre Dardot and Christian Laval (2009: 481, 21) on neoliberal society. For them, ‘the belief that the financial crisis marked the end of neoliberal capitalism is the worst belief ’. It is not difficult to understand why they are so sanguine on that subject. They define neoliberalism as the new ‘logic of the world’, as an ideology and a governing system based on generalized competition between business enterprise, nation-states and individuals. For them, ‘neoliberalism is precisely the deployment of the market’s logic as a normative logic to be adopted from the state to the more intimate constitutive part of subjectivity’. Well yes, but very similar ideas can be found in Marx, who was discussing not neoliberalism but capitalism. We learned from him that capitalist development involves the progressive commodification of everything, the subsuming of all aspects of social life to the logic of the market, increasing competition among all, and the reduction of all values to those of money and profit. Thus, when Dardot and Laval identify neoliberalism with capitalism, they are right by definition. For sure, the 2008 global financial crisis didn’t mark the end of capitalism. It just ended the belief in self-regulated markets and the practice of the small state, privatization and deregulation. The Economist – the magazine that subscribes fully to the neoliberal credo – continues to write about ‘reforms’ that will solve all the economic problems that increasingly different countries face, but this kind of rhetoric has lost credibility. For the two authors, the alternative to neoliberalism is another ‘reason’: ‘The practices of knowledge “communization”, mutual assistance, cooperative work may exhibit the traits of another reason of the world’ (p. 481). But we are very far from that. We understand neoliberalism in a more restricted and precise way, as the radical attempt to make capitalism fully capitalist, and assert that it is no longer dominant as a class coalition or a policy regime. Neoliberalism was an attempt to make true all the traits that Marx identified when he was defining capitalism as a mode of

186 L. C. Bresser-Pereira and M. Ianoni production, as a ‘pure’ form, and not as a mixed social formation. Thus, neoliberalism was necessarily a failure. Modern capitalism does not follow only the logic of capital; it follows also the logic of the organization and of democracy, and, so, it is a necessarily mixed social formation. In modern capitalism it is not only the capitalists that count; the professional or technobureaucratic class and the people also count. For sure, neoliberal ideology remains, because it promotes the interests of rentier capitalists and financiers, but it has ceased to be dominant in the way it was in the 1990s. Second, consider the distinction between neoliberalism and conservatism. Conservatism is the ideology that privileges social order over social justice; it is the identification of social order with the existing establishment; it is the belief that the economic and political power system is something ‘natural’, which cannot be easily reformed. Neoliberalism is conservative because it defends the interests of the rich and the powerful, but it was an attempt to adopt radical reforms aiming to restore classical economic liberalism – something that completely contradicts conservative values and practices. The political competition between conservative and progressive or social democratic political parties will always be with us, because neither the right nor the left is able to govern capitalism successfully for lengthy periods of time. But conservative political parties can adopt social democratic and developmental policies, as happened under the post-war social democratic and developmental policy regime, while social democratic political parties can adopt neoliberal reforms, as we saw in the Neoliberal Years of Capitalism. Our view is that a new developmental class coalition is a real possibility. The idea that markets are self-regulating was discredited once more in 2008, and this fact is widely acknowledged except by mainstream neoclassical economists, isolated as they are in their insulated departments of economics in the major universities. The view that the basic cause of the crisis is the radical deregulation of financial markets has become practically universally accepted; and it is impossible to ignore the fact that the state, whose only role according to neoliberalism should be to guarantee property rights and contracts, has played a major role in rescuing national economies from the crisis. Central banks are the lenders of last resort; the state has proved to be the rescuer of last resort. Regulation of the banking system has been greatly extended at the national level and also at the international level. The problem posed by banks that were ‘too big to fail’ is not resolved; re-regulation cannot yet guarantee that banking crises will not happen again, but the financial system lost power and regulatory agencies recovered it – normative power, political power. On 19 June 2013, the UK’s Parliamentary Commission on Banking Standards published a report which asserted that the public have a sense that advantage has been taken of them, that bankers have received huge rewards, that some of those rewards have not been properly earned, and in some cases have been obtained through dishonesty, and that these huge rewards are excessive, bearing little or no relation to the work done.

Developmental class coalitions 187 A report like this would have been unthinkable ten years ago. Today it is clear that many modern financial flows do not play the useful role in capital allocation that orthodox economic theory assumes. Even the IMF now accepts capital controls in special circumstances. Banks and the financial system more broadly have restored their profitability, and continue to control a larger share of total profits than their economic role would suggest, but they are neither as profitable nor as politically powerful as they were before the crisis. We see the advance of the role of the state also in the real economy. The trade liberalization discourse continues as before, but the practice is very different. First, in the area of trade the Doha Round has been practically abandoned. If it were ever concluded, the result would be negligible; countries all over the world have been increasing their import tariffs and their administrative controls over imports. Second, industrial policies of all kinds have regained legitimacy, beginning with the US. Since the beginning of his administration, President Barak Obama made it a central objective to re-industrialize his country. On the other hand, the prospects for the rentier capitalists, who form the dominant sector of the capitalist class in neoliberal class coalitions, are poor. The main logic of the Neoliberal Years was to comply with the demand of rentiers for positive and high interest rates and rents. In the early years increasing the profit rate, which had fallen since the late 1960s, was also an objective shared with the business enterprises; but it was soon achieved. More difficult was to increase the interests and rents received by the rentiers, because the abundance of capital existing in the world economy has long suppressed interest rates and rents. During the Neoliberal Years this problem was already present, but it was overcome by financialization. Since the crisis, it has lost part of its strength – financialization being understood here as the association of top and middle-class rentiers capitalists with financiers and the adoption by the latter of financial innovations, high leverage, highly risky financial transactions and straight fraud that allowed them the threefold multiplication of their revenues. Also since the 2008 crisis, the basic interest rate has been negative, reflecting the abundance of capital and the relative loss of power of the rentiers. More than that: there is no prospect of interest rates becoming positive in the next ten years. But what to say of the euro crisis and the austerity programmes that are being demanded of the indebted economies of Ireland and the countries of Southern Europe? Isn’t this neoliberalism? It is more conservatism than neoliberalism. The southern countries in the Eurozone are in a trap. Following neoliberal logic, they created an absurd institution – a single currency that is, actually, a foreign currency for each one of the countries. If the Eurozone member states had ceased to be sovereign countries, if they were like, for instance, federal states like those in the US or in Brazil, then to share a single currency would be the normal thing to do. But they are far from having given up their national sovereignty. Thus, when immediately after the creation of the euro, the ‘internal euros’ of the southern countries became increasingly valorized in relation to the northern euros because their relative unit labour costs

188 L. C. Bresser-Pereira and M. Ianoni increased, they faced a major economic problem.19 With the euro they were unable to depreciate their national currencies and so restore the monetary competitiveness of their business enterprises. The rational solution for the crisis would be a monetary reform agreed by the Eurozone that would mean in practice the discontinuation of the euro; but the conservative consensus is that this option is ‘unthinkable’. Actually, it is unthinkable to the rentiers and financiers, but not to the people. To the rentiers and financiers the best solution is the austerity programme – the ‘internal depreciation’ under way – which entails recession, unemployment, and a fall only in wages and salaries. An effective depreciation would make everyone, not only the poor and the middle class, pay for the required recovery of competitiveness. Thus, the political choice that is being made in Europe is not a neoliberal bet in the market against the state, but a conservative choice benefiting the rich. This short discussion of the euro crisis prepares us for a discussion of the next issue. We assume that the state is recovering, and will continue to recover, its subsidiary but strategic role in the coordination of large and complex capitalist economies, because markets alone are unable to coordinate them – in other words, because, given the extended experience that we have of the limitations of markets in coordinating both the macroeconomic aggregates and the noncompetitive sector of the economy, it makes much more sense to combine state and market instead of leaving all the economic coordination only to markets. But from this we cannot conclude that the resulting capitalism will be progressive. The second developmentalism – the one of the Fordist regime of accumulation – was progressive and was associated with social democracy; but developmentalism may be also conservative. Indeed, given the economic constraints that capitalism is facing at present and the difficulty that social democratic political parties are experiencing in overcoming them, we suggest that the developmental class coalition that will emerge from this crisis is more likely to be conservative than progressive. The character of class coalitions and policy regimes, whether conservative or progressive, is not just the outcome of the political will of the social actors and their capacity to make compromises and reach political agreements. It depends also on economic constraints and on how favourable are the economic conditions that rich countries face. The less satisfactory the expected rates of profit and consequently of capital accumulation, the more serious will be the economic constraints, and the more likely it is that the class coalition that emerges from this crisis will be conservative, and the cost of the adjustment will fall on the poor. When the profit rate is satisfactory, and rates of investment and growth are high, there is scope to attend to the demands of the workers and of the poor, and the emerging coalition is more likely to be a social democratic one. But rich countries have been far from that situation for many years. Growth rates are very low because profit rates are unsatisfactory and investment rates consistently low. When this is the case, the conservative and easiest way out is to reduce wages by adopting austerity programmes, and that is what we usually see.

