Second Image IPE: Bridging the Gap Between Comparative and International Political Economy (International Political Economy Series) 3031376927, 9783031376924

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INTERNATIONAL POLITICAL ECONOMY SERIES SERIES EDITOR: TIMOTHY M. SHAW

Second Image IPE Bridging the Gap Between Comparative and International Political Economy Andreas Nölke

International Political Economy Series

Series Editor Timothy M. Shaw , University of Massachusetts Boston, Boston, USA; Emeritus Professor, University of London, London, UK

The global political economy is in flux as a series of cumulative crises impacts its organization and governance. The IPE series has tracked its development in both analysis and structure over the last three decades. It has always had a concentration on the global South. Now the South increasingly challenges the North as the centre of development, also reflected in a growing number of submissions and publications on indebted Eurozone economies in Southern Europe. An indispensable resource for scholars and researchers, the series examines a variety of capitalisms and connections by focusing on emerging economies, companies and sectors, debates and policies. It informs diverse policy communities as the established trans-Atlantic North declines and ‘the rest’, especially the BRICS, rise. NOW INDEXED ON SCOPUS!

Andreas Nölke

Second Image IPE Bridging the Gap Between Comparative and International Political Economy

Andreas Nölke Institute of Political Science Goethe University Frankfurt Frankfurt, Hessen, Germany

ISSN 2662-2483 ISSN 2662-2491 (electronic) International Political Economy Series ISBN 978-3-031-37692-4 ISBN 978-3-031-37693-1 (eBook) https://doi.org/10.1007/978-3-031-37693-1 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover credit: © Rob Friedman/iStockphoto.com This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

For Andrea Once again, thank you for your patience and support

Preface

This book summarizes a research program I have pursued for the last 20 years, after a previous focus on combining International Relations and Organization Theory that was culminating in my habilitation thesis on transnational policy networks. The basic idea of this book is to recombine Comparative and International Political Economy, two sub-disciplines that have developed very different agendas since the late twentieth century. This divergence has led to a neglect of theorizing the interplay between domestic and international capitalism, despite the groundwork by Peter Katzenstein and Peter Gourevitch, among others, in the last 1970s. My opus magnum bundles my earlier studies into new insights. Only by combining specific studies on very diverse topics such as accounting standards, deep integration in trade, Eurozone crisis and stabilization, German exportism, the emergence of dependent capitalism in East Central Europe, multinationals from large emerging economies, economic de-globalization and the global economic order, this book can develop new theory linking Comparative and International Political Economy. Large parts of the book draw very substantially on my previous publications (partially with coauthors), as indicated in the footnotes. However, these publications are not simply reproduced, but rephrased and summarized as far as relevant for the overall theoretical argument. In addition, these summaries have been updated, about factual developments as well

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as literature written since the publication of the original articles. In some cases, existing publications had to be complemented by new research, to develop a comprehensive analytical framework. The book is structured along the classical topics of International Political Economy. It also covers the most important national economic models discussed in Comparative Political Economy. Thus, I hope that it can serve as a basis for an advanced introduction to Political Economy. Most of all, however, I hope that Second Image IPE contributes to a reunion of the two sister sub-disciplines in future research and teaching. Cologne, Germany May 2023

Andreas Nölke

Acknowledgements

Funded by Volkswagen Foundation Over the past 20 years, numerous co-authors have joined me in this research program temporarily. I am immensely appreciative of their invaluable inspirations, contributions and support. My thanks go to Alexandre de Podestá Gomes, Angela Wigger, Arjan Vliegenthart, Bastiaan van Apeldoorn, Benjamin Braun, Christian May, Daniel Kinderman, Daniel Mertens, Daouda Cissé, Dorottya Sallai, Ian Bruff, Jan Fichtner, James Perry, Jean-Christophe Graz, Johannes Petry, Gerhard Schnyder, Heather Taylor, Henk Overbeek, Kai Koddenbrock, Marcel Heires, Matthias Ebenau, Michael Schedelik, Moisés Balestro, Sandra Eckert, Sigrid Quack, Simone Claar, Sven Grimm, Tim Engartner, Tobias ten Brink and Vincent Lindner. I also learned a lot from Arie Krampf, Fulya Apaydin and Merve Sancak during our common work in organizing the SASE mini conferences on “Connecting the Dots between Global Capitalism and National Capitalisms” in Amsterdam and Rio de Janeiro. I am also extremely indebted to Martin Höpner for countless ideas and suggestions regarding this research agenda. Finally, I appreciate the advice given by three anonymous reviewers. Brigitte Holden and Niklas Kullick have supported me during the preparation of the manuscript with excellent research assistance. Thank you very much! This book would not have been possible without the unwavering support by Tim Shaw and Anca Pusca at Palgrave. I am also very grateful

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to Arun Kumar Anbalagan for his diligent support and patience during the production process of this book. I was only able to write this book due to the support by the Volkswagen Foundation within its Opus Magnum program. Silvia Birck and Vera Szöllösi-Brenig were very helpful in the preparation and the administration of this research grant. Carola Westermeier replaced me in my professorial duties. Thank you for your support! The empirical research for previous publications that form the background of this book was supported by the German Research Foundation under Grant Numbers NO 855/3-1, NO 855/3-3 and NO 855/4-1, as well as by the NORFACE research program “Democratic governance in a turbulent age (Governance)” with funding from the European Union’s Horizon 2020 research and innovation program under Grant Agreement No. 462-19-080.

Contents

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Introduction: Why “Second Image IPE”? 1.1 The Need for a Second Image International Political Economy 1.1.1 Why We Need Mid-Range Political Economy Theorizing 1.1.2 Why International Political Economy Needs Comparative Political Economy 1.1.3 Why Comparative Political Economy Needs International Political Economy 1.2 The State of the Second Image IPE Literature 1.2.1 Second Image: Intellectual Predecessors and Their Limitations 1.2.2 Second Image Reversed: Intellectual Predecessors and Their Limitations 1.2.3 Recent CPE/IPE Combinations in the Context of the Discussion on Growth Models 1.3 The Plan of the Book References Building Blocks for a Recombination of Comparative and International Political Economy 2.1 Comparative Political Economy: The Diversity of National Capitalisms

1 1 2 5 7 9 9 12 14 15 16 23 23

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2.1.1

A Brief Sketch of Relevant Theory Development in Comparative Political Economy 2.1.2 Selected Core Features of National Models of Capitalism 2.2 International Political Economy: International Institutions and Economic Processes 2.2.1 A Brief Sketch of Relevant Theory Development in International Political Economy 2.2.2 Selected Core Features of International Institutions and Economic Processes References 3

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24 28 33 34 36 41

Security 3.1 Second Image Reversed: War and the Historical Evolution of Export-Led Capitalism 3.1.1 The Puzzle: Emergence of Pronounced Export-Led German Capitalism in Spite of Manifold Disadvantages 3.1.2 Security Considerations and the Historical Evolution of the German Export Model 3.1.3 Security Considerations and the Emergence of Export Models in Small Emerging Economies 3.2 Second Image: Export-Led Capitalism and Foreign Policy 3.2.1 Foreign Policy Prerogatives of Export-Oriented Growth Models 3.2.2 Germany’s Foreign Policy in the European Single Market 3.2.3 External Monetary Policy: Germany, Bretton Woods and the European Monetary System 3.2.4 The Relationship Between the German Export Model and German Security Policy References

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Finance 4.1 Second Image: Liberal Market Economies and Postnational Economic Norms 4.1.1 The US Economic Model and Policy Prescriptions of World Bank and IMF

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50 54 58 60 61 64 67 69 73

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Liberal Versus Coordinated Economies in the Regulation of Hedge Funds 4.1.3 Anglo-American Financialized Economies and the Rise of Transnational Private Governance 4.2 Second Image Reversed: Financialization and the Destabilization of National Capitalisms 4.2.1 The Erosion of Traditional Rhenish Corporate Governance 4.2.2 Fair Value Accounting Standards and Coordinated German Capitalism 4.2.3 Transnationally Mobile Capital and State-Permeated Capitalism in Brazil References

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4.1.2

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87 91 92 99 103 107

Regional Integration 5.1 Second Image Reversed: E(M)U and the Erosion of European Varieties of Capitalism 5.1.1 The European Integration Process and Pressure on European Varieties of Capitalism 5.1.2 The Euro and the Destabilization of Southern European Capitalism 5.2 Second Image: The German Economic Model and EU Economic Stabilization 5.2.1 The German Economic Model as Blueprint for Eurozone Crisis Rescue Prescriptions 5.2.2 The U-turn: German Export Capitalism and NextGenerationEU References

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Trade 6.1 Second Image: Regulatory Diversity of Capitalisms and Transatlantic Cooperation 6.1.1 Comparative Capitalism, Technical Standards and the Failure of the TTIP Negotiations 6.1.2 The Exception to Prove the Rule: Transatlantic Harmonization of Accounting Standards 6.2 Second Image Reversed: Deep Integration and Emerging Market Capitalism

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117 118 121 127 128 134 139

145 146 150 155

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6.2.1 6.2.2 6.2.3

Deep Trade Integration and National Institutions of Capitalism Controversies About Deep Integration in Central America Opposition to Deep Integration During the Negotiations of the EU-Southern Africa Economic Partnership Agreement

References 7

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162 167

Foreign Direct Investment 7.1 Second Image Reversed: Multinationals and Types of Emerging Market Capitalism 7.1.1 Embracing FDI: The Emergence of Dependent Market Economies in East Central Europe 7.1.2 Selectively Using FDI: Foreign Multinationals and the Rise of State-permeated Capitalism 7.2 Second Image: Multinationals from Emerging Markets and Global Economic Institutions 7.2.1 The Rise of Multinational Corporations from Emerging Markets: State Capitalism 3.0 7.2.2 Domestic Public Support Measures for Multinationals in State-permeated Capitalism 7.2.3 Multinationals Based in State-Permeated Capitalism and Global Economic Governance References

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Global Order 8.1 Second Image Reversed: Globalization, De-globalization and National Economic Models 8.1.1 Comparative Capitalism and Globalization 8.1.2 Economic De-globalization: Relevant Aspects for National Models of Capitalism 8.1.3 Economic De-globalization and National Models of Capitalism: First Traces 8.2 Second Image: Emerging Market Capitalism and Postnational Global Economic Norms 8.2.1 Institutional Incompatibilities Caused by the Rise of State-Permeated Capitalism

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8.2.2 8.2.3

The Heterogeneity of Growth Models and the Limits of Cooperation in Global Finance The State-Capitalist Contestation of Postnational Liberal Institutions in Global Finance

References 9

Conclusion 9.1 Findings: The Contours of Second Image IPE 9.1.1 The Big Picture: A Deeply Unbalanced Global Political Economy 9.1.2 Linkages Between National and International Capitalism 9.2 Normative Concerns and Policy Implications: Perils of Intrusive Liberalism 9.2.1 A Normative Focus on National Economic Self-Determination 9.2.2 Policies in Favor of Balanced Growth Models and Institutional Complementarities 9.2.3 Second Image IPE and the Problem of International Cooperation 9.3 Future Research Agenda: Toward Historical Political Economy 9.3.1 The Findings in Historical Context: A Move Towards Liberalism and Back 9.3.2 Elements of Historical Political Economy References

Index

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222 227 233 233 233 236 242 242 244 248 252 252 256 259 265

Abbreviations

ACP AIFM ASEAN+3 BBBEE BDI BEE BJP BNDES BWI CBAM CC CETA CHIPS CIPS CME COMECON CRA CSR DEG DGB DIN

Africa, the Caribbean and the Pacific Alternative Investment Fund Managers ASEAN Member States and the People’s Republic of China, Japan and the Republic of Korea Broad-Based Black Economic Empowerment Bundesverband der Deutschen Industrie/Federation of German Industries Black Economic Empowerment Bharatiya Janata Party Banco Nacional de Desenvolvimento Economico e Social Bretton Woods Institutions Carbon Border Adjustment Mechanism Comparative Capitalism Comprehensive Economic and Trade Agreement Clearing House Interbank Payments System China International Payments System Coordinated Market Economy Council for Mutual Economic Assistance Contingent Reserve Arrangement Corporate Social Responsibility Deutsche Entwicklungsgesellschaft/German Development Corporation Deutscher Gewerkschaftsbund/German Trade Union Confederation Deutsches Institut für Normung/German Institute for Standardization xvii