Developmental class coalitions 189 But couldn’t the way out be Keynesian? US President F.D. Roosevelt adopted that response in the 1930s, when economic conditions were terrible. Why can it not be repeated today? First, because statesmen of Roosevelt’s calibre are very rare; but, second and more significantly, because the challenge that the American president faced was domestic, while the challenge that the rich nations face today is global. In the 1930s the crisis was one of effective demand; today, the short-term crisis – the Global Financial Crisis – was initially a demand crisis, and most countries responded adequately to it with substantial increases in expenditures. But, once the world economy had returned to ‘normality’ in the US, Britain and in Japan (we exclude here the Eurozone, because it is confronting its own crisis), this normality did not mean high or even satisfactory growth rates but low, very low ones. This prompted all kinds of pessimistic responses, including talk of secular stagnation. The arguments sustaining this thesis were not particularly persuasive, but the fact that leading mainstream economists adopted such an attitude in relation to future growth shows how gloomy are the prospects of capitalist development. In truth, rich countries face two major economic problems. One of them is essentially a problem for the rentier capitalists and financiers – the abundance of capital, which expansive monetary policies (the issuing of money by central banks, called ‘quantitative easing’) has only aggravated; the other is a real challenge for the productive sector, for business entrepreneurs and workers – the continuing and increasing competition from developing countries. The abundance of capital is an old problem. John A. Hobson, who at the end of the nineteenth century was the first economist to define modern imperialism, explained imperial expansion by reference to the abundance of capital at home and the search for new markets and investment opportunities abroad. As time passes this problem tends to become more challenging, because the accumulation of capital net of depreciation tends to surpass the rate of growth of GDP: in the long term, investment rates in rich countries are around 16 per cent of GDP against growth rates around 3 per cent. Economic imperialism manifests itself in modern times in the expansion of multinational enterprises occupying the domestic markets of developing countries without real reciprocity.20 The investments of the multinational enterprises solve the problem of excess capital, but they don’t solve the domestic problem that rich countries face – the lack of investment opportunities for business enterprises deriving from increasing competition coming from developing countries, whose low labour costs give them a competitive advantage. This problem emerged in the 1970s, when the first Newly Industrializing Countries (NICs) started exporting manufactured goods instead of just primary goods. The new contenders were South Korea, Taiwan, Singapore, Hong Kong, Brazil and Mexico. In the following decades, as globalization triumphed, competition from developing countries intensified in a second wave, when in the 1980s Malaysia, Thailand and Indonesia began to export manufactured goods, and, in a third wave, when two huge countries, China and India, also started competing with rich countries. The reaction of

190 L. C. Bresser-Pereira and M. Ianoni multinational enterprises was to invest even more abroad, seeking to be internationally competitive by using the local labour and dominating unilaterally the domestic markets of developing countries. For business enterprises and their owners this was an attractive solution to their countries’ loss of competiveness, but it didn’t resolve the problems of the poor and of the middle classes, who depend on domestic investment to improve their standards of living, and of national governments, which depend on the people to be re-elected. The way out domestically was the depression of wages and the huge increase of inequality which defined the Neoliberal Years. The global financial crisis of 2008 ended this era, but the inequality remained. The rentier middle classes lost, but the salaried middle classes also continue to lose. The relative recovery in the US didn’t imply ending, much less reversing, the increase in income and wealth inequality. As the president of the Federal Reserve Bank, Janet Yellen, remarked in 2010, the top 5 per cent of the US households had 61 per cent, and in 2013 63 per cent, of the total wealth of the US. Thus, wealth inequality, which was increasing before the crisis (in 1989, the top 5 per cent households had 53 per cent of total wealth), continued to increase after the crisis.21 Given their relatively monopolistic power, the large business enterprises continued to achieve good profits, but low growth rates show that this does not mean that investment opportunities or the expected rates of profit for business enterprises – particularly for the small and medium-size ones – were satisfactory. Thus, the pressure on wages and on labour entitlements leading to more ‘flexible’ labour contracts will probably continue in the years to come – something that social democratic political parties cannot accept without embracing even greater contradictions than those they did in the Neoliberal Years (this is a constraint that conservative political parties don’t face). On the other hand, the reduction in transport costs led to increased immigration to rich countries, which is favourable to their economies but is widely rejected by the salaried middle classes. This is also a major problem for social democratic parties, whereas centreright conservative parties have much less difficulty dealing with it. A recent conservative developmental class coalition that is paradigmatic of what we can expect in the near future is Agenda 2010, which we have already mentioned. It is the class coalition that the social democratic Chancellor of Germany, Gerhard Schröder, successfully led in 2003. Agenda 2010 involved a series of reforms planned and executed with the aim of reforming the German welfare system and labour relations. The declared objective was clearly developmental – to promote economic growth and thus reduce unemployment. The plan included unpopular measures such as a 25 per cent reduction in the basic value over which the income tax is due, reductions in the cost absorption of medical treatment, and cuts in pensions and in unemployment benefits. It enjoyed the support of business enterprises, the conservative and the liberal political parties, and the Catholic and Protestant churches, while within the Social Democratic Party there was strong internal opposition. The unions initially rejected the plan, but eventually accepted it in so far as business enterprises committed themselves to stop laying off employees and relocating their plants

Developmental class coalitions 191 to Eastern Europe. Agenda 2010 was clearly Germany’s reaction to the low growth rates that the country was experimenting and to competition from China of other developing countries. As Brigitte Lestrade (2004: 2) observed, ‘Germany seemed to be caught in an ineluctable spiral of decline, given its high unemployment, low growth, and increasing public deficit.’ Eventually, Agenda 2010 represented a major success in reducing unemployment, and was the origin of the euro crisis that broke a few years later. It was a successful conservative class coalition, which the workers and the unions initially rejected, but after some time accepted because it worked. The left in Germany continues to oppose it – which is understandable because conservative class coalitions eventually promote the interests of the rich more than those of the poor. But the fact is that the left and its economists didn’t have an alternative policy to offer. The Keynesian idea of expanding demand to achieve full employment clearly didn’t apply, given that the problem was not insufficient demand – something that lost much of its force as national economies became more open and competitive – but a lack of competitiveness.

A final caveat But the concept of the political class coalition makes sense only within the framework of the nation-state. Thus, the prediction that the 2008 crisis opened the way for conservative developmental class coalitions in the rich countries depends on how far the nation-state resists globalization, which represents a major challenge to it. The argument that nation-states have lost their relevance under global capitalism is false, principally because economic nationalism is the ideology that holds the nation-state together. The poor and the middle classes continue to be nationalist because their welfare depends on the economic development of their countries. Notwithstanding the many problems associated with representative democracy, in modern democracies the great majority of the citizens continue to identify with their nation, because they know how important it is that the nation has its own state to act on its behalf. Thus, democratic governments have no alternative but to be nationalist so as to continue to represent the interests of their nations. This is economic nationalism, not ethnic nationalism. The terrible experiences of ethnic or fascist nationalism on the one hand, and the interest of rich countries in dominating the domestic markets of developing countries on the other hand, made the word ‘nationalism’ a pejorative one, but the people and governments of rich countries remain nationalist in economic terms. Yet a nation is strong when there is a basic national agreement among its members. It was the idea of the nation that welded the elites to the middle classes and the poor, and made nations real nations – a form of political organization of society that depends on a state as an instrument for the achievement of political objectives, and, notwithstanding internal conflicts, is solidary in the face of competition with other nations. This basic national solidarity was strong before globalization, but is no longer. With globalization the elites of the more developed countries have become increasingly ‘globalized’, that is, they have

192 L. C. Bresser-Pereira and M. Ianoni weakened or simply cut their links with the people, while seeking to constitute a global elite formed from the national economic elites of rich countries and the dependent elites of developing countries. The reason for this dramatic change in basic political allegiance is objective. The revenues of not only rentier capitalists and financiers but also the top executives of the multinational corporations derive increasingly from the investments of multinational enterprises abroad. In most rich countries, the dividends and interest that the very rich receive are the result not of profits made in their respective domestic markets, but of those made in the ensemble of other countries. Multinational corporations continue to operate with the firm support of their respective governments, regardless of whether the political coalition is conservative or social democratic, which refutes the common claim that multinationals enterprises have no nation. But the nations in rich countries have become weaker because the economic elites in these nations have abandoned their basic national alliance with the people because their revenues have ceased to originate in the domestic market of each multinational corporation, and because their governments are divided between attending to the national interests of their people and the global interests of their elites. In the previous developmental class coalitions that we have discussed in this chapter, the capitalist class was divided into two segments – a liberal rentier and financier segment and a developmental productive or entrepreneurial segment – but the rentier and financier class remained national. This is no longer the case, and, in addition, the top executives of the major business enterprises have also ceased to be national. This means that the powerful nations that have dominated the world since the nineteenth century, including the US, have created an economic system – globalization, the opening of domestic markets and the emergence of global corporations – that is undermining them from inside. Thus, a caveat is required in relation to our prediction that in rich countries a conservative class coalition is being formed. The loss of the idea of nation that we are observing among their elites suggests that this forming a class coalition will not be an easy task for conservative politicians. The neoliberal class coalition has lost its political legitimacy, but it is possible that no substitute for it will emerge. This means that capitalism may face in the years to come a time of crisis and extreme uncertainty – a time when the defining social condition will be anomie, and the defining political condition a power vacuum; a time when a fragmented society provides little moral orientation to its members; a time when the state is weak and power is everywhere and nowhere. In conclusion, the likely prospect that the capitalist system faces today is the formation of a conservative developmental class coalition; the danger ahead is that even this may prove to be unviable, and what we will face is low rates of growth, if not stagnation, combined with social unrest and political fragmentation. For us, the ideal was that developmental and progressive class coalition became dominant; but this remains the least probable outcome because rich countries will continue to face competitive pressure from developing countries, mainly China and India. For sure, the rich countries’ imperialist strategy of occupying the markets of

Developmental class coalitions 193 the weaker developing countries with their multinationals and their finance continues remains an option, but its scope is getting narrower, particularly in Asia, where the fast-growing countries are becoming stronger and more autonomous, are preserving their national identities while modernizing rapidly, are able to define national development strategies, and are catching up.

Notes 1 Paper prepared for international symposium Growth, Crisis and Democracy: The Political Economy of Social Coalitions and Policy Regime Change, organized by Waseda University and the European University Institute, Firenze, November 2014; revised June 2016. 2 On the comparison between economic liberalism and developmentalism, see BresserPereira (2013). 3 Among other references, see Johnson (1982). 4 ‘Organization’ is here understood as the relation of production that defines the technobureaucratic or professional social class. 5 In the past, economic growth was associated with industrialization, which involved the transfer of labour from small to higher per capita income activities; today, we have highly sophisticated services, and growth is associated with ‘productive sophistication’. 6 The courtesan or patrimonial aristocracy lived mostly from the treasury of the state, whereas the landowner aristocracy lived mostly from land rent. 7 Remember that in the nineteenth century liberals were against democracy, arguing that it would impose ‘the tyranny of the majority’. 8 Although the US is the more advanced country in economic and technological terms, and although the New Deal reforms opened the way for social democracy, in the US the welfare state was less developed. Probably for that reason, modern democracy is often called ‘liberal democracy’, although many developed countries have overcome this stage and are social democracies. 9 But one cannot ignore the fact that in some cases, as in Spain, the absolutist state did not play the role of driving change in the feudal relations of production for reasons that may not be covered here (see Marx, New York Daily Tribune, 9 September 1854). 10 Only in 1834 did Britain liberalize trade by reducing its very high import tariffs (Chang, 2002). 11 See Bairoch (1963). 12 ‘Mercantile system’ is the term used by Adam Smith in his approach to mercantilism. 13 The Civil War in France, Third Address, ‘The Commune’, no page numbers. 14

The English East India Company, as is well known, obtained, besides the political rule in India, the exclusive monopoly of the tea-trade, as well as of the Chinese trade in general, and of the transport of goods to and from Europe. But the coasting trade of India and between the islands, as well as the internal trade of India, was the monopoly of the higher employees of the company. The monopolies of salt, opium, betel and other commodities, were inexhaustible mines of wealth. The employees themselves fixed the price and plundered at will the unhappy Hindus. The Governor-General took part in this private traffic. His favourites received contracts under conditions whereby they, cleverer than the alchemists, made gold out of nothing. (Marx, 1867: 528)

15 ‘Colonial system, public debts, heavy taxes, protection, commercial wars, etc., these children of the true manufacturing period, increase gigantically during the infancy of Modem Industry’ (Marx, 1867: 531).

194 L. C. Bresser-Pereira and M. Ianoni 16 Vincent (1967) identifies the same coalition as that formulated by Moore Jr. (1966). 17 Hirsch (1980: 117) says in relation to Germany: ‘The percentage of wage earners employed as office workers and state employees increased considerably; from 36 per cent in 1961 to over 50 per cent in 1975.’ 18 For a brief reference to the social concertation in Spain, see Eurofound: bit.ly/ 1ByhHqc. 19 The unit labour cost is obtained by the division of the average wage rate by the productivity of labour. 20 Without real reciprocity because, in the case of developing countries, they offer their domestic markets to rich countries without the latter opening their domestic markets in return. Reciprocity would come through their investments, but experience and developmental macroeconomics show that there is a high rate of substitution of domestic for foreign savings, and, in consequence, an increase in consumption rather than in the total investment rate (Bresser-Pereira et al., 2014). 21 Source: Speech of Janet Yellen in Boston, 17 October 2014.