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ABBREVIATIONS

DME DR-CAFTA ECJ ECOFIN ECSC EEC EFSF EFSM EMS EMU EPA ESM ETF FASB FDI FSB FSF FTA FVA GAAP GIZ HME IASB IASC IFRS IIA IMF IMFC IOSCO IPR ISI ISO JSE LME MME MNC NDI NGEU NGO OEP PKE PTB

Dependent Market Economy Dominican Republic and Central America Free Trade Agreement European Court of Justice Council for Monetary and Financial Affairs European Coal and Steel Community European Economic Community European Financial Stabilization Facility European Financial Stabilization Mechanism European Monetary System Economic and Monetary Union Economic Partnership Agreements European Stabilization Mechanism Exchange Traded Fund Financial Accounting Standards Board Foreign Direct Investment Financial Stability Board Financial Stability Forum Free Trade Agreement Fair Value Accounting Generally Accepted Accounting Principles Gesellschaft für Internationale Zusammenarbeit/German Development Agency Hierarchical Market Economy International Accounting Standards Board International Accounting Standards Committee International Financial Reporting Standards International Investment Agreement International Monetary Fund International Monetary and Financial Committee International Organization of Securities Commissions Intellectual Property Rights Import-Substitution Industrialization International Organization for Standardization Johannesburg Stock Exchange Liberal Market Economy Mixed Market Economy Multinational Corporation Normenausschuss der Deutschen Industrie NextGenerationEU fund Non-Governmental Organization Open Economy Politics Post-Keynesian Economics Partido Trabalhista Brasileiro/Brazilian Labor Party

ABBREVIATIONS

R&D ROSC SACU SADC SEC SME SPFS SSA SURE SWIFT TBT TDCA TRIPS TTIP UNCTAD US GAAP VoC WTO ZEW

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Research and Development Report on Observance of Standards and Codes Southern African Customs Union Southern African Development Community Securities and Exchange Commission State-permeated Market Economy Bank of Russia’s System for Transfer of Financial Messages Social Structures of Accumulation Support to Mitigate Unemployment Risks in an Emergency Society for Worldwide Interbank Financial Telecommunication Technical Barriers to Trade Trade, Development and Cooperation Agreement Trade-related aspects of Intellectual Property Rights Transatlantic Trade and Investment Partnership United Nations Conference on Trade and Development United States generally accepted accounting principles Varieties of Capitalism World Trade Organisation Zentrum für Europäische Wirtschaftsforschung/Mannheim Center for European Economic Research

List of Figures

Fig. 2.1

Fig. 2.2 Fig. 2.3

Fig. 2.4

Fig. 2.5

Fig. 2.6 Fig. 5.1

Fig. 5.2

Fig. 7.1

Market capitalization of listed companies for selected countries (Source Own representation, based on data from World Bank) Trade balances for selected countries (Source Own representation, based on data from World Bank) Integration into global markets for goods for selected countries (Source Own representation, based on data from World Bank) Capital mobility as indicator of financialization (Source Own representation, based on Reinhart and Rogoff [2009: 165]) Foreign direct investment as share of global activity (Source: Own representation, based on data from World Bank) Trade as share of global economic activity (Source Own representation, based on data from World Bank) Exports in relation to gross domestic product: Germany in comparison to Italy and France (Source Own representation, based on data from World Bank) Balance of payment in relation to gross domestic product: Germany in relation to the Southern Eurozone (Source Own representation, based on data from OECD) Restrictions towards foreign direct investments for selected countries (Source Own representation, based on data from the OECD FDI restrictiveness index)

31 32

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40 41

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LIST OF FIGURES

Fig. 7.2

Fig. 8.1 Fig. 8.2

Share of FDI stock in relation to gross domestic product for selected countries (Source Own representation, based on data from UNCTAD) Number of trade interventions globally (Source Own representation, based on data from Global Trade Alert) Number of signed and terminated investment agreements globally (Source Own representation, based on data from UNCTAD)

184 209

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List of Tables

Table 1.1 Table 2.1 Table 9.1 Table 9.2 Table 9.3

Linkages between international and national capitalism Paradigmatic country cases for models of capitalism International-level influences on national models of capitalism International-level preferences from national models of capitalism Juxtaposition of coordinated and liberal phases of capitalism

2 29 237 239 259

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CHAPTER 1

Introduction: Why “Second Image IPE”?

1.1 The Need for a Second Image International Political Economy Kenneth Waltz (1959) has developed the notion of a “second image” for theories of International Relations, particularly on the causes of war. He contrast s this notion with those of a “first” and a “third image”. First image theories explain war through the personalities of political leaders, such as Churchill, Hitler, or Napoleon. Second image theories highlight the importance of domestic features of states for the explanation of war, for example their economic systems or their democratic character. Third image theories—preferred by Waltz himself—explain war by recourse to the properties of the international system, for example by highlighting its anarchic nature and the distribution of power in this system. Although Waltz developed this trichotomy for the study of International Relations, the second image notion is particularly prominent in International Political Economy (IPE), based upon the seminal publications by Peter Gourevitch (1978) and Peter Katzenstein (1978). Katzenstein’s second image analysis follows Waltz’ notion and explains foreign economic policies based on economic and political attributes of different countries. Gourevitch, in contrast, reverses Waltz’ notion (“second image reversed”) and studies how external factors—in particular globalization—influence domestic features of countries, such as their economic systems. A simple way of imagining the two perspectives is to © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Nölke, Second Image IPE, International Political Economy Series, https://doi.org/10.1007/978-3-031-37693-1_1

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Table 1.1 Linkages between international and national capitalism

International capitalism Bottom up Second Image

↑…………↓

Top down Second Image Reversed

Domestic capitalism Source Own representation

distinguish between top down (or international to national) and bottom up (national to international). Bottom-up mechanisms are under the heading of “second image”, and top-down mechanisms under “second image reversed” (Table 1.1). This book argues that we need to combine both perspectives—second image and second image reversed—for a comprehensive understanding of global capitalism. More generally, we need to recombine Comparative Political Economy and IPE. Without a systematic incorporation of the (comparative) study of economic systems, we cannot answer the most important questions of IPE (1.1.2). Comparative Political Economy (CPE), in turn, has to incorporate the interactions between economic systems in order to understand the evolution of these systems (1.1.3). Before we can substantiate these claims, however, we need to understand how we came to this unfortunate split in the development of Political Economy and what this implies for attempts to recombine the two sub-disciplines (1.1.1). 1.1.1

Why We Need Mid-Range Political Economy Theorizing

If we look back at the historical development of Political Economy, we note a process of increasing differentiation. Political Economy has split up into increasingly numerous disciplines and sub-disciplines. This has not only led to the neglect of important topics and concepts that fall between these communities of scholars, but also led to a process of methodological polarization. Due to this polarization, we find grand social theories without systematic empirical support on the one side and well-tested micro-theories on very limited hypotheses on the other. This process has

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gone too far. We do not only have to recombine Economics and Political Science (and comparative and international perspectives on Political Economy), but also have to move a step back, towards more cumulative and context-sensible mid-range theorizing. The classical authors of the eighteenth and early nineteenth centuries, for example Adam Smith, David Ricardo or Karl Marx, did not neatly distinguish between the economic and the political. The same applies to ideas about Neomercantilism that developed in the late nineteenth century in different regions of the globe (Helleiner 2021). Only towards the end of the nineteenth and the beginning of the twentieth centuries, Economics and Political Science established themselves as completely separate disciplines. A crucial step in this process was the victory of the Neoclassical School over the competing approach of the (mostly German) Historical School in Economics. Some of the classical authors in Political Economy—in particular Ricardo—were looking for general laws of economics, based on abstract and deductive reasoning. Others, such as Smith, combined the search for abstract theory with descriptive and inductive historical reasoning (Bell 2016). The split between the Historical and the Neoclassical School in the nineteenth century builds upon these different emphases. The Historical School highlighted the importance of historical, country-specific developments. The Neoclassical School, in contrast, treated this reasoning as insufficiently scientific. Its academic ideal was the traditional understanding of Physics, the search for laws that are valid independent from time and space. Within Economics, the Neoclassical School has become predominant during the early twentieth century and has later become an important basis of contemporary mainstream Economics, such as the New (Neoclassical) Synthesis (Woodford 2009). Its overwhelming victory has cut off the common roots of Economics, Political Science, and Sociology in Political Economy. The study of country-specific features and their historical evolution has increasingly been relegated to Area Studies. The triumph of the Neoclassicals has also led to the development of a new scientific ideal across the Social Sciences, the quantitative testing of highly specific causal relations. Later, this increasing process of differentiation and specialization has also affected Political Economy scholarship within Political Science. During the second half of the twentieth century, CPE and IPE established themselves as independent disciplines. Whereas IPE mostly grew out of

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the increasing attention to economic issues in International Relations, the genesis of CPE opposition against World System and Dependency theories in Development Studies played a major role (Smith 1993: 353–354). During the 1960s and 1970s, a new generation of scholars threw out the baby with the bathwater, by not only opposing the determinist character of some of these Marxist theories, but also their organic linkage between domestic and international developments. Correspondingly, the connection between the comparison of economic systems and their international interactions increasingly retreated into the background. At the same time, the combination of different forms of theorizing and of the use of empirical material, which still was present with Adam Smith, Karl Marx, and other founders of Political Economy, has also retreated towards highly separate avenues of research. Arguably, the process of differentiation in Political Economy went too far. This not only relates to the development of methodologically separate research communities in IPE, which do not communicate with each other (Sect. 2.2.1), but also to the disadvantages of the split between Political Science and Economics, as well as of CPE and IPE. This book is part of a plea for a gradual return towards “pre-disciplinary” theorizing of Political Economy (Jessop and Sum 2001), which overcomes not only the always increasing process of differentiation and atomization of empirical research, but also the split between the study of “the economic” and “the political” (May et al. 2022: 4). Following Polanyi (1944), we are highlighting the fundamental embeddedness of the economy in social and political structures. In order to support this process, this book does not only present suggestions for a recombination of CPE and IPE, but also formulates these suggestions on the level of mid-range theorizing, in order to avoid the methodological extremes that developed during the advanced differentiation process. The concept of middle-range theorizing goes back to Robert K. Merton (1949). It equally opposes the idea of grand structural theories that cannot be meaningfully investigated by empirical research and the idea of micro-theories that only study isolated empirical relationships in very specific settings. Middle-range theories, in contrast, operate on a medium level of abstraction and highlight the importance of historical and spatial context. They are still close enough to empirical reality to allow for testing, but also abstract enough to allow for the elaboration of comprehensive theoretical accounts for clearly demarcated empirical

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phenomena, to be combined in aggregates of separate theories. Correspondingly, this book please for a return to the “missing middle”, not only with regard to CPE and IPE, but also concerning theory and method. 1.1.2

Why International Political Economy Needs Comparative Political Economy

IPE studies cross-border economic processes and their political management. Core topics include global finance, trade, foreign direct investment (FDI), and regional integration. The discipline is deeply divided, mainly between the positivist and mostly quantitative American School and the more interpretative and informal British School (Cohen 2019). The need to combine IPE with CPE mainly stems from two aspects. First, IPE requires CPE in order to develop comprehensive answers to its core research questions. Take, for example, the question of the determinants of international cooperation in fields like finance, investment or trade (Keohane 1984), one of the most important questions of the American School of IPE. Arguably, domestic features of the participating economies matter regarding the question whether cooperation is feasible and which form it will take. Instead of ad hoc-theorizing about these features, a recourse to CPE’s rich arsenal of concepts helps us to systematically study which domestic features matter and which not. Pursuing this avenue of research does not replace existing IPE theories on the determinants of international cooperation, but will complement the latter in a highly useful way. Second, many findings of IPE “hang in the air” without recourse to CPE. One of the most important issue areas of IPE is international cooperation, including various international institutions such as organizations and regimes. While IPE—similar to the discipline of International Relations—has developed a very sophisticated set of concepts regarding the determinants and forms of international cooperation, it is much weaker in theorizing the effects of the latter. Here, CPE may come in, by highlighting which effects matter greatly regarding the fundamental institutional complementarities supporting specific national types of capitalism, and which only require only minor policy alignments. Take, for example, the introduction of the Euro as common currency in the Eurozone, a major step of international cooperation. Only a recourse to CPE and its focus on the heterogeneity of the socio-economic models of the