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Authoritarian developmentalism, democratic neoliberalism, and economic growth in Korea Economic growth in different policy regimes Hyug Baeg Im

Introduction: political regimes, economic policy regimes, and economic growth in South Korea Since the democratic transition in 1987, Korea has supported the “exogenous modernization thesis” that economic development and democracy has a strong causal relationship with regard to sustainability, durability, or consolidation of new democracies (Przeworski et al., 2000). Since the democratic transition, steady economic growth, successful overcoming of the East Asian economic crisis in 1998, and resuming of economic growth showed that democracy in an affluent society like South Korea would not be subverted to authoritarianism and the Korean case perfectly fit Przeworski’s “exogenous democratization thesis.”1 Despite successful political regime change to democracy in 1987, what Adam Przeworski calls “policy regime change” (Przeworski, 2001, 2010) did not take place in Korea. The main pillars of the “developmental state policy regime” of the authoritarian period remained intact under new democratic governments. The economic policy regime of authoritarian governments did not change under the new democracy because Korean transition was a typical example of democratic transition from an economically successful authoritarian regime.2 After the political regime change, while democratically elected governments have made many political and social reforms, such as the establishment of liberal democratic institutions, de-politicization of the military, decentralization of politics, holding local elections, instituting American style law schools, etc., the governments made only a few reforms with regard to economic policy regime, simply to follow the major economic policies of authoritarian predecessors. However, the old policy regime could not sustain indefinitely. The Korean developmental state policy regime was not sustainable when it faced external as well as internal political and economic changes such as the end of the Cold War, global hegemony of neoliberalism, and the alternation in power between political parties through election. Economic crisis occurred in 1997, and the newly elected Kim Dae Jung government took responsibility to overcome the economic crisis and introduced a new neoliberal policy regime under the pressure

Economic growth in Korea 197 from global capital, the IMF, and the U.S. Treasury. In 2008, President Lee Myung Bak, who made the second turnover of government, faced a global economic crisis originated from the successive meltdowns of big Wall Street financial institutions. This time, the Lee government did not respond to the crisis with new policy innovations, but faithfully followed neoliberal prescriptions such as currency swap agreements with the U.S., Japan, and China. The Lee government was praised for its successful defense against externally generated economic crisis and the neoliberal policy regime has been sustained in South Korea. Relying on an alternative perspective on comparative advantage of democracy over authoritarianism with regard to economic development and growth, I will compare economic performances of three different political-economic policy regimes, i.e., “authoritarian developmentalism (1963–1987),” “democratic developmentalism” (1987–1997), and “democratic neoliberalism” (1998–present). First, I will explain the concept of economic policy regime and economic policy regime change. Second, I will compare economic performances of different political economic policy regimes: (1) the authoritarian developmental regime during the Park Chung Hee and Chun Doo Hwan dictatorships (1963–1987); (2) the democratic developmental regimes under the Roh Tae Woo and Kim Young Sam presidency (1988–1997); (3) democratic neoliberal regimes under the Kim Dae Jung, Roh Moo Hyun, Lee Myung Bak, and Park Geun Hye presidency (1998–present). Third, I will try to find an answer to the question why democratic developmentalism during the Roh Tae Woo and Kim Young Sam presidency performed the best among the three political economic policy regimes in Korea, i.e., authoritarian developmentalism, democratic developmentalism, and democratic neoliberalism. Finally, I will test the so-called “incompetence of democratic government thesis” which contends that the authoritarian regime excelled in democratic governments in terms of economic performances measured by GDP growth per capita, export growth, low inflation rate, full employment, and gross fixed capital formation, etc. A tentative conclusion is that democratic governments did not perform economically inferior to authoritarian governments, but in some areas, democratic governments outperformed authoritarian governments.

Economic policy regimes and economic growth in Korea3 Why have political leaders of different parties made similar policy choices when faced with economic crisis? Adam Przeworski analyzes the continuity of policy choices with the concept of “economic policy regime” (Przeworski, 2001, 2010). Przeworski defines “policy regime” as “an equilibrium in which different parties offer and implement similar policies” regardless of their ideological orientations and partisan stripes. Few economic policy regime changes occur despite rotation of power among different parties until some political party, triggered by economic crises, introduces major policy innovations, has been elected and reelected with the policy proposals and successful implementation of

198 H. B. Im proposals, and the succeeding government of the different party follows and imitates the policies of its predecessors (Przeworski, 2010). Looking at the South Korean case through the window of Przeworski’s “policy regime” is useful to analyze the introduction, stability, and change of policy regime in newly developed democracies. In South Korea, policy makers in economically developed new democracies had implemented similar economic policies of previous authoritarian governments that they regarded as successful. The economic policy regime of the Korean authoritarian regime in the 1970s and 1980s was called the “developmental state” policy regime in which the state guides, disciplines, and governs the market (Wade, 1990). The developmental state policy regime lasted until the advent of the East Asian economic crisis in late 1997 despite political regime change from authoritarianism to democracy. Faced with the unprecedented economic crisis in late 1997, the newly elected Kim Dae Jung government accepted IMF conditionalities for bailout loans that included transforming the economic policy regime to a neoliberal one. Imposed economic policy regime change from outside, however, was a great success. South Korea repaid IMF loans and got out of IMF conditionalities in a very short period of time of less than two years; the Korean economy resumed sustainable growth without massive layoffs; foreign currency reserves were sufficiently amassed to defend short-term financial fluctuation; exports exploded and huge trade surpluses continued while maintaining a low inflation rate. Encouraged by the success, President Roh Moo Hyun, elected as the candidate to the same Democratic Party as Kim Dae Jung, pursued more radical neoliberal policies than did Kim Dae Jung. In 2007, Korea passed Huntington’s “two turnover” test and completed the democratic consolidation by electing opposition conservative GNP (Grand National Party) candidate Lee Myung Bak to be the president of Korea (Huntington, 1991; Im, 2010). President Lee Myung Bak, the first CEO president who served as the chairman of Hyundai Construction Co., deepened the neoliberal policy regime. Lee Myung Bak, however, created his own style of neoliberal policy regime by injecting Keynesian public works programs into neoliberal policies such as Pan Korean Grand Waterway, the Four Major Rivers Restoration Project, and the “Green New Deal” policy. President Lee Myung Bak was able to cope with the Global Financial Crisis in 2008 with currency SWAP agreements with the U.S., Japan, and China. The buoyancy of the highgrowth Chinese economy helped the Lee Myung Bak government resolve Korean companies’ liquidity problems.

Authoritarian developmentalism, 1961–1987 Economic policy innovations of Park Chung Hee I will, first, try to trace back the trajectory of the creation, stability, and demise of authoritarian developmentalism under the Park Chung Hee and Chun Doo Hwan dictatorships. Admirers of Park Chung Hee praise Park’s choice of policy

Economic growth in Korea 199 regime, developmental statism, as the key to explain rapid economic growth in the 1960s and 1970s. The “Korean miracle” was possible by Park’s optimal strategic choice. Park, at first, chose an import substitution industrialization strategy (ISI) in which rural development, capital goods industry, and import substituting goods industries were emphasized while exports were given a secondary role. However, after witnessing/admitting/observing the dismal outcome of the key planned sectors but unexpected high growth of exports, Park changed the development strategy from ISI to EOI (export oriented industrialization) (Im, 1987: 241–242). Park Chung Hee was the first Third World country leader to respond to the changes in the international market that showed the ongoing transition from classical international division of labor to new international division of labor (the feasibility of world market oriented manufacturing in peripheral countries) (Frobel et al., 1980; Im, 1987, 242). Park’s Korean miracle was a success story of what Wallerstein called “promotion by invitation” (Wallerstein, 1979). Park promoted the Korean economy from the periphery to the semi-periphery by responding to the invitation from the capitalist world economy (Wallerstein, 1979). Park’s key economic policy innovation was the creation of a typical authoritarian developmental state model in which the state, rather than market, guided, led, and governed the effectiveness and efficiency of the state-directed economy. Alice Amsden argues that Park’s model was an innovation because the developmental state, unlike the predatory interventionist state, overcame the penalty of “lateness” by state “subsidies” and “getting the relative price deliberately wrong” (Amsden, 1990: 16). Weiss and Hobson point out the innovative strategy of Park’s developmental state which provided “subsidies” by which the subsidies were not provided in the form of giveaway but provided in exchange for good performances in terms of output, exports, production quality, and investment in training and R&D (Weiss and Hobson, 1995). Weiss and Hobson also emphasize that Park invented the big bourgeoisie (chaebol) and nurtured them as “national champions” and “empire builders” who prioritized long-term interests of expanding market share over short-term interests of maximizing profits (Im, 1996).4 Moreover, Park’s developmental state has its own rule of discipline which was necessary to respond effectively to crisis situations. Park’s disciplinary rule was one of “forced adjustment” imposed by a powerful state on society (Kim and Im, 2001). During the Park Chung Hee era chaebols, as the few highly diversified “national champions,” rested on a conscious provision of rents, financial subsidies, license privileges, and technological assistance. Without those provisions of rents by the state, chaebols could hardly enter risky ventures in heavy and chemical industries (HCI) in the 1970s. Park Chung Hee devised a harsh but effective rule of forced adjustment whereby adjustment costs were disproportionately borne by society, not by chaebol conglomerates. The core in the rule of forced adjustment was the socialization of adjustment costs and therefore bred serious moral hazards (Kim and Im, 2001).