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Eurozone members allows us to understand why this step later has led to the near breakdown of the currency zone (Nölke 2016). The need to combine IPE with CPE in order to understand changes at the global level more comprehensively does not only relate to the typical research concerns of the American School (such as the determinants of international cooperation), but also to those of the British School. For example, the process of financialization cannot be understood properly without distinguishing its very specific effects on different national systems of capitalism. Financialization has not only led to strikingly different trajectories with regard to housing in the rich economies of the North (Fernandez and Aalbers 2016), but also to highly specific patterns of subordination in the economies of the South (Karworski and Stockhammer 2017). Similarly, by combining IPE with recent advances in Growth Model scholarship in CPE, it can overcome its one-sided focus on micro-foundations—most prominent in the Open Economy Politics (OEP) research program dominating in the American School (Lake 2009)—with a macroeconomic one (Blyth and Matthijs 2017). This also helps compensating the one-sided bias of the American School towards Neoclassical Economics with Post-Keynesian Economics. A combination of IPE and CPE also points to important research questions that have been neglected by a traditional IPE approach. Take, for example, topics such as accounting standards or competition policy. Regulations in this field traditionally matter greatly for the constitution of domestic capitalism. Since the millennium, transnational cooperation in this field has increased considerably, in the context of the International Accounting Standards Board (Nölke 2011a) and in the International Competition Network (Djelic 2011). Still, the importance of these new forms of international economic cooperation has primarily been brought to the attention to IPE scholars by works highlighting their significance from a perspective combining CPE and IPE, given that institutional changes in this field may have considerable repercussions on national models of capitalism (Perry and Nölke 2006; Wigger and Nölke 2007). From a traditional IPE perspective, in contrast, cooperation in these fields originally was neglected, since it did not take place within the traditional inter-governmental fora. Arguably, the need to combine IPE with CPE has further increased with the rise of large emerging economies such as China. When IPE emerged as a field of study during the 1970s, the most important powers participating in the global economy—the US, Western Europe

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and Japan—shared many common features. Correspondingly, many IPE scholars neglected the domestic differences between these economies and focused on their international interactions only. The rise of China, however, brings a country with a very different domestic relationship between markets and state into the fold; arguably, the same applies to other large emerging economies, such as India (Nölke et al. 2020). If the domestic features of the largest and most powerful economies are relevant for an understanding of their international behavior, this is a strong argument for the need to combine IPE with the study of CPE (Petry and Chen 2023). This argument becomes even more important if large emerging economies develop alternative international institutions challenging the established liberal economic order, based on their very specific domestic features (Nölke et al. 2015). 1.1.3

Why Comparative Political Economy Needs International Political Economy

CPE is concerned with the juxtaposition of country-related models of capitalism and with the internal functioning of these models. While the comparison of these national models goes back to the Historical School in the late nineteenth century and to Gramsci’s studies of “Fordism” in the 1930s, CPE as a discipline has only taken off since the 1980s (May et al. 2022: 24–31; Smith 1993: 353–356). Particularly, the “Varieties of Capitalism” (VoC) approach (Hall and Soskice 2001), its predecessors and the various generations of subsequent Comparative Capitalism (CC) scholarship have contributed to the rising prominence of the sub-discipline. More recently, the increased cooperation between CPE and Post-Keynesian Economics has been transforming the subdiscipline, complementing the traditional supply-side institutionalist focus of CC with a demand-side focus on macroeconomic policies (Baccaro and Pontusson 2016). A combination of CPE with IPE is essential because any understanding of national economic models is impossible without a study of the international processes and structures they are embedded in, such as global value chains, global financial hierarchies or powerful supranational institutions like the EU. During the first decades of CC scholarship, CPE had mostly eschewed the study of economic and political linkages across borders, in favor of a comparative study of states as containers. In part, this was an overreaction against Dependencia theories that had dominated the field

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before the establishment of CPE and which treated domestic economies as determined by the global capitalist system (Smith 1993: 353–354). The counter-reaction towards “methodological nationalism” has led to substantial—and justified—critique, particularly by scholars close to the British School of IPE, which are highlighting how national models are molded by the global evolution of capitalism (Ebenau et al. 2015). Similarly, scholars working on the IPE of European integration highlight that the European Union is not neutral regarding different types of national capitalism, highlighting in particular the affinity of the Union with to liberal and its eroding character regarding organized types (Höpner and Schäfer 2010). Important research questions of CPE cannot be comprehensively answered without recourse to IPE. Take, for example, the question of the sources of economic growth. While much of traditional CPE has located these sources in firm-centered institutional complementarities and macroeconomic growth models on the national level, more recent research has highlighted the important interdependence between debtled and export-led models for growth in the Eurozone before the Global Financial Crisis (e.g. Baccaro and Pontusson 2016, 2018; Regan 2017). Again, the rising importance of emerging economies makes the case for a combination of CPE with IPE even more compelling. Due to their late industrialization, these economies have been molded during their rise by a very different global economic system than established powers such as the United Kingdom or the United States. For example, the existence of powerful global financial markets and a high degree of cross-border capital mobility make for a major difference—with regard to both the availability of foreign capital and the potential crises going hand in hand with financial globalization—if compared with the financial system under Bretton Woods (Prasad et al. 2006). Similarly, the unique economic system of the Visegrad countries in East Central Europe—with its extremely heavy reliance on FDI—can only be understood in the context of the situation after the end of the Cold War (Nölke and Vliegenthart 2009). In a more general perspective, some of the more dynamic perspectives in IPE can nicely complement the somewhat static perspective of the CC approach that plays a dominating role in CPE. Particularly, the British School of IPE places a strong emphasis on structural developments such as the rise of neoliberalism or of financialization that are cutting across the various models of capitalism on the national level. A combination of CC and IPE can balance these tensions very well.

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The State of the Second Image IPE Literature

Given the manifold advantages of a combination of CPE and IPE under the heading of “Second Image IPE”, the question arises whether this has been pursued already. Actually, the need to combine the two sub-disciplines has frequently been highlighted (Coates 2000: 226–227; Phillips 2005; Graz and Nölke 2008; Nölke 2011b; Mayntz 2019: 19); the problem rather is how to do it in practice. While the combination of Comparative and IPE is very rare and has never been implemented in a comprehensive manner (1.2.3), and the notion of “second image reversed” has not led to a systematic theory-building program at all (1.2.2), we can at least draw on a large number of second image conceptualizations in IPE. Still, these are not immediately suited for a recombination of CPE and IPE, as I will detail below (1.2.1). 1.2.1

Second Image: Intellectual Predecessors and Their Limitations

Political scientists such as Peter Katzenstein (1976, 1978, 1985), who work on the borderline between Comparative Politics, Political Economy and International Relations, have played a particularly prominent role in the development of second image approaches in IPE. In recent decades, very different models have been developed as to how this second image can be filled in concretely. Particularly prominent in this context are approaches that focus very strongly on the role of individual social and economic interest groups (Moravcsik 1997; Schirm 2013). In the US in particular, the latter approach, within the paradigm of OEP (Lake 2009; Oatley 2011), has gained widespread acceptance in recent decades. Still, most of the scholarship has not made use of the analytical concepts developed in CPE, with the partial exception of some works by Orfeo Fioretos (2001, 2010, 2011) and Thomas Kalinowski (2013, 2015, 2019). Peter Katzenstein (1976, 1978, 1985) has been the pioneer in linking IPE to concepts of Comparative Politics. He has consistently highlighted the distinctiveness of national economic systems, based on their specific historical evolution. Katzenstein has explained how domestic features influence the divergent foreign economic policies of advanced economies, with a special focus on corporatism and on small states (but also on Germany). While he did not have the analytical arsenal of the still developing CPE at his disposal, he pre-empted some of the core

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concepts of the later VoC approach, such as the juxtaposition of liberal and socially coordinated economies. Katzenstein’s work is exemplary for non-reductionist mid-level theorizing on Political Economy, with considerable attention to the complexity of historical detail. Later, however, the pioneering works of Katzenstein with regard to domestic structures increasingly have been neglected, when IPE turned to the study of international regimes, where most approaches treated states as containers, without concern for their domestic economic institutions. Katzenstein himself moved his research focus to Constructivism and to security studies. A decade later, Andrew Moravcsik (1997) triggered a major revival of the second image in International Relations and IPE by reformulating Liberalism based on the notion of Two-level Games (Putnam 1988). A modified, more formal version of Liberalism has established itself as paradigmatic in the American School of IPE, under the heading of OEP (Lake 2009; Oatley 2011). However, in both cases, the focus is not on a linkage with the economic institutional concepts of CPE, but on simple interest group politics (based on material interests), domestic political institutions as well as factor endowments, and international bargaining. In Germany, Stefan Schirm (2013, 2020) has established a combination of liberal second image approaches with Constructivism and Institutionalism. While his take on interest groups is firmly based in Liberalism—but without formal modeling and testing—he argues that not only domestic interests, but also ideas and institutions matter in order to explain the foreign economic behavior of governments. While this allows for a far more comprehensive perspective on the latter, it also suffers from a very limited reduction of complexity. When interests, ideas and institutions matter, everything on the domestic level matters. However, none of the above three research programs inspired by Liberalism engages with CPE in any detail (although Schirm incorporates Varieties of Capitalism in his conception of domestic institutions). While the latter was only in the process of establishing itself when Katzenstein wrote on small states, the approaches of Moravcsik and the authors of the OEP program are mainly based on the politics of interest groups, which are prominent in Comparative Politics. Fundamentally different domestic economic institutions and structures do not matter in these accounts. Instead, the basic assumption is that all economies are alike and that we can identify similar laws that are valid independent of space and time. This assumption is particularly problematic if we take into account

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that all of the above approaches have been developed for the analysis of the rich economies of the Global North. Studies of interest intermediation in the Global South, however, have demonstrated a much reduced importance of formal industrial associations and a central role for informal relations between representatives of governments and civil society (May et al. 2019). Still, we do not have to start from scratch when using core concepts of CPE for explaining developments in the global political economy. Orfeo Fioretos (2001, 2010, 2011) and Thomas Kalinowski (2013, 2015, 2019) have pioneered this perspective, building upon a more general turn towards Historical Institutionalism in IPE (Farrell and Newman 2010). Fioretos (2001)’s combination of CPE and IPE even was involved in the original volume triggering the VoC research program, and Kalinowski (2015) coined the notion of Second Image IPE. In contrast to the liberal approaches of Putnam and Moravcsik, they pursue less actor-focused, but rather structural approaches, highlighting the institutional constraints for actors stemming from the national context (Kalinowski 2015: 763). Correspondingly, we can build upon their work when studying how national models of capitalism influence the regulation of global finance (Chapter 4). However, both have limited their explorations to only one issue area of IPE, namely finance. Whether their concepts can be extended to other areas, such as trade or foreign direct investment, remains open. Moreover, their utilization of CPE concepts mostly is limited to CC, thereby excluding the more recent discussion on growth models (see Sect. 2.1). Even the reference to CC is limited with Kalinowski, when very different national models of capitalism are summarized under the heading of a common “European” model. The same applied to his summary treatment of China, Japan and South Korea as an “Asian” model—most students of CC would highlight substantial differences between these national types of capitalism (e.g. Witt and Redding 2014). Similar limitations apply to Institutional Complementarity Theory as developed by Tim Büthe and Walter Mattli (2010, 2011). It is very loosely based on the notion of “institutional complementarity” as developed within the VoC approach in CPE. However, it does not engage with the core concepts of this strand of CPE. Institutional Complementarity Theory is more in line with OEP’s focus on interest groups and their domestic institutional environment—and is only applied to the topic of regulatory harmonization (see Sect. 6.1.1).

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Finally, a very important limitation of all of the existing second image approaches as the basis for a recombination of CPE and IPE is their onesided focus on the inside-out perspective; that is, they mostly revolve around explaining the international behavior of governments based on domestic determinants. This does not only neglect repercussions of domestic economic developments on the global economy (which may or may not be mediated by inter-governmental cooperation), but also the contrary perspective, from the international to the national level. The latter problem also applies to the second image reversed-perspective, just in the opposite direction (see 1.2.2). Before we turn to the latter, I would like to highlight that a second image perspective may be conceived as a “German” contribution to IPE theory. It is striking how many scholars stemming from Germany are pursuing this agenda, if placed in a broader perspective of IPE scholars globally. This includes the (German-born) Katzenstein and Kalinowski, as well as Schirm and myself. Arguably, the reason for this accumulation is the setup of the discipline in Germany (Nölke 2003). Here, IPE (and International Relations) are firm parts of Political Science and did not evolve into a separate discipline, as in the United States (IR) and in the United Kingdom (IPE). Correspondingly, German scholars of IPE may have more exposure to concepts of Comparative Politics and CPE than their Anglo-American colleagues. Thus, they may serve for Political Economy as “integrative experts, as, in effect specialists in connections among subdisciplinary bodies of knowledge” (Caporaso 1997: 564). 1.2.2

Second Image Reversed: Intellectual Predecessors and Their Limitations

The second image reversed-perspective studies the influence of the international economy upon domestic economies. While this perspective has led to a multitude of empirical studies, it has hardly been theorized. The notion of “second image reversed” has been coined by Peter Gourevitch’s seminal article (1978). In contrast to the overwhelming majority of studies in International Relations and IPE, Gourevitch did not try to explain developments on the international level, such as international cooperation, war or peace, but developments on the national level. By doing so, he anticipated debates of discussions on “globalization”, at a moment where the process of economic globalization had barely begun.

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At the core of Gourevitch’s treatment is a comprehensive demonstration that the “second image reversed”-perspective had implicitly been utilized by several research traditions in the Social Sciences, including discussions on late industrialization, Dependencia, liberal approaches highlighting the beneficial effects of the global economy on domestic development and the emerging debates on interdependence and transnational relations. Still, this never had been acknowledged systematically, in contrast to the second image perspective that was widely accepted. Together, these two perspectives make a strong claim that Comparative and IPE should not be studied in isolation of each other. Gourevitch (1984, 1986) later deepened the perspective by empirically comparing different strategies of large countries of the Global North (France, Germany, Sweden, UK, US) faced with historical economic crises (1873–1896, 1929–1949, 1970s). Similar to Katzenstein, he argues on a mid-level of theorizing, sensitive to historical legacies of individual countries. Gourevitch’s basic argument is that these crises challenge established public policies and lead to alternative ones, within given political and ideological constraints. Crucially, countries differ in their reactions, depending on the alliances between core societal actors. Gourevitch eclectically identifies a number of factors that can explain these different reactions, including the nature of domestic economic institutions, production profiles or systems of political representation. In spite of (or because of) the thousands of studies on economic globalization (and Europeanization) in the subsequent decades, however, the second image reversed-perspective has never been developed to a consistent theoretical program linking CPE and IPE. Explicit recursions to Gourevitch’s research program rather focused on issues of national identity (Zarakol 2013) or interest groups (Lobell 1999). While Gourevitch’s article (1978) has been cited some 3000 times (according to Google Scholar)—mostly in the context of debates on economic globalization—it has never led to a systematic research program linking Comparative and IPE, given that the gap between the sub-disciplines rather has widened, not narrowed in the meantime (Zarakol 2013: 150). Still, it is also to Gourevitch’s credit that the discipline of CPE developed very rapidly during the 1990s (Smith 1993: 351).

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1.2.3

Recent CPE/IPE Combinations in the Context of the Discussion on Growth Models

While the importance of linking the domestic and international levels of Political Economy has been widely acknowledged in Political Economy by now, it has never led to a comprehensive research program linking the two sub-disciplines. Within CPE, there has not even been much reasoning about a reconnection with IPE. Recently, however, we have been witnessing an increasing number of studies that are highlighting the importance of the international dimension for the study of national models of capitalism. While this broader perspective for many years mainly was a demand articulated by scholars with a background in Marxism (e.g. Ebenau et al. 2015), the Eurozone crisis has triggered an increasing interest in studies of the interdependencies of different national models of capitalism. The growing attention to international aspects in CPE is closely linked to the recent shift from supply-side and firm-centered VoC approaches (Hall and Soskice 2001) to demand-side and macroeconomic Growth Model perspectives (Baccaro and Pontusson 2016). Firmcentered approaches in CC focus strongly on the national institutional environment for companies. They have a limited interest in cross-border activities, with the exception of national models of capitalism strongly influenced by multinational companies, namely the dependent market economies of East Central Europe (Nölke and Vliegenthart 2009). From a macroeconomic Growth Model perspective, in contrast, international interdependencies matter a lot, including different national profiles with regard to export and to access to international financial markets. Seen in this way, the shift to the Growth Model perspective in CPE—and the increasing interaction between CPE and Post-Keynesian Economics (Stockhammer et al. 2016; Hein et al. 2021; Stockhammer 2022; Stockhammer and Kohler 2022)—has very much eased the way for a recombination of CPE and IPE. So far, however, the emerging research program of combining CPE, IPE and Post-Keynesian Economics under the heading of Growth Models is in a very early stage. On the one hand, we find a number of conceptual treatments making the case for this combination (Blyth and Matthijs 2017; Schwartz and Tranøy 2019; Blyth and Schwartz 2021; Baccaro et al. 2022, Schwartz and Blyth 2022). On the other hand, we find empirical studies on a few selected topics, but without being embedded in a

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more comprehensive theoretical framework. These topics most notably still include the Eurozone (Johnston and Matthijs 2022) and the FDIdependent economies in East Central Europe and Ireland (Ban and Adascalitei 2022; Bohle and Regan 2022), but now also the specific embeddedness of emerging economies such as China and Latin American resource exporters in global capitalism (Sierra 2022; Tan and Conran 2022).

1.3

The Plan of the Book

The purpose of the book is to first develop elements of mid-range theorizing that systematically connect CPE and IPE (Chapter 9). The basis of this theorizing is existing empirical studies within these disciplines (Chapters 3–8). The direction of theory building thus is mainly inductive. However, we do not have to start from scratch. In order to further cumulative research, I will use the established conceptual vocabulary of CPE and IPE (Chapter 2). Correspondingly, the focus will be on global economic institutions and structures (IPE) and on national-level economic institutions as well as policies (CPE). The latter follows from the central role that CC (economic institutions) and Growth Models (economic policies) play in contemporary CPE. In order to reduce complexity, the book neglects other analytical categories, in particular the focus on individual actors (e.g. companies or interest groups), which stand at the focus of liberal approaches to IPE such as OEP. However, it will divert from the recent tendency to ground the collaboration between CPE and IPE only on the macroeconomic and demand-side categories of the Growth Model approach, but will also incorporate the company-specific and supply-side ones, which have been developed in CC. At the core of the book are empirical studies of interactions between national and international aspects of capitalism in different world regions and issue areas. In order to overcome the current state of research consisting of abstract reasoning on the one side and isolated empirical studies on the others, this book takes a systematic approach, with regard to the incorporation of both country cases—including the most important advanced and emerging economies—and issue areas. The structure of the book follows the established issue areas of IPE. Next to the core issues of finance, foreign investment, trade and the economic aspects of

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security, it also covers the crosscutting topics of regional integration and global order. For each of the issue areas, I am demonstrating how domestic features of capitalism influence international dimensions of the latter (second image) and how these international dimensions influence domestic capitalism (second image reversed). I do not use fixed order between the two perspectives, since there is no ontological priority for either the national or the international in Second Image IPE. This is in marked contrast to Dependencia or World System Theory, where the international level determines the domestic, and to Liberalism and OEP, where theorizing gives preponderance to domestic interest groups and political institutions. Instead, the ordering between second image and second image reversed is pragmatic, usually based on the historical order of the development covered in the individual sections. Given that the book summarizes my work during the last twenty years, it does not contain new empirical research. For methods and original data sources, the reader has to consult my previous publication, as named in the footnotes. In a few cases, I have complemented my own previous publication with a summary of existing studies, in order to base theory development on a broad selection of issue areas and country cases. Whereas the former is based on the common practice in IPE, the latter follows from the theoretical categories in CPE, the focus of the next section.

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CHAPTER 2

Building Blocks for a Recombination of Comparative and International Political Economy

2.1 Comparative Political Economy: The Diversity of National Capitalisms Over the last decades, Comparative Political Economy (CPE) has developed a strong focus on the comparison of national models of capitalism (Menz 2017; Clift 2021; Vermeiren 2021). Before we can describe the most relevant country types for the subsequent recombination of CPE and International Political Economy (IPE) (Sect. 2.1.2), we need to clarify on which CPE traditions this recombination will be based (Sect. 2.1.1). Two basic ideas govern the selection of CPE traditions. On the one hand, the recombination should be based on widely used theories, in the interest of cumulative research and a broad applicability in the discipline. On the other hand, it should take account of the theory development in the discipline, in order to avoid well-known weaknesses of previous approaches.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Nölke, Second Image IPE, International Political Economy Series, https://doi.org/10.1007/978-3-031-37693-1_2

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2.1.1

A Brief Sketch of Relevant Theory Development in Comparative Political Economy1

Since the early 1990s, the comparative study of capitalist economies based on country typologies has found wide interest. Much of this research has developed in opposition to the (implicit) idea of conventional Economics that there are general regularities that exist irrespective of specific country contexts and that there is one best way on how to organize an economy. More specifically, much of this comparative study has been motivated by opposition to simple economic Liberalism, for example the idea of an “End of History” (Fukuyama 1992). This opposition separates CPE also from much applied work undertaken in New Institutional Economics, with its implicit assumption of liberal systems as superior option for all countries. The latter perspective first had been articulated with regard to economic policy in countries of the Global South, e.g. with regard to the Washington Consensus (Williamson 1993), and later extended to political systems (Acemoglu and Robinson 2012). Broadly, we can identify three bodies of scholarship, which have furthered the comparative study of economic systems (Jackson and Deeg 2006; Wood et al. 2014). The most widely known scholarship can be subsumed under the heading of Comparative Capitalism (CC), summarizing the seminal Varieties of Capitalism (VoC) approach (Hall and Soskice 2001), its predecessors and further development. In the neighbor discipline of Business Studies, the National Business Systems perspective (e.g. Whitley 1999) has found much attention. In contrast to VoC, it is very limited with regard to theoretical complexity reduction and gives much attention to the peculiarities of individual countries (e.g. Witt and Redding 2014). Separate from these traditions, French Regulation Theory has developed concepts for the classification of different country-specific economic systems (e.g. Amable 2003; Becker and Jäger 2013), although its focus usually is on the inter-temporal variation of capitalism, not its international variation (Sect. 9.3.2). Subsequently, I will focus on the CC tradition, given that its wide utilization makes it particularly promising for a cumulative recombination of Comparative and International Economy. Although there was an early precursor in Shonfield (1965), the bulk of modern CC research emerged in the 1990s. Important pioneering work 1 The argument in this subsection draws in part on Nölke (2016, 2019).