200 H. B. Im Stability of authoritarian developmentalism under Chun Doo Hwan After the dictator Park Chung Hee was assassinated by his close protégé, KCIA chief Kim Jae Kyu in October 1979, another military authoritarian regime led by Chun Doo Hwan was restored in 1981. With regard to policy regime, the new military authoritarian government inherited most of the pillars of the developmental authoritarian policy regime invented by Park Chung Hee, such as chaebols as the national champion of the Korean economy, “governing the market” (Wade, 1990), a productionist state regime, and socialization of adjustment costs. Chun, nonetheless, made minor revisions to Park’s economic policy regime, which was more “market-conforming” than Park’s developmental state. Therefore, I call Chun’s policy regime a “market-conforming” developmental state policy regime in the sense that the authoritarian state stressed more market rationality and economic liberalization than did Park’s “market-shaping” developmental state. Chun’s liberalization policies included trade liberalization, financial liberalization allowing chaebol companies to invest in NBIFs (Non-Bank Financial Institutions), and abolition of state subsidies to specific strategic industries. But basically Chun’s policy regime can be called a developmental state regime on the ground that the state controlled major banks and financial capital, nurtured chaebols as the champion of Korean industrialization and thus forced adjustment costs disproportionately on politically weak sectors in the society, and excluded workers from the distribution of national growth and repressed workers from organizing unions and protesting in the street as well as in workplaces. During Chun’s tenure, the economy soundly resumed rapid growth with relatively low inflation. While many said that the good economic performance of the Chun government owed to favorable exogenous conditions, called “Three Lows” (low oil prices, low interest rates, and low exchange rates), rapid economic growth was possible mainly because President Chun mended the flaws in Park’s developmental policy regime and complemented it with the injection of neoliberal policies with “autonomous state” apparatuses (Skocpol et al., 1985: 9).

Democratic developmentalism, 1988–1997 Developmentalism survived under the new democratic government of Roh Tae Woo Despite political regime change to a liberal democracy in 1987, the economic policy regime remained intact.5 None of the election promises to overhaul the developmental state policy regime was kept by newly elected President Roh Tae Woo, the candidate of the ruling Democratic Justice Party. President Roh Tae Woo sustained the developmental state policy regime. Roh Tae Woo, as the first democratically elected president since 1972, had to protect the new fragile

Economic growth in Korea 201 democracy from subversion, political turmoil, and militant union workers’ demand for more wages. Immediately after democratic breakthrough on June 29, 1987, more than 3000 strikes erupted in the aftermath. For managing uncertain and volatile transition politics, President Roh needed to maintain a good booming economy that would have served as the cushion for political turmoil. President Roh needed robust economic growth and thus he had to rely on the old policy regime, which had a proven record of long-term high economic growth. The necessity for successful democratic transition prevented him from exploring new economic policy innovations.6 Roh chose “stability” rather than “innovations” in terms of economic policies. Authoritarian capitalists argue that democracy provided workers the right to demand more consumption, and vote-maximizing democratic politicians tried to satisfy workers’ (or low income masses’) demands. As the democratic government tried transfer of income to the workers by reallocating resources from long-term investment to consumption and welfare, the outcome would be lower profit, less investment, and economic stagnation (Galenson, 1959; de Schweinitz, 1964; Przeworski, 2000). However, Roh’s excellent economic and social performances proved the dismal prediction of authoritarian capitalists’ arguments (Galenson, 1959; de Schweinitz, 1964) to be wrong in the case of Korean new democracy. Despite the outburst of workers in the street, the Korean economy had been doing outstandingly well. Economic growth under Roh Tae Woo was very high compared to advanced industrial countries as well as high-growth East Asian emerging market economies. Roh Tae Woo did a good job in managing the many problems that occurred in the transition period. Under the Roh Tae Woo presidency, democracy was not subverted, the economy continued to grow rapidly under democracy, and the middle class did not invite praetorian dictators. Economic growth and crisis under the Kim Young Sam presidency President Roh was succeeded by Kim Young Sam who was the candidate of the same ruling Democratic Liberal Party. Therefore the inauguration of Kim Young Sam was actually an intra-party power succession. Nonetheless, Kim Young Sam as the first civilian president since 1963 aggressively pursued demilitarization and civilianization of politics. However, he did not try to overhaul the developmental state policy regime which had revealed many problems in terms of growth, distribution, transparency, moral hazard, and responding to globalization effectively. And in the last year of his presidency, he put the whole economy into an unprecedented national economic crisis and contributed to the first turnover of power to opposition party leader Kim Dae Jung in the presidential election in December 2007. Under the Kim Young Sam presidency Koreans became richer than any other time in history with per capita income of more than 10,000 dollars in 1995 and Korea joined the OECD, a club of affluent democratic countries. In Asia, only Japan has been a member country of the OECD.

202 H. B. Im Crisis in the developmental policy regime in 1997 The wind of globalization began to blow in Korea in the last years of the Kim Young Sam presidency in the mid-1990s. However, most Koreans believed that economic prosperity would continue without changing the developmental state policy regime. They even welcomed globalization as a window of opportunity that would provide them more markets for Korean exports. They did not understand the negative side of globalization that would change the whole rules of game in international political economy (Wade, 1998; Lee, 2012). Koreans entered into the global open market without instituting new governance in finance, business, and labor. The outcome of insufficient preparedness to globalization was a disaster to Koreans. When the wave of the East Asian financial crisis reached Korea in late 1997, the financial system melted down and the Korean economy was pushed to the brink of state default. South Korea avoided the worst scenario with help from the IMF that bailed out massive loans of 55 billion dollars with many conditionalities. Financial crisis in Korea showed the world that the developmental policy regime had come to an end. Problems in the developmental state policy regime had been accumulating in the last days of the Kim Young Sam presidency, and reached crisis point with the advent of the East Asian financial crisis in Korea. There have been competing diagnoses and explanations about the causes of the economic crisis in Korea. Krugman (1998) argued that Asian crises, including Korea, broke out with the burst of the financial bubble in a contest of declining returns to investment. International capital flows contributed to inflows of foreign capital in Korea, while crony capitalism increased domestic investment in speculative real estate and unsound financial activities. Corsetti et al. (1998) observed unsound fundamentals of several imprudent macroeconomic policies as responsible for the onset of the crisis such as real currency appreciations by pegging fixed exchange with the US dollar, excessive lending to risky and low profitability projects of chaebols, a weak and fragile financial system, and accumulation of short-term debt. Radelet and Sachs (1998: 22) explained self-fulfilling panics in external financial markets as the main causes of the crisis. They argued that the Korean financial crisis was triggered by dramatic swings in creditor expectations about the behavior of other creditors, thereby creating a self-fulfilling, though possibly individually rational, financial panic. Wade and Veneroso (1998) point out the conspiracy of the Wall Street–US Treasury–IMF complex as the main culprit as to the cause of the East Asian financial crisis. The trio conspired to force those countries in East Asia, South Korea as the largest economy among them, to policy regime change to neoliberalism including radical financial liberalization by pulling out massive amounts of invested capital and thus pushing those economies to the verge of bankruptcy. I believe that these theories on the cause of the economic crisis can explain partially the true story about the short-term cause of economic crisis in 1997,

Economic growth in Korea 203 but these theories are not sufficient to explain the long-term structural cause of the crisis. I find that the crisis was caused structurally by two constraints, democratization and globalization. Koreans started to feel the wind of globalization with the Plaza Accord in 1985. The Plaza Accord forced a sharp revaluation of East Asian currencies, and fueled American demands for the opening of financial markets in Korea. Globalization as a whole became a powerful constraint on macroeconomic management of the developmental state. Moreover, the advent of globalization coincided with democratization, and democratization in turn hindered smooth adjustment to the impact of globalization. The electoral democracy immediately had negative effects on Korea’s model of development. Workers launched a massive wave of strikes only a month after the democratic breakthrough in 1987. The strikes ushered in a new era of labor militancy, which would fundamentally hinder effective workings of the developmental state policy regime. Between 1987 and 1990 dissident labor leaders engaged in a wide range of union organizations from regional conferences for unions in small vendor firms, industry federations for service workers, and councils for workers employed by chaebol firms and finally the establishment of a loose umbrella organization for major dissident labor unions, called the “democratic” Korean Confederation of Trade Unions (KCTU) in 1995. Thereby, the national level of labor movements fractured into two hostile peak organizations, a “reformist” official Korea Federation of Trade Unions (KFTU) and a dissident “democratic” KCTU, which had successfully penetrated into chaebol firms. Democratization activated organizing labor union movements at the company, intermediary, and national peak level, but those national and intermediate unions were too weakly organized to force the state and peak associations of big business to agree on a comprehensive social contract binding all major segments of capital and labor to an economically sustainable rate of wage increase. The real wage, in fact, rose 8.3 percent annually between 1987 and 1996, 3.7 percentage points higher than one achieved between 1979 and 1986 (Kim and Im, 2001). The rise of union movements and labor militancy threatened the political mechanism of adjustment under the developmental policy regime. The typical adjustment mechanism was state subsidies to chaebol firms and repression of wage increase. When faced with stagflation crisis, the developmental state injected massive relief loans for chaebol firms while forcing on workers a dramatic reduction in wage increases. After 1987, located within a dense web of linkages between industries established by vertically and horizontally integrating chaebol conglomerates, as well as placed in a geographically concentrated network of subcontractors organized around the final assembler, chaebol, labor unions could individually disrupt production in myriad related industries through strikes. Labor unions had a structural power to decide the wage rate, which constrained state action and business calculation even without an active exercise of it by union leaders. Democratization sowed the seeds for the demise of one of the main pillars of economic policy regime, wage repression by developmental state (Kim and Im, 2001). Moreover, the coming of electoral democracy made the formula of adjust-

204 H. B. Im ment of policy regime obsolete by transforming chaebol itself into a privileged status group. After democratization, finance officials in 1987 imposed a ceiling on loans for Korea’s forty largest chaebol conglomerates and pushed for a gradual reduction of cross shareholding between affiliate chaebol firms. Then in 1990 amidst a business crisis, Roh Tae Woo envisaged a regrouping of chaebol into four “specialized” industrial groups with four or five “core areas” of production through a swap of secondary “unrelated” businesses with other conglomerates. The call for chaebol reform had a large audience within society. These reform efforts, however, failed dismally. They were actively sabotaged by an organized lobby of chaebol groups, but also structurally preempted by Korea’s dependence on chaebols for continuous export growth. However, chaebols were not merely a passive target for change. They were also an active player whose decision ironically weakened Korea’s old model of growth from which they benefited so much. As globalization made the opening of financial markets inevitable, in addition to an intense political pressure from abroad, finance officials encouraged entry of chaebols into formal financial markets as well as curbing of market lenders, to establish local commercial banks and a host of nonbank financial institutions without an effective program of decontrol on interest rates, which resulted in a dangerous situation of moral hazards. Chaebols soon acquired a controlling share in most insurance firms, investment and finance companies, and securities houses. These nonbank financial institutions became a source of capital for distressed chaebols and hardly brought a more efficient allocation of economic resources. Chaebols’ takeover of financial institutions only worsened Korea’s already serious problem of moral hazards as financial institutions become a direct source of capital for inefficient chaebol firms who could not borrow from commercial banks. The maladjustment to globalization and insufficient policy innovation under democratic governments generated structural crisis in the developmental state policy regime. Therefore, the economic growth regime forged by Park Chung Hee had been actually disintegrated well before a financial crisis struck Korea in late 1997 (Kim and Im, 2001). However, despite unprecedented economic crisis in late 1997, Koreans went to the polling places and elected an opposition leader to the president and delegated him to overhaul the developmental state policy regime and to institute a new policy regime that could resume economic growth without the so-called “crony capitalism” which prevailed under authoritarian regimes and extended its life in the new democracy. Therefore, the election in 1997 shows the durability and the improved accountability of the Korean democracy. The election demonstrated Korean people’s determination to live under democracy regardless of severe external fluctuations like the financial crisis. And the defeat of the ruling party candidate in the election showed that the electoral mechanism of accountability was working since the people called on the ruling party to take responsibility for generating such profound national economic crisis. Democracy helped Korea to make a comprehensive policy regime change without arousing serious

Economic growth in Korea 205 political instability by institutionalized electoral mechanism for legitimate power change (Haggard, 2000; Kim, 2001).

Democratic neoliberalism, 1998–present Policy regime change to democratic neoliberalism under the Kim Dae Jung presidency In the midst of national economic crisis, the government changed through the presidential election in late 1997. At the presidential election on December 18, 1997, the Korean people elected Kim Dae Jung to the presidency. The election of Kim Dae Jung meant the first peaceful transfer of power to the candidate of an opposition party through popular votes. Koreans mandated the long time opposition leader the tasks of advancing democracy toward consolidation, overcoming economic crisis and instituting new democratic governance that would restore economic growth and prosperity. Kim Dae Jung escaped from the economic crisis by the infusion of emergency stand-by loans by the IMF, which provided Korea with an unprecedented 55 billion dollars in exchange for neoliberal structural reform along the lines of the Washington Consensus. IMF actually demanded that Korea should discard Park’s developmental state model and instead adopt an Anglo-Saxon neoliberal economic model. Kim Dae Jung’s solution was “the parallel development of democracy and market economy.” Kim Dae Jung publicly questioned the efficacy of the authoritarian developmental state model. As a result, Park’s developmental authoritarianism was degraded from a “historical necessity” to a “historical obstacle” hindering “parallel development of democracy and market economy” (Cho, 1997; Hankookchungchiyounkoohoe, 1998). Policy regime change to neoliberalism The Kim Dae Jung government launched four key structural reforms in the areas of chaebols, financial institutions, public sector, and labor. In instituting a more flexible labor market, the Kim Dae Jung government, for the first time in history, relied on tripartite compromise, coordination, and agreement among labor, capital, and the state. With new tripartism, the Kim Dae Jung government persuaded unions to accept a flexible labor market in return for more political and social rights to the workers and made a grand compromise in the “February 6 Social Pact.” The tripartite agreement helped Kim Dae Jung to persuade fleeing Wall Street capital to return and reinvest in Korea and thus help Korea overcome the financial crisis. After overcoming the financial crisis, the Kim Dae Jung government found the IT industry to be the future source of growth. The Kim Dae Jung government built up a nationwide high-speed internet superhighway networks, nurtured high-tech venture firms, and for the first time in history constructed a Korean welfare state, called the “productive welfare system,” to compensate market