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has been done by Albert (1992), Hollingsworth and Boyer (1997), and Crouch and Streeck (1997). There are now already three generations of CC research. The first generation consists of these pioneering works as well as the classic research by Hall and Soskice (2001). In their VoC approach, Hall and Soskice distinguish between liberal market economies (LMEs) and coordinated market economies (CMEs), the first exemplified by the United States and the second by Germany (although ideal types and real types have been linked too closely in a problematic way, see Hay 2020). The VoC approach focuses on the comparison of the two ideal types on the basis of five institutional spheres that are particularly relevant for the competitiveness of firms (corporate governance, corporate finance, industrial relations, education and training, and the transfer of innovations) and two particularly important coordination mechanisms that cut across these spheres (networks between firms and associations in coordinated, markets and formal contracts in liberal capitalism). The focus of this theory is to explain the different production profiles of economies with a focus on the supply side. For example, in terms of its strong position in incremental innovation in the automotive and mechanical engineering industries, Germany benefits from patient capital providers and long-term labor relations, while the US’s institutional advantages in industries such as biotechnology and IT services are based on its ability to shift capital and labor to new firms in the short term. The second generation of CC studies critically examined the VoCparadigm and sought to develop it further. Particularly criticized were the narrow geographical focus of the original approach, its static and strictly dualistic orientation towards only two ideal types, its exclusive focus on the supply side of the economy and its neglect of transnational economic interdependencies (Bruff et al. 2013; Coates 2005; Hancké et al. 2007). The second generation therefore focused, among other things, on the development of additional ideal types to capture capitalism in emerging markets (Claar and Nölke 2013), especially the dependent market economies (DMEs) of Eastern Europe (Nölke and Vliegenthart 2009) and the hierarchical market economies of Latin America (Schneider 2013), and processes of institutional change (Becker 2009; Hall and Thelen 2009). The third generation of CC studies has taken an even more pronounced change of course in recent years. A particular focus is now on the role of the state, the specific conditions of integration of economies

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into the global economy, and the importance of domestic demand, especially in the state-permeated economies of the large emerging markets (May et al. 2014; Nölke et al. 2020). A particularly radical departure from the supply-side analysis of the competitive conditions of firms under the VoC approach is now taking place in the form of the Growth Model perspective, which focuses on entire economies and the analysis of the demand side of the economy. A comparison of LMEs or CMEs is now usually replaced by that of export- or debt-driven growth models (Baccaro and Pontusson 2016, 2018; Stockhammer 2016; Hein et al. 2021). A major difference between these different schools of CC research is their temporal perspective: while the emergence of firm-based institutions on the supply side (the focus of the first two generations) usually takes decades, growth models can potentially shift their focus through economic policy measures even within a few years. The starting point of Growth Model research is that in today’s economies of industrialized countries, domestic economic demand derived from investment and wages no longer provides sufficient growth, in contrast to the first decades of the postwar period. To stimulate growth nonetheless, modern economies have developed substitute strategies. One of these strategies relies on driving the economy primarily through household consumption. Since wages are now insufficient for adequate consumption, households are allowed to take on relatively easy debt, for example to purchase real estate, thus driving domestic demand. The alternative strategy, on the other hand, involves mobilizing the necessary demand from abroad, i.e. relying very heavily on exports. European countries have made use of these strategies to varying degrees. The United Kingdom and Spain, for example, have relied fully on the debtfinanced consumption strategy in recent decades, Germany just as clearly on the export strategy, while Sweden has pursued a relatively balanced growth model in recent decades (Baccaro und Pontusson 2016). Similar to CC, we find different approaches to Growth Model analysis. Before the study of Growth Models became popular in CPE, thanks to Baccaro and Pontusson (2016), it had already inspired many studies in Post-Keynesian Economics (PKE). Both the research interest and the methods of analysis, however, are slightly different. Students of CPE mainly focus on the more descriptive identification of actual growth contributions to demand aggregates—usually (debt-led) private consumption and (net) exports—in the growth of gross domestic product (GDP). The traditional research concern in PKE, in contrast, is on.

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the structural parameters of an economy determining the response of aggregate demand and growth to distributional changes (mainly saving propensities out of different types of income, responsiveness of investment, exports and imports towards distributional variables)

with wage- and profit-led demand regimes as central distinction (Hein et al. 2021: 1199, see also Lavoie and Stockhammer 2013; BarredoZuiarrain 2019). Whereas the CPE approach to Growth Models turned away from supply-side institutions completely, some strands of PKE assume that the macroeconomic demand-side analysis can be combined very productively with the micro-economic supply-side perspective of CC (Behringer and van Treeck 2018). An earlier combination of the study of micro-economic country models with PKE in Regulation Theory (Freyssenet 2005), which preceded much of contemporary CPE Growth Model research and combined it with some ideas of CC, mostly went unnoticed, possibly because of the language barrier, since it was published in French (Amable 2022). Generally, the measurement of national growth models still is a moving target, with a steady flow of alternative suggestions for calculation (Baccaro and Pontusson 2016, Behringer and van Treeck 2018; Hein et al. 2021; Hassel and Palier 2021; Kohler and Stockhammer 2022; Morlin et al. 2021; Baccaro and Hadziabdic 2022). Again similar to CC, Growth Model research has started with the established economies, before turning to emerging economies more recently (Morlin et al. 2021; Schedelik et al. 2021; Mertens et al. 2022; Stockhammer 2022). While there is no consensus yet on the classification of the growth models of most emerging economies, two (types of) emerging economies have received a particular amount of attention. On the one side, these are the countries of East Central Europe. The growth models of these economies have been baptized “FDI-led” (Bohle and Regan 2021; Ban and Adascalitei 2022), because of the unusually high importance of foreign direct investment (FDI), which also is at the core of their classification as “dependent market economies”. On the other side, the Chinese growth model is at the focus of several studies (Mertens et al. 2022; Tan and Conran 2022). Although there is not yet a widely used moniker for the Chinese demand model, there is agreement that the Chinese economy has become more balanced (in favor of domestic investment and consumption), after its strong focus on export-led growth in the decade before the global financial crisis.

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2.1.2

Selected Core Features of National Models of Capitalism2

For a recombination of CPE and IPE, we need to select a few national models of capitalism, which can serve as a standard basis on the side of CPE. Here, we need to distinguish between ideal types and typical country cases. Ideal types are analytical constructs, which are based on theoretical considerations. Typical country cases approximate some of these considerations, but never are pure representations of the ideal type. This distinction sometimes has been blurred in CC research, leading to the demand to separate systematically between the two concepts, and to locate specific countries at a specific point of time graphically between different ideal types (Becker 2009). However, this separation has proven to be too cumbersome in day-to-day research. Correspondingly, the subsequent discussion will be based on an equation of ideal types and country cases, unless stated differently. Even more than two decades after the original CC approach (Hall and Soskice 2001), it still makes sense to single out coordinated and liberal market economies ideal types—and Germany (CME) as well as the US (LME) as country illustrations. This juxtaposition even has gained renewed importance in the context of Growth Model analysis, given that the two countries also serve as two of the most well-known examples for export-led (Germany) and debt-led (US) growth models. In line with the theoretical development during the three generations of CC research—and the rise of emerging economies in global economic output that has made a recombination of CPE and IPE more pressing than ever (Sect. 1.1.2)—we need to incorporate more than the classical VoC cases of Germany and the United States. Based on the existing CC and Growth Model research traditions in CPE, it makes sense to incorporate China as a paradigmatic case for a large and balanced emerging economy, and to incorporate the Czech Republic as a paradigmatic case of a dependent and FDI-led economy (Table 2.1). Although there is some disagreement on the assessment of the Swedish model (Hein et al. 2021: 1199–2000), the above research traditions agree on the classification of the German export-led and the US debt-led growth models (e.g. Behringer and van Treeck 2018; Barredo-Zuiarrain 2019; Morlin et al. 2021). In addition, there is a wide agreement on the important role of FDI for the growth models of East Central Europe 2 The argument in this subsection draws in part on May et al. 2023

2

Table 2.1 Paradigmatic country cases for models of capitalism

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Germany USA China Czech Republic

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Comparative capitalism

Growth model approach

Coordinated Liberal State-permeated Dependent

Export-led Debt-led Balanced FDI-led

Source Own representation

and of the changing character of the Chinese economy after the global financial crisis, from export-led towards more balanced, with an important role for domestic consumption and investment. For the purpose of a recombination with IPE, this classification is a sufficient point of departure. Alternatives would have been India (for state-permeated and balanced), and Hungary, Poland or Slovakia (for dependent and FDIled), but the Czech Republic and China offer more empirical contrasts for the subsequent illustration (May et al. 2023: 85–120). In contrast to VoC, growth models are less stable. Whereas there is a high degree of stability with regard to many of the supply-side institutions studied by CC (often over several decades), some of the demand-side features highlighted by Growth Model analysis can change within a few years, particularly in the context of a major economic crisis. Actually, the postwar decades of European capitalism saw far more similarities between West European growth models than the period after the introduction of the common currency. Similarly, the differences between European debtand export-led models have become less pronounced after the global financial crisis (Kohler and Stockhammer 2022). Correspondingly, we need to qualify the above classification regarding its temporality. While most of the classifications hold both before and after the global financial crisis, China before the crisis would have been an exception, since it was heavily export-led. Given the limited scope of this chapter, I cannot introduce all types and models of CC and the Growth Model approach subsequently. On the side of CC, important additional models are the hierarchical market economies (HMEs) in Latin America (Schneider 2013) and Arab capitalism (Hertog 2023). On the side of Growth Model analysis, an important distinction is between two types of debt-led growth models. On the one side, we have the United States and the United Kingdom as global drivers

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or managers of financialization; on the other side, we have countries pursuing a process of dependent financialization, such as the countries in the European Eastern and Southern periphery before the euro crisis and many emerging economies. Subsequently, I will sketch out the most important stylized features for the four models of capitalism that will form the basis of the subsequent recombination with IPE. This sketch is based on the assumption that CC and Growth Model analysis can be combined in a productive way, in contrast to parts of CPE, which are claiming that we need to make a clear break, discard CC and turn to Growth Models exclusively (Baccaro and Pontusson 2016). Others, however, highlight important interrelationships between important factors on demand and supply side (e.g. the importance of VoC-type institutional complementarities for high-quality good exports), as well as the striking parallels between the two perspectives in terms of the selection of paradigmatic country cases (Behringer and van Treeck 2018; Vermeiren 2021). In line with third generation CC, I will thus combine demand- and supply-side factors. In line with this theory development, I will not limit the discussion to the traditional VoCcategories such as corporate governance, but also incorporate the later CC discussion on the national management of international economic integration, for example with regard to global financial markets and trade. Not all aspects of CC are equally relevant for a recombination with IPE. Arguably, the most important is corporate governance and finance, whereas issues such as education and training are much less relevant, given their strong domestic character, without much international interference. This also includes the transfer of innovations within an economy, since competition policy—a particularly important factor in this regard (Wigger and Nölke 2007)—has not yet become a major issue in international economic relations. Similarly, industrial relations have only been molded by international economic relations in exceptional circumstances, such as the Eurozone crisis (Sect. 5.1.2). Given the increased openness of most economies for cross-border financial flows since the 1980s, corporate finance—and by implication corporate governance—is among the CC institutional spheres most open to cross-border influence. It is also a sphere where the differences between different national models become particularly clear. A classical distinction between CMEs and LMEs is the relative importance of banking systems (high in CMEs such as Germany) and of capital markets (high in LMEs such as the US). A simple indicator for this relative importance is the

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market capitalization of listed companies in relation to GDP (Fig. 2.1). The latter is much higher in the US, where stock markets are far more important for corporate finance than in Germany. As far as emerging markets are concerned, it is much less important in DMEs such as the Czech Republic (where much capital is provided by the mother companies of local subsidiaries of multinationals), if compared to state-permeated economies (SMEs) such as China. In the latter, however, a high market capitalization does not mean a general openness to transnational financial markets; instead, the influence of the latter is circumscribed by various measures of state control (Petry 2020a, 2020b). Turning to the perspective of Growth Models, a core feature with high relevance for the combination with IPE is the different role that exports play in these different national models. A decomposition of actual growth contributions to demand aggregates demonstrates that exports contribute far more to growth in export-led economics, as in debt-led economies. Given the ongoing controversies on how to measure these contributions best, an alternative way to visualize these differences is to look at the trade balances of the countries concerned. In this case, the total amount (instead of the trade balances as a share of GDP) is particularly illuminating (Fig. 2.2). It demonstrates that the debt-led model of the US is

capitalization as share of GDP

250

200

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GER USA

100

CHN CHZ

50

0 GER

USA

CHN

CHZ

Fig. 2.1 Market capitalization of listed companies for selected countries (Source Own representation, based on data from World Bank)

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GER

USA GER USA CHN

CHN CHZ

CHZ -1500

-1000

-500

0

500

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balance in $US million

Fig. 2.2 Trade balances for selected countries (Source Own representation, based on data from World Bank)

the “global consumer of last resort”, meaning that its debt-led growth model absorbs the export surplus of the global exporters. In overall quantitative terms, the giant economy China is the most important surplus country globally, but as a share of GDP, the DME Czech Republic has a much higher integration in global trade, followed by the export-led CME Germany. The balanced Chinese SME, in contrast, is barely more integrated in global trade than the debt-led US economy (Fig. 2.3). To conclude, a recombination of CPE and IPE needs to pay attention to the profound diversity of models of national capitalism. Additionally, it should not be limited to the models of capitalism in the traditional core of the global economy, but also has to incorporate (at least) the semi-periphery, given the strongly increasing importance of emerging economies during the last decades. Moreover, it should not only study the supply side of the economy—as in traditional approaches to CC—but also need to incorporate the demand side as well. Finally, it may not be limited to the study of national economies conceived as “containers”, but needs to incorporate the interdependencies between these economies as well. This is where we need to turn to IPE.

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trade as share of GDP

140 120 100 GER

80

USA

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CHN

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CHZ

20 0 GER

USA

CHN

CHZ

Fig. 2.3 Integration into global markets for goods for selected countries (Source Own representation, based on data from World Bank)

2.2 International Political Economy: International Institutions and Economic Processes3 In comparison with CPE, IPE is more deeply divided internally along theoretical lines. Correspondingly, any identification of core features for a recombination with CPE (2.2.2) first has to clarify how to deal with this theoretical diversity (2.2.1). However, this very brief overview is not intended to give any justice to the profound theoretical diversity in IPE (Cohen 2019; Wullweber et al. 2013); it just serves the purpose of identifying some particularly promising concepts for the above recombination.

3 The argument in this section draws in part on Nölke (2019) and May et al. (2023).

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2.2.1

A Brief Sketch of Relevant Theory Development in International Political Economy

Contemporary theory development in IPE is so diverse that we need theories about theory development in order to impose some order in this highly diverse field. Arguably, the broad distinction of a “British” and an “American” school of IPE introduced by Cohen (2007, 2019) is the most widely used concept in this field. These schools differ so much with regard to both research interests and research methodology that they hardly communicate with each other. We can illustrate the methodological differentiation process by looking at the internal division of IPE. Contemporary scholarship within the predominant “American School” of IPE focuses on the quantitative testing of isolated causal relationships between two or three variables. Its reductionist methodological approach is borrowed from the Neoclassical School in Economics, with its focus on formal modeling and highly sophisticated quantitative testing of highly abstract hypotheses linking two or three variables, to be valid irrespective of time and space. Here, the focus increasingly is on ever more sophisticated methods and large datasets, but we are losing the bigger picture of national, global and historical context. Moreover, when method trumps theory development, only very specific issues are being investigated, those where suitable datasets are available (Cohen 2019: 27–34). On the other side, the contemporary “British School” of IPE also does not serve as an example (in spite of its preference for the big picture), given its “intellectual ecumenism taken to an extreme” and its “obscurity in the specification of empirical relationships” (Cohen 2019: 64, 66). With regard to their research interests, scholars that broadly can be conceived as part of the American School of IPE spend a lot of attention on the determinants of international cooperation. These determinants can be located in the domestic political economy, in particular with regard to the existence of powerful organized interests. These interests play a prominent role in the predominant paradigm of Open Economy Politics/OEP (Sect. 1.2.1). It can also be located in the design of international institutions, for example in their degree of legalization. These concerns traditionally have been tackled by various approaches within Liberal Institutionalism (Keohane 2012). More recently, much theorizing in the American School has moved to a somewhat higher level of abstraction, by focusing on the Liberal International Order in general (Börzel

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and Zürn 2021; Lake et al. 2021) and by linking concerns about the erosion on the latter with security considerations, under the heading of “weaponized interdependence” (Farrell and Newman 2019). Compared to the American School, representatives of the British School tend to care more about the structural developments in global capitalism. Very often, these concerns go back to the post-Marxist critique of the political economy, for example questions about North–South exploitation or the domestic exploitation by rentier interests in transnational finance (Cohen 2019: 52–70). As with all broad juxtapositions, the distinction of the British and the American Schools of IPE is not watertight. Of course, not all American IPE scholars focus on OEP and international institutions. Benjamin Cohen (2019: 38–51) has coined the term “America’s Left Outs” for those US and Canadian scholars, which are not part of the American School mainstream and very often share concerns with the British School. In addition, a deeply critical perspective on the development of global capitalism is not a monopoly of the British School. Both French Regulation Theory (Hollingsworth and Boyer 1997) and Latin American Dependencia (Madariaga and Palestini 2021) have substantially contributed to the critique of global capitalism. With regard to the latter, the distinction of an American and a British school might indicate that there is no meaningful theory development outside of these two national communities broadly conceived. Of course, this would be wrong. While the theoretical contribution of the above two schools to IPE is widely acknowledged, we can also identify a multitude of contributions from Europe, China and various other countries (Cohen 2019: 71–127), although these cannot be so neatly summarized as with the American and the British School. Nevertheless, IPE still is a “Northern” discipline, dominated by authors from an Anglo-American background. For the recombination of CPE and IPE, it is important to incorporate crucial research concerns of the two dominating research communities, in order to contribute to a systematic accumulation of knowledge. Correspondingly, we should link CC and Growth Models research with the American School focus on international institutions, with national models of capitalism as determinants of these institutions (second image) and international institutions as influence on national models of capitalism (second image reversed). At the same time, we should link the above traditions in CPE with the British School concern on structural developments in capitalism, with national models of capitalism as determinants of

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these structural developments (second image) and with structural developments as influence on national models (second image reversed). The subsequent subsection will identify some particularly important features of international institutions and of structural developments of global capitalism that may serve as building blocks for the recombination of CPE and IPE. Of course, the combination of the above elements with CC and Growth Model research is not the only option on how to recombine CPE and IPE. The most relevant alternative option would be to highlight—in a broadly Marxist perspective—the unity of capitalism and its development in general, and then give some limited space to national circumstances, as in the concept of Variegated Capitalism (Jessop 2013; Peck and Theodore 2007), or in some strands of Regulation Theory (Becker and Jäger 2013; Hollingsworth and Boyer 1997). Indeed, CC research has been criticized for leaving the greater context of capitalism out of sight, of being too static and nation state-centric (Bohle and Greskovits 2009; Streeck 2010; Wood et al. 2014). However, turning to Variegated Capitalism or Regulation Theory would mean losing a lot of the considerable complexity reduction that goes hand in hand with the identification of a few core models of national capitalism and a selected number of core features of global economic processes. It may also lead to some blind spots, given that concepts of Variegated Capitalism do not give much substantial attention to the nature of international institutions. Finally, these alternatives would speak against the principle of cumulative research, given the overwhelming number of CPE studies based on concepts of CC. Correspondingly, my preference is for analytic eclecticism (Sil and Katzenstein 2010), i.e. to selectively combine theoretical concepts of different research traditions. 2.2.2

Selected Core Features of International Institutions and Economic Processes

Based on the broad distinction of the British and the American schools and the conceptual achievements of authors working in these two traditions, a recombination of CPE and IPE should address two types of features with regard to the global economy. On the one side—paying attention to concerns of the American School—we need to focus on the nature of international cooperation, more specifically on the various forms of international institutions. On the other side, the focus should

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be on structural developments of global capitalism, such as financialization and the development of new international dependencies based on FDI and trade. In both cases, we need to allocate an important role to the emerging economies of the Global South, in order to overcome the latent “Northern bias” in IPE. Most IPE scholarship on international institutions focuses on intergovernmental institutions in economic relations, in particular international organizations and international regimes. Core research concerns are the conditions for the emergence of these forms of international cooperation, of decision-making processes within these institutions, and on their effects—including the implications for the optimal design of international institutions (Koremenos et al. 2001). An important distinction here is the one between conventional international organizations and supranational organizations. Supranational organizations have power over their member states, whereas international organizations (and international regimes) rely on the consensus of the latter (Branch and Ohrgaard 1999). During the last decades, we have seen the emergence of a research program on transnational private governance (or regulation). In this case, not governments develop (and enforce) international rules, but private actors (Graz and Nölke 2008). Obviously, Second Image IPE has to clarify whether there are differences between these three types of institutions and their effects on national types of capitalism. Similarly, we need to study whether types of capitalism have specific affinities with one of these three modes of international economic institutions. Correspondingly, while most American School IPE scholarship is strongly motivated by the question whether or not international cooperation takes place, a Second Image IPE perspective also has to ask whether the mode of a specific international institution also carries a specific economic content, for example an affinity with economic liberalism (Overbeek et al. 2007). More recently, parts of the American School IPE debate have moved away from individual international institutions and more into the direction of the discussion of global economic orders (e.g. Copelovitch et al. 2020; Farrell and Newman 2021; Lake et al. 2021; Norrlof et al. 2020). Again, this raises the question whether a specific international economic order has to be modeled upon the national economic model of its leading power, and whether the rise of new economic powers with a deviating national economic model creates insurmountable tensions with the existing order. Of course the background of the recent research interest is the rise of China (and other large emerging economies) and the potential

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demise of the liberal international economic order. This question is not only relevant for Political Economy, but also Security Studies. This has become even more important in the context of “weaponized interdependence”, i.e. the utilization of international institutions as a weapon for economic sanctions (Farrell and Newman 2019; Nölke 2022). When we turn to the structural developments in global capitalism, the two most important developments during the last four decades were the financialization of the global economy and the emergence of global value chains in production, as the core of economic globalization. In comparison with the latter, trade—particularly trade in goods—has moved in a much less spectacular way. From the perspective of the British School within IPE, these developments are particularly important with regard to the dependencies and hierarchies they are creating (or reinforcing) in the global political economy. Although early forms of financialization developed in the Euro Dollar markets of the 1950s and 1960s, the broad-based financialization of the US economy has developed since the late 1970s. At the origin of this process was the exhaustion of fiscal resources in comparison with societal demands in the US. In this situation, relaxing the formerly very tight regulation of credit was an important safety valve (Krippner 2011). The financialization of the global economy is a very hierarchical process, with the US and the UK at its center. These economies are managing the process, based on their large financial sectors (Fig. 2.1). Many economies of the Global South experience a process of subordinated financialization (Bonizzi et al. 2020; Kvangraven et al. 2021), based on short-term capital movements searching for financial profit, with considerable risks for the economies concerned, for example with regard to currency underor overvaluation. The UK and particularly the US economies, in contrast, can afford considerable balance-of-payment deficits (and a correspondingly high standard of living), given that their currencies and financial sectors are very attractive globally. Given the multifaceted nature of the process of financialization (Heires and Nölke 2013; Mader et al. 2020), it is notoriously difficult to grasp with a single indicator. However, a measure of capital mobility as developed by Reinhart and Rogoff (2009) provides a rough approximation (Fig. 2.4). It demonstrates the existence of a first phase of financial globalization in the late nineteenth and early twentieth centuries, a short revival during the 1920s, followed by a period of de-globalization during the

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Fig. 2.4 Capital mobility as indicator of financialization (Source Own representation, based on Reinhart and Rogoff [2009: 165])

1930s to 1970s, and a steep new wave of financial globalization since the 1980s. The relaxation of cross-border capital controls also helped the globalization of production, a process that took off since the 1990s. Even more important for this process, however, was the integration of the Eastern Block and of China into global capitalism. The economic opening of these two regions made large amounts of highly qualified, but cheap labor accessible, a crucial advantage for FDI. More recently, this process not only has stagnated, but also has moved in reverse (Fig. 2.5). Similar to financialization, the globalization of production via the emergence of global value chains is a hierarchical process (Dicken 2015; Ponte et al. 2019). The management of these chains usually is dominated by the headquarters of large multinational corporations (MNCs), whereas companies (and workers) in the poorer economies of the Global South are at the bottom of these chains. More recently, however, large emerging economies such as China have been able to cultivate their own MNCs, thereby also creating Southern-based hierarchies (Nölke 2014; Nölke and May 2018).

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6

FDI as share of GDP

5 4 3 Series1

2 1

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

0

Fig. 2.5 Foreign direct investment as share of global activity (Source: Own representation, based on data from World Bank)

Compared to financialization and the globalization of production via the FDI of MNCs, the expansion of global trade (in goods) has taken place in a more moderate way (Fig. 2.6). It also has started to stagnate recently, at least as far as trade in goods is concerned. For more than two decades, inter-governmental advances with regard to the global liberalization of trade in the World Trade Organization (WTO) have been blocked and its supranational element—the dispute settlement system—has also become paralyzed since 2019 (Pollack 2022). Of course, structural developments in capitalism and international institutions have to be closely linked. International economic orders and international organizations can be the embodiment of a specific economic structure of capitalism, as the role of the International Monetary Fund (IMF) in the currency system of Bretton Woods was for embedded liberalism and its focus on limited capital mobility (Ruggie 1982). Similarly, the inter-governmental General Agreement on Trade and Tariffs (GATT) was closely linked to the slow liberalization of global trade within this economic order.

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trade share of GDP

30 25 20 15 10

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Fig. 2.6 Trade as share of global economic activity (Source Own representation, based on data from World Bank)

To conclude, a recombination of CPE and IPE needs to incorporate both core features of international economic institutions and of international economic processes on the side of IPE. Whereas the American School in IPE has made important contributions with regard to the nature of international institutions, the British School has unearthed important structural developments in capitalism. The recombination thus has to reflect upon the different modes of international institutions as well as upon the substantial norms these institutions are spreading. It also has to take into account that capitalism has changed tremendously during the last four decades, particularly during the processes of financialization and the globalization of production.

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Lake, David A., Lisa L. Martin, and Thomas Risse. 2021. Challenges to the Liberal Order: Reflections on International Organization. International Organization 75 (2): 225–257. Lavoie, Marc, and Engelbert Stockhammer, eds. 2013. Wage-Led Growth: An Equitable Strategy for Economic Recovery. London: Palgrave MacMillan. Madariaga, Aldo, and Stefano Palestini, eds. 2021. Dependent Capitalisms in Contemporary Latin America and Europe. London: Palgrave Macmillan. Mader, Philip, Daniel Mertens, and Natascha van der Zwan (eds.). 2020. The Routledge International Handbook of Financialization. London: Routledge. May, Christian, Andreas Nölke, and Tobias ten Brink. 2014. Institutionelle Determinanten des Aufstiegs großer Schwellenländer: Eine globalpolitökonomische Erweiterung der “Varieties of Capitalism.” PVS Sonderheft 48: 67–94. May, Christian, Daniel Mertens, Andreas Nölke, and Michael Schedelik. 2023. Politische Ökonomie: Vergleichend – International – Historisch. Wiesbaden: Springer VS. Menz, Georg. 2017. Comparative Political Economy. Oxford: Oxford University Press. Morlin, Guilherme Spinato, Nikolas Passos and Ricardo Pariboni. 2021. Growth Theory and the Growth Model Perspective: Insights From the Supermultiplier. Quaderni del Dipartimento di Economia Politica e Statistica 869. Siena: Università di Siena Nölke, Andreas (ed.). 2014. Multinational Corporations from Emerging Markets: State Capitalism 3.0. Houndmills: Palgrave. Nölke, Andreas. 2016. Economic Causes of the Eurozone Crisis: the Analytical Contribution of Comparative Capitalism. Socio-Economic Review 14 (1): 141– 161. Nölke, Andreas. 2019. Comparative Capitalism. In The Palgrave Handbook of Contemporary International Political Economy, ed. Shaw, Timothy M., Laura C. Mahrenbach, Renu Modi, and Xu Yi-chong, 135–151. Houndmills: Palgrave. Nölke, Andreas. 2022. Geoeconomic Infrastructures: Building Chinese-Russian Alternatives to SWIFT. In Capital Claims: The Political Economy of Global Finance, ed. Benjamin Braun and Kai Koddenbrock, 147–166. London: Routledge. Nölke, Andreas, and Christian May (eds.). 2018. Handbook of the International Political Economy of the Corporation. Cheltenham: Edward Elgar. Nölke, Andreas, Tobias ten Brink, Christian May, and Simone Claar. 2020. StatePermeated Capitalism in Large Emerging Economies. London: Routledge. Nölke, Andreas, and Arjan Vliegenthart. 2009. Enlarging the Varieties of Capitalism. The Emergence of Dependent Market Economies in East Central Europe. World Politics 61 (4): 670–702.

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Norrlof, Carla, Paul Poast, Benjamin J. Cohen, Sabreena Croteau, Aashna Khanna, Daniel McDowell, Hongying Wang, and W. Kindred Winecoff. 2020. Global Monetary Order and the Liberal Order Debate. International Studies Perspectives 21 (2): 109–153. Overbeek, Henk, Bastiaan van Apeldoorn, and Andreas Nölke, (eds.). 2007. The Transnational Politics of Corporate Governance Regulation. London: Routledge. Peck, Jamie, and Nik Theodore. 2007. Variegated capitalism. Progress in Human Geography 31 (6): 731–772. Petry, Johannes. 2020a. Same Same, but Different: Varieties of Capital Markets, Chinese State Capitalism and the Global Financial Order. Competition & Change 25 (5): 605–630. Petry, Johannes. 2020b. Financialization With Chinese Characteristics? Exchanges, Control and Capital Markets in Authoritarian Capitalism. Economy & Society 49 (2): 213–238. Pollack, Mark. 2022. I International Court Curbing in Geneva: Lessons From the Paralysis of the WTO Appellate Boy. Governance 36 (1): 23–39. Ponte, Stefano, Gary Gereffi, and Gale Raj-Reichert (eds.). 2019. Handbook on Global Value Chains. Cheltenham: Edward Elgar. Reinhart, Carmen M., and Kenneth S. Rogoff. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton: Princeton University Press. Ruggie, John G. 1982. International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order. International Organization 36 (2): 379–415. Schedelik, Michael, Andreas Nölke, Daniel Mertens, and Christian May. 2021. Comparative Capitalism, Growth Models and Emerging Markets: The Development of the Field. New Political Economy 26 (4): 514–526. Schneider, Ben Ross. 2013. Hierarchical Capitalism in Latin America: Business, Labor, and the Challenges of Equitable Development. Cambridge: Cambridge University Press. Shonfield, Andrew. 1965. Modern Capitalism. Oxford: Oxford University Press. Sil, Rudra, and Peter J. Katzenstein. 2010. Analytic Eclecticism in the Study of World Politics: Reconfiguring Problems and Mechanisms Across Research Traditions. Perspectives on Politics 8 (2): 411–431. Stockhammer, Engelbert. 2022. Macroeconomic ingredients for a growth model analysis for peripheral economies: a post-Keynesian-structuralist approach. New Political Economy, online first. Stockhammer, Engelbert. 2016. Neoliberal Growth Models, Monetary Union and the Euro Crisis: A Post-Keynesian Perspective. New Political Economy 21 (4): 365–379.

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CHAPTER 3

Security

3.1 Second Image Reversed: War and the Historical Evolution of Export-Led Capitalism How can we explain the emergence of the strange case of export-led growth models? Export-led growth models carry manifold disadvantages, if compared with a more balanced growth model, including an unnecessary low standard of living for its domestic population and—particularly for large countries—international tensions with other economies that have to absorb their export surplus, to the disadvantage of their domestic industry. Subsequently, I will demonstrate these features with the case of Germany (Sect. 3.1.1), before turning to its historical evolution. As we will see, security considerations played an important role for the original emergence of this model (Sect. 3.1.2), a pattern that finds confirmation with the emergence of other cases of pronounced export models, such as Israel under the first Netanyahu governments and East Asian countries such as South Korea and Taiwan (Sect. 3.1.3).

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3.1.1

The Puzzle: Emergence of Pronounced Export-Led German Capitalism in Spite of Manifold Disadvantages1

The export orientation of an economy is conventionally measured by the export ratio, i.e. the ratio of exports to gross domestic product. For example, the value of exported goods and services in relation to gross domestic product in Germany in 2020 was 43.5%, significantly higher than in its large European neighbors France (28.0), Great Britain (27.4), Italy (29.5) or Spain (30.6), and in relation to Japan (15.5) and the USA (10.2) even about three times as high (WKO 2021). Germany’s economy relies heavily on exports, in contrast to other economies of its size. Typically, smaller countries possess large export shares compared to the total national economy; however, larger ones tend to target their domestic market more. The export-heavy nature of the German economy has been higher than in neighboring countries since the founding of the Federal Republic, but it has intensified even further historically, from 16% in 1960 to 23% in 1980 and 29% in 2000 (Lampe and Wolf 2015: 282). Even though the figures on export orientation have increased significantly only recently, this characteristic has been a topic of international relations for a long time. Michael Kreile, for example, reported on an “‘export mystique’ which no relevant social group called into question” as early as 1977 (Kreile 1977: 777). William Wadbrook counted this mystique in 1972 among those goals “which are more or less agreed among decision-makers, but which are not usually announced explicitly” (Wadbrook 1972: 54). And as Henry Wallich put it very graphically as early as 1955: exports are close to the heart of every German engaged in economic pursuit. A prominent journalist has called them the sacred cow of German economic policy. The salesman rolls up his sleeves, the businessman drops his competitive restraints, the worker postpones his wage demands, and the government official does violence to his liberal principles when exports are at stake. (Wallich 1955: 244)

Wallich has highlighted one of the drawbacks of this export-driven economic model: suppressed domestic demand. To achieve success through exports, wages need to be held back and public spending

1 The argument in this subsection draws on Nölke (2021a, 2021b).

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constraints put in place. As a result, local demand is significantly reduced which leads to limited growth and standards of living for the domestic population. Convincingly, Baccaro and Pontusson (2016) have demonstrated that economies with a more balanced focus on higher-quality services can foster both domestic and external growth. Since 2005, the capital intensity of Germany’s export-oriented economy has tragically remained stagnant due to its lack of encouragement for private-sector investments. The combination of low wages and social security contributions makes productivity-enhancing and manpower-saving endeavors an unattractive option (Bardt et al. 2017). A rising emphasis on price competition as opposed to product quality rivalry (De Ville and Vermeiren 2016) is curtailing incentives for bulky investments in research and development activities. Furthermore, by keeping wages low and public expenditure to a minimum, in an effort from Germany to remain a cost-effective trader of exports, the standard of living is considerably lower than it could be. This also includes favoring a weak currency for their export market aim to be achieved. The current state of public infrastructure in Germany is indicative of this strategy: approximately half the operating highway bridges were built between 1965 and 1975, designed for significantly less traffic than today’s usage. Meanwhile, an astonishing 10,000 railway bridges date back to before World War I (Bardt et al. 2017). Over the past few years, many bridges have begun to decay and deteriorate, causing great upheaval within the transportation sector. German politicians opted for low public expenses instead of investing in crumbling infrastructure to keep Germany’s export costs competitive on the global market. In theory, there could be a strong correlation between the objective of an export surplus and providing retirement benefits for Germany’s growing elderly population. However, because of unfortunate investments abroad, a substantial portion of the export surplus has been forfeited (Klär et al. 2013). Furthermore, it is improbable that countries currently suffering from trade deficits with Germany would be able to provide for the financial needs of German pensioners when they require it most. This becomes even more concerning when we consider that the surplus created by Germany is mostly steered into a few select corporate pockets. The odds are dim that Germany will suddenly experience an export deficit, or other countries with deficits quickly convert to surplus economies. Ultimately, the emphasis on hazardous international investments instead of low-risk credits to German businesses has caused a

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serious distortion in the structure of Germany’s financial sector; many established banks have been forced to dissolve (Braun and Deeg 2020). Due to its successful export-based approach, the German economy faces an increased risk of disruption posed by global economic crises or external conflicts. As we have seen during the Covid-19 pandemic and the Ukraine War, Germany’s reliance on exports makes it highly vulnerable to changes in international markets—a disadvantage that could be detrimental if not mitigated properly. Unlike the other leading economies in the world, Germany is heavily impacted by occurrences outside its borders. From Brexit to a widespread US-China trade dispute, no other major economy has been as open and exposed to potential risks of trade protectionism. This leaves Germany susceptible to economic coercion, which was demonstrated when the then President Trump pressured Berlin into paying more for their NATO dues. By transforming its economy into a world-renowned export powerhouse, Germany has seen consistent albeit modest economic growth and moderate unemployment levels. Yet due to the compression of domestic demand, these figures remain lower than expected. Nevertheless, this transformation has augmented a tremendous amount of inequality in German society, parts of which still being considered impoverished. The prime impetus for these developments can be attributed mainly to the price sensitivity of certain elements among various exports out of Germany (Baccaro and Pontusson 2016: 15–18). Despite some German exports being bought without much thought as to their costs (e.g. luxury vehicles), many other products are cost sensitive. To maintain low prices for products, German elites prioritize wage control and cost management in public expenses. The “Hartz” reforms of the late 90s are infamous examples; they drastically decreased unemployment benefits, thereby diminishing labor’s capacity to negotiate. Undoubtedly, the Eastern enlargement of the European Union in 2004 also has caused a decrease in wages, due to its improved relocation opportunities towards regions with less costly labor and no hesitancy against Western investments (Sect. 7.1.1). If comparing only nominal wages, the wage restraint in Germany may not be immediately evident. In 2018, with hourly wages averaging around 35 Euro, Germany was among the most costly places to produce within the European Union; Denmark, Luxembourg, Belgium and Sweden were more expensive whereas France had similar costs. Additionally, hourly wages have risen substantially over the last several decades from 25 to

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35 e/hour. In contrast, German wages have grown slowly over the last three decades in comparison with both productivity and other European countries. For example, during 2001–2010, Germany had the lowest yearly cost increase per hour out of all EU member states. Additionally, if we look at a longer period from 2001 to 2018, it has also seen one of the slowest increases following Greece and Portugal who significantly devalued after 2010 (Herzog-Stein et al. 2019). Even more crucial than nominal labor costs is the development of unit labor cost, which also takes productivity into account. If we compare Germany and the Southern European periphery with regard to their respective unit labor costs, we can see a stark difference—with Germany having a significantly lower development of these costs in the first two decades after the millennium. Portugal is the only economy that has managed to keep up with Germany’s low unit labor cost development during this decade, and it was able to achieve this goal through a massive internal devaluation after the Eurozone crisis. All other Eurozone economies have seen more significant increases in their unit labor cost since 2000 (Herzog-Stein et al. 2019). Although the German export economy has been a positive development for many, it is not so favorable for workers in Germany. Wages have remained much lower than their potential due to productivity advancements, and even worse when compared to other surrounding economies. This strategy of wage restraint organized by unions within the export sectors, with guidance from major companies’ works councils, was created as an exchange allowing more job security among employees. Despite this, wages in German export-led companies are not exceptionally low. Rather, the country has employed a different wage moderation strategy since the mid-1990s that focuses on dualization—separating core workers from marginal employees and paying them significantly lower salaries (Goldschmidt and Schmieder 2015). Through this dualization process, companies can explore a vast array of options for their labor needs, from temporary and atypical employment opportunities to the outsourcing of services or production processes with lower costs. Given the intensification of the export-led growth model, approximately 40% of people in 2016 had to live on wages that were lower than they even earned during the early 1990s (DIW 2017). Germany has experienced a surge in its low-wage sector compared to other economies located in Western and Northern Europe. Moreover, the German social security system has been weakened to keep business contributions low. In

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2018, the social expenditure ratio was an estimated 26.3% of gross salaries (Schröder 2019), which is far lower than those of Sweden (49.3%), France (46.5%), Italy (39.2%) and Austria (35.8%). To further fuel their export-led model, Germany has aggressively kept company taxes low. From 1998 to 2002 specifically, they experienced a drastic reduction of these rates from 52.3 to 29.4%, which is considerably higher than the average decrease across the entire European Union (BpB 2019). Unfortunately, this significant cut in corporate tax revenue also caused public infrastructure such as roads and train networks as well as institutions like schools to suffer; quality has clearly taken a hit for public services too. On the other hand, the owners of export companies have been harvesting excessive profits over time—with this alarming trend even prompting a warning from the International Monetary Fund in 2019 (IMF 2019). As early as 2012, Germany had acquired notoriety for being Europe’s most unequal nation when it comes to wealth (Grabka and Westermeier 2014). In the last eight years, disparities in wealth have been on a steady incline with the Gini coefficient rising 20% since 2010 (DGB 2019). Currently, it is estimated that 10% of Germany’s population owns 64% of its total wealth and one percenters possess an astounding 30% alone—almost as much as 87% combined (DGB 2019). In conclusion, the shifting of Germany’s economy to a heavily exportoriented development model has not been equally advantageous for all social classes. Indeed, it has led to an increase in wealth disparity. Why did this drastic transformation occur? Security was undoubtedly one of the main factors at play. 3.1.2

Security Considerations and the Historical Evolution of the German Export Model2

Exports had already played a prominent role in the establishment of the German economy in the late nineteenth century and its comeback after World War II (Abelshauser 2004: 22–59). Following the latter, the intensification of exports was already triggered by a crisis (the socalled breakthrough crisis of 1950/1951), a pattern that has since been repeating several times. We can assume a great deal of continuity in

2 The argument in this subsection draws on Nölke (2021a, forthcoming).

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the German economic structure since the end of World War II at the latest, with its special feature of export orientation having intensified even further since the crises of the 1970s. There is a high degree of path dependency involved. As soon as an economy has strongly specialized in an export model, and the reasoning of public discourse and the basic institutional setup follow this micro-economic orientation of competitiveness, it will be very difficult to construct a broad-based political coalition that deviates from this argument and, therefore, heavily stabilizes an export model once established. Some of the essential course-setting for the German economy even goes back to the nineteenth century, in particular to the phase of high industrialization in the Second Empire (1871–1918). Like the United States, Germany was a latecomer to industrialization. Against the then dominant British economic power, Germany was relatively without a chance in the already established sectors of the textile and steel industries. German industry therefore relied on new technologies to establish itself, especially mechanical engineering, the electrical engineering industry and large-scale chemicals. The German production regime of “diversified quality production” (Sorge and Streeck 1988) was strongly science based from the beginning. Even in its formative phase in the late nineteenth century, it was already export oriented, since the high cost of these new technologies could only be amortized through “economies of scale”. However, the focus was not on cheap standardized mass production as in the USA at the time, since there was no sufficiently large domestic market for this. The production regime typical of Germany, on the other hand, was focused on quality and on adapting products to individual requirements, with recourse to a particularly skilled workforce. Crucially, export orientation was revived after World War II. The starting point was the Korean War. Here, the Federal Republic initially experienced a brief balance-of-payments crisis in 1950/1951 (arising from sharply higher commodity prices in the context of the war), but then a sustained export boom, as the Korean War strongly stimulated demand for German industrial goods (Abelshauser 2004: 154–174). However, the mercantilist export strategy that had been adopted to combat the balanceof-payments crisis (but also under pressure from the Allies who were interested in German industrial goods—and the repayment of German debt after the war) was maintained after the original problem had been solved (Höpner 2019). It was complemented by a variety of instruments to promote exports, ranging from preferential treatment for exporting

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companies in the event of raw material shortages to the introduction of export credit guarantees (today referred to as “Hermes guarantees”). The emergence of a strongly export-oriented economy was also favored by the lasting weakening of the East German landowners, who had advocated a rather protectionist economic policy based on agricultural autarky during the Empire and the Weimar Republic, and by the high degree of convergence with the interests of the hegemonic US at that time and its plans to build a liberal world economic system (Staack 2007: 90). Many of the fundamentals of the German capitalism model identified by comparative capitalism research (wage moderation, undervaluation, fiscal austerity, harsh inflation control) could also already be identified in the 1950s and, to the irritation of neighboring countries, led to export surpluses even then. From today’s perspective, however, these surpluses were quantitatively very harmless, and the same applies to the associated tensions with neighboring countries. The surpluses were also initially only to a limited extent the result of a deliberate strategy, but were also based on a fortunate constellation (Herrmann 2019: 87–92). World War II had destroyed less industry in Germany than initially expected. Wage levels were quite low due to mass unemployment, especially from refugees and displaced persons from the East. Repressed wages disadvantaged imports and favored exports. In this situation, the unions opted for the model of co-determination, productivity-oriented wages and companybased social partnership favored by Hans Böckler—and against Victor Agartz’s demands for political wages and economic democracy. The dual structure of unions and works councils established at the time was fundamentally more prone to competitive corporatism and wage moderation than a purely union structure, since works councils were comparatively easy to blackmail by threatening job cuts. Furthermore, exchange rates were fixed in the Bretton Woods system, so that export successes did not lead to appreciation, especially since Germany avoided the necessary adjustments in currency relations for as long as possible (see Chapter 5). The government refrained from fiscal stimulation of the economy in the 1950s and early 1960s—also a consequence of the strong role of ordoliberal ideas in the early phase of the Federal Republic—and the Bundesbank acted as a guardian of “internal (price) discipline” so that inflation remained lower than in neighboring countries. This allowed them to be outcompeted. Wilhelm Vocke, the president of the Bank Deutscher Länder (the predecessor of the Bundesbank), was already completely unequivocal in this regard (quoted from Holtfrerich 1998: 383):

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Certainly, the price increases in our country have caused us serious concern - but, if you compare them with the foreign price level and with the price increases abroad, you will see with satisfaction that we constantly remain considerably below it. And that is our opportunity, that is crucial, for our currency and especially for our export. We live on the increase of our export, and this again on the relative keeping down of our price and wage level. (my translation)

The Bundesbank’s high interest rates to minimize inflation and the resulting comparatively low consumer spending were also functional for mobilizing private savings for Germany’s capital-intensive export industry (Mertens 2015). Germany has thus long since had an economy clearly dominated by exports, with only one relatively brief episode deviating from this (apart from the autarky efforts of the interwar period). During the second half of the 1960s—under Economics Minister Karl Schiller (1966– 1972)—an understanding of the importance of a balanced economic structure temporarily developed, as codified in particular in the 1967 Stability Act (“Gesetz zur Förderung der Stabilität und des Wachstums der Wirtschaft”). Although the Stability Act also included price stability— along with full employment and economic growth—among the four objectives, it also included external balance—a clear contrast to the fixation on exports. Thanks to this orientation, a brief recession in 1967 was quickly overcome without structural changes, also with the help of the “Concerted Action” and an initial economic stimulus program. However, the export orientation was then intensified during the severe economic crises of the late 1970s and early 1980s. The German economy experienced two recessions during this period, in 1975 and 1982, triggered by the collapse of the Bretton Woods system and oil price hikes. As a result, most Western industrialized countries had to contend not only with sharp declines in economic output but also with high rates of inflation (“stagflation”). The Bundesbank—freed from defending the exchange rate to the dollar after the collapse of Bretton Woods—reacted by means of very stringent inflation control and enforced a strategy of wage restraint with sharp interest rate hikes, after very high wage settlements had been made once again in 1973/1974 (also as a protest against the excessive wage moderation by the Concerted Action in previous years), especially in the “Kluncker Round” in the public sector. At the time, the Bundesbank pursued a very tough policy of controlling

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the money supply, without regard to the development of demand and the consequent significant spike in unemployment (Herrmann 2019: 162–169). In any case, the trade unions, led by IG Metall, “learned” immediately, moving towards a more defensive stance that clearly prioritized job security over higher wage demands and subsequently refrained from very high settlements (Hoffrogge 2019). This was accompanied by a further deepening of export orientation through price competition, which was even better realized by the Bundesbank’s tough stance. Germany’s deepened export model enabled it to weather the stagflation period better than many other industrialized countries in terms of unemployment and economic growth, but in doing so it (unwittingly) helped lead to a fundamental shift away from the social compromise of the postwar period in these countries and thus contributed to the rise of neoliberalism (Germann 2021). Although increasing export surpluses led to further recriminations and foreign policy tensions with its Western allies, the Federal Republic continued to follow this recipe during the subsequent recessions of 1982 and 1993, before the introduction of the euro then cemented the German export model even further. The intensification of the German export model through the euro, the associated deindustrialization of Southern Europe and the assertive role of the German government in stabilizing the Economic and Monetary Union (EMU) during the euro crisis ultimately led to considerable tensions within the European Union in the early 2010s, to the point of destabilizing it (see Chapter 5). 3.1.3

Security Considerations and the Emergence of Export Models in Small Emerging Economies3

The German economy has demonstrated a high degree of path dependency, after the establishment of the export focus during the late nineteenth century and then again during the Korean War. However, security tensions as origin of an export-led economic model are not limited to Germany. Bob Jessop and Ngai-Ling Sum were the first to coin the concept of “exportism” in relation to East Asia. During the second half of the twentieth century, this economic regime has been found among countries such as South Korea and Taiwan (Sum 2001; Jessop

3 The argument in this subsection draws on Nölke (2020).

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and Sum 2006). The leading force of an export sector just like Germany’s drove the then East Asian economic model. One could argue that both types of economies emerged around the same time due to similar political grounds—with America advocating for their respective inclinations towards exports during the Cold War era. Recently, the economic paths of export-led economies have begun to diverge. The Eurozone has increased Germany’s focus on exports while East Asian countries have attained a more balanced economy with domestic consumption playing a larger role due to an increase in financialization (Doucette 2018). In light of the very similar developments observed in East Asia and Germany, the question arises whether we can find countries