206 H. B. Im losers and provide social safety nets for them. Under democratic governments, high economic growth continued without victimizing equitable distribution. On being elected to the presidency, Kim Dae Jung reached the same conclusion as the IMF that the cause of the economic crisis lay in the developmental state policy regime and thus the prescription for escaping from the crisis must focus on reforming the four main pillars of developmental policy regime such as the chaebols’ monopoly, moral hazard in financial institutions, translucent and unaccountable public sector, and rigid labor market. The Kim Dae Jung government instituted new governance in those four targeted sectors to satisfy the “global standard,” meaning an Anglo-Saxon or neoliberal policy regime.7 Neoliberal policy innovations of Kim Dae Jung First, in order to lay the foundation for corporate governance reforms, President Kim Dae Jung reached an agreement with major chaebol owners on the “Five Principles of Chaebol Reform” on January 13, 1998 and announced three supplementary principles of chaebol reform on Independence Day of August 15, 1998. The “Five Plus Three Principles” are the backdrop to the corporate governance reforms of the Kim Dae Jung government. A lot of improvement has been made in the internal and external corporate governance with regard to enhancing transparency, accountability, and minority shareholders’ rights (Cho, 2003: 296–297), the removal of the shadow-voting rule, increasing the ratio and strengthening the power of outside members in the board of directors.8 The transparency in corporate governance has been enhanced with improved disclosure rules. Accounting principles that complied with international standards were introduced in December 1997 and, beginning in August 2000, consolidated financial statements became mandatory for companies with assets larger than 2 trillion won. In 2002, penalties for fraudulent public disclosure by listed firms were increased (Ahmadjian and Song, 2004). The governments strengthened auditing procedures. The government can impose fines up to 500 million won on accounting firms for improper audits. There also has been remarkable reform in external corporate governance. First, the new Commercial Code streamlined merger procedures and made M&A by foreign companies easy. The acquiring firm can purchase more than 90 percent of the target company shares (Cho, 2003: 301). The new regulations removed limit on equity ownership by foreigners and hostile takeover barriers, and allowed M&A specialized funds (Jang, 2003). Now foreigners can purchase 100 percent of the shares of most Korean firms. Korea changed from the most protected country to foreign investors to the most foreign investment capital-friendly country. Second, with respect to the governance of financial institutions the Kim Dae Jung government established an integrated supervisory agency, called the FSC (Financial Supervisory Commission) in the aftermath of the crisis and placed all regulatory powers over banks, security companies, and insurance firms under the new FSC. The idea to establish an integrated financial supervisory agency was

Economic growth in Korea 207 first proposed by the Presidential Commission on Financial Reform under the Kim Young Sam government and was not realized until the inauguration of President Kim Dae Jung because of bureaucratic infighting and political opportunism of nondecisions in delicate financial reforms. However, as the IMF forced Korea to restructure its financial institutions, political circles rushed to install the FSC (Kim, 2003: 73). The FSC played a pivotal role in improving the poor financial sector governance system. The FSC implemented the closure of financial institutions that had never occurred before. As of September 1998 the FSC closed five banks, sixteen merchant banks, two security companies, and an investment trust company. In addition, four security companies, four insurance companies, and an invest trust company were suspended. The total number of either closed or suspended was ninety-four. After overhauling financial institutions, the FSC introduced a prompt corrective system and management evaluation system, strengthened the bank disclosure system by increasing the regular disclosure items to the scope requested by the IAS, and upgraded prudential regulation standards by strengthening loan classification standards as well as provisioning requirements in accordance with international standards (Nam et al., 1999). The last, but the most important neoliberal innovation that Kim Dae Jung had to launch was the reform for instituting a neoliberal flexible labor market. Given the most militant unions and workers, international capital was unwilling to invest in Korea without labor reform. Therefore, Kim Dae Jung launched labor reform for flexible labor markets. Kim Dae Jung, before the election, was known as the champion of democracy and the friend of workers. After the election, President-Elect Kim changed and embraced IMF prescriptions for the flexible labor market. Kim Dae Jung transformed himself from a pro-labor populist politician to a neoliberal “IMF man in Seoul”; he implemented aggressively IMF-mandated flexible labor market reforms (Cumings, 1999: 36). In implementing neoliberal labor policies, Kim chose a consensual approach of forming a social pact to reform the rigid labor market to a flexible labor market. He tried to institute a flexible labor market with the consent of organized workers who would be the victims of a flexible layoff system by means of burden sharing the costs of restructuring among labor, capital, and government. On December 26, President-Elect Kim proposed the establishment of the Tripartite Commission to overcome the economic crisis in the meetings with union leaders and urged them to discuss policies and measures to surmount the national disaster (KILF, 1998: 5). In less than a month the major actors in labor politics decided to accept Kim’s proposal for establishing a tripartite commission. To summarize, the major agreements on ninety issues, among them labor, capital, and government, were: (1) an earlier implementation of flexible layoffs and legalization of hiring substitute workers; (2) allowing labor union activity; (3) recognizing school teachers’ union activity in collectivity bargaining; (4) allowing the unemployed to join unions; (5) strengthening social safety net; (6) tripling the unemployment fund from 0.7 trillion won to 2.0 trillion won (7); assuring business’s greater share of burden through corporate governance

208 H. B. Im reform and corporate restructuring; (8) politicians’ pledge for political reforms (Kim, 2000: 206–209). Kim Dae Jung instituted the Tripartite Commission and three parties of labor, business, and the government of the Commission concluded the February 6 Social Pact in 1998. In the pact making, unions made concession to government and business allowing the earlier implementation of flexible layoffs in return for securing industrial citizenship of workers, active policy of employment, more social safety net and social welfare. The government and the political society moved quickly to back up the political exchanges through the legislations of the agreements. The National Assembly quickly convened to revise labor laws on February 13 in accordance with the Social Pact of February 6. The new laws allowed flexible layoffs not only in the case of emergency situations, but also in cases of corporate mergers and acquisitions, handovers and restructurings (Mo and Moon, 2003: 64). The February 6 Social Pact played a key role in overcoming financial crisis, short-term financial crunch in particular. The Social Pact and the quick legislative actions that backed up the agreements assured international capital of the prospects for success of financial and corporate restructuring. As the Social Pact removed the barriers to restructuring business and banks through layoffs and hiring substitute workers, international capital had confidence in the ability of the Korean government and businesses to successfully manage the financial crisis and restructure the economy. Creditors in Wall Street started to agree on rolling over the matured loans and converting short-term loans into long-term loans, and took actions to buy the bankrupted companies and to invest in the Korean stock market. In less than six months the Korean economy escaped from shortterm credit crunch and the government launched longer-term neoliberal restructuring. Sustaining democratic neoliberalism under the Roh Moo Hyun presidency: democratic populist neoliberalism Roh Moo Hyun’s election to the presidency in 2002 signified the intraparty transfer of power and the inauguration of the second consecutive center-left government. He was a populist in a sense that he was very popular among progressive young voters and owed his election very much to them. However, after inauguration he faithfully followed Kim Dae Jung’s neoliberal policies. He further cut corporate taxes to induce foreign direct investment (FDI) and pursued a free trade regime by making bilateral free trade agreements starting with the Korea–Chile FTA in 2004. By the end of his presidency, Roh Moo Hyun concluded four major FTAs (Korea–Singapore, Korea–EFTA, Korea– ASEAN, Korea–US [KORUS]). As the Three Kims (Kim Young Sam, Kim Dae Jung, Kim Jong Pil) Era came to an end, new political phenomena have risen in Korea. The election of Roh Moo Hyun signals an end to the politics of the Three Kims generation. Postmodern and post-materialist political issues such as generational shift, gender

Economic growth in Korea 209 equality, environmental protection, peace, and civil society came to the fore of the political agenda. These changes did not occur spontaneously after the exit of the Three Kims who dominated the Korean political scene. Profound social change acted as the motive force that pushed the emergence of new politics. That social change is the rise of what I call “neo-nomadic society” in Korea. South Korea is one of the countries where the IT revolution has been advancing very fast. The number of mobile phone and internet users and the total amount of internet use is the highest in East Asia except city states like Singapore and Hong Kong. More than 30 million Koreans became netizens who access the Internet every day. The number of mobile phones exceeds the number of population. South Korea is the only country that has completed the countrywide information superhighway infrastructure. The per capita VDSL user is the first in the world, surpassing the United States. As far as the IT revolution is concerned, South Korea is no more the country that is “catching up” advanced countries, but the frontrunner that leads the revolution. Koreans’ nomadic temperaments have reemerged with the advent of digital revolution and globalization. The “digital gale” in “Teheran Valley,”9 spectacular growth of mobile phones and internet users, and phenomenal increase in digital access have transformed the Korean people into virtual nomads. The inflow of foreign workers, flexible labor markets, free trade agreements, and the opening of agricultural markets by the WTO have compelled Korean workers and farmers who have to travel to find jobs for survival to become lower-nomads. Affluent people become hyper-nomads who travel all over the world to preoccupy the profitable resources. Thomas Friedman of The New York Times pointed out that Koreans are one of the “cybertribes” in the neo-nomadic world. Equipped with the Internet and connecting it with a diaspora community (7 million overseas Koreans) spread out all over the world, the Korean cybertribe can combine speed, creativity, entrepreneurial talent, and global networking, and generate enormous wealth (Friedman, 2000). The rise of the neo-nomadic society has transformed Korean politics toward being organizationally smaller in size, faster in speed, networking-friendly, more open, and tolerant. Neo-nomadic democracy slims down the size of political organization and thus realizes the high-efficiency, low-cost politics. Heavy physical materials add inconvenience to ceaselessly traveling neo-nomads. A neonomadic democracy will likely transform Korean politics to a more open, flexible, participatory, and inclusive one (Im, 2009). Neo-nomadic democracy thrives on a neo-nomadic economy. Netizen society power and internet politics could not have been possible without the development of neo-nomadic industry. Plus, Korea is the frontrunner in the IT industry in terms of IT hardware, software, and systems. Also, the IT industry became the major source of new economic growth surpassing heavy and chemical industries and traditional labor-intensive industries. Neo-nomadic democracy goes hand in hand with the neo-nomadic economy and creates a new parallel development of democracy and market economy in the twenty-first

210 H. B. Im century. Democracy and market economy have found a new source of partnership in the neo-nomadic IT industry. Sustaining democratic neoliberalism under a different party government of Lee Myung Bak: Keynesian neoliberalism A conservative politician and former CEO of the Hyundai group, Lee Myung Bak won the 2007 presidential election. His victory signified the second peaceful turnover of power from the ruling party candidate to the opposition party candidate, and thus Korean new democracy passed Huntington’s test for democratic consolidation. However, the rotation of power did not generate policy regime change because previous center-left governments had already pursued radically neoliberal economic policies. What Lee Myung Bak had to do in terms of economic policy regime was to deepen the neoliberal business-friendly policy regime such as more reduction of corporate taxes, privatization of public corporations, deregulation, labor market flexibility, small government, privatization of welfare service, and expanding FTA agreements with the EU, Canada, Mexico, Australia, New Zealand, China, and Japan. What is unique in Lee Myung Bak’s neoliberalism was that he mixed neoliberalism with Keynesian public works programs such as the Four Great Rivers Project. In less than a year since Lee Myung Bak’s inauguration, the Korean economy was confronted with the second economic crisis, which originated in the heart of global capitalism, Wall Street, in October 2008. Lee Myung Bak responded to the 2008 global crisis better than Kim Dae Jung did in 1997–1998 due to the buoyancy of the Chinese economy and the SWAP agreement with the U.S., Japan, and China. After the crisis, surviving chaebol firms emerged as the true global players, some of them (e.g., Samsung) surpassing the Japanese rivals by preemptive entering into new dynamic industries such as IT and cultural industries. The Lee Myung Bak government pursued further globalization and concluded FTA with the U.S. and EU. Even though economic growth resumed with the input of neoliberal reform therapy, social inequality worsened and the whole society polarized among classes, occupations, industries, and schools. The incumbent Lee Myung-Bak government strengthened neoliberal policies and promoted “business-friendly” policies, such as tax cuts for the rich, and deepened social polarization as a result. The tax reduction for the rich goes against the social justice that John Rawls teaches. Tax reduction to the rich generated reverse income transfer from the poor to the rich, deepened social polarization between the rich and the poor with regard to income, and dismantled the thick middle class. As a consequence, the class structure post the financial crisis in 1997 has shifted from a “diamondshaped” class structure to a “snowman-shaped” or “sandglass-shaped” one. The whole society disassembled into a “society without a waist.” Society-wide polarization has taken place in every area of income, property, employment, education, industry, and class (No, 2009).

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Comparative economic performances of authoritarian developmentalism, democratic developmentalism, and democratic neoliberalism When reviewing the performances of authoritarian governments and democratic governments, I find that the performances of authoritarian governments have been overstated while the performances of democratic governments have been underrated. There have been many myths in the thesis of poor performances of democratic governments and public disenchantment about democratic governments. Also the “miraculous” achievement of authoritarian government has to be demystified because this miraculous achievement was attributed not only to wise and proper strategic choice of development by dictators (à la Machiavelli, virtu) but also indebted to many exogenous instances of luck that the dictators were handed over from the past, outside forces, and cultural legacies (à la Machiavelli, fortuna). Therefore, I can say that democratic developmentalism and democratic neoliberalism is superior to authoritarian developmentalism in terms of economic development. Authoritarian developmental thesis denied in terms of economic development since democratic transition in 1987 The economic performances of democratic governments after democratic transition in 1987 were strong, robust, and sustainable. Authoritarian capitalists predicted that immediately after democratic transition workers will stand up to demand for more wages to consume and capitalists and governments will respond to workers’ demands positively because now workers have organization to solve the collective action problem and votes to decide the locus of power. Thus, the firms increased wages and the government transferred income from the rich to the poor through taxes. The outcome, according to authoritarian capitalists, would be economic stagnation as wage increase reduces profit rate, then firms cut investment and at the same time the government tends to distribute income away from investment by tax, transfer, and less public investment. Hence lowering investment slows down growth (Przeworski et al., 2000: 143). However, in South Korea after democratic transition in 1987, none of the post-transition syndromes occurred. Of course, workers erupted. After democratic breakthrough at the June 29 Compromise, more than 3000 strikes erupted between July and August only throughout the whole industrial workplaces. As authoritarian capitalists predicted, workers demanded more wages, better working conditions, and rights to organize and collective actions. Nonetheless, despite massive workers’ eruption and the sharp rise of wages,10 firms did not reduce investment: domestic investment rate in 1987 was 32.4 percent which was very high compared with that of advanced industrial countries, to say nothing of Latin American new democracies; gross fixed capital formation as the percent of GDP also remained very high at the level of 30 percent compared

212 H. B. Im with 22 percent in advanced industrial countries and 21 percent in Latin American countries (Figure 9.1). GDP growth rate in 1987 was very high, at 11 percent. Korean capitalists did not reduce investment despite steep rise of wages because the economy was so strong and robust it made more profit even with paying more wages to workers. The success of economic development under the democratic governments is not confined to the democratic transition period but was extended to the whole democratic consolidation period. Except in 1999 when the GDP growth rate dropped to –7 percent from the previous year’s 5 percent, average GDP growth rate in the whole period of democracy after transition (1987–2012) is about 6.2 percent which is not much lower than average GDP growth rate in the whole authoritarian period (1961–1986), 7.9 percent (Figure 9.2). Among three periods of authoritarian developmentalism, democratic developmentalism, and democratic neoliberalism, growth rate in the second period is the highest, 8.6 percent, while that in the first period is the second highest, 7.9 percent, and the growth rate in the third period is the lowest, 3.5 percent.11 Nonetheless, compared with growth rates in the same period (1998–2012) of advanced industrial countries and Latin American emerging market countries, the Korean economy did perform much better than those two groups (3.5 percent in Korea, 1.9 percent in advanced countries, 3.1 percent in Latin American countries). Second, Gross Fixed Capital Formation (as percent of GDP) during the democratic period has been much higher than the authoritarian ‘Miracle’ period (Figure 9.1). Between 1961 and 1986, average GFCF was 26.4 percent, while that of average GFCF in the democratic period is about 32 percent. Between the democratic developmental period and the democratic neoliberal period, the growth rate of GFCF in the democratic neoliberal period is slightly higher than that of the democratic neoliberal period, 36 percent and 36.4 percent respectively. 40

Percentage of GDP

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Figure 9.1 Gross fixed capital formation (% of GDP). Source: World Databank (http://databank.worldbank.org).

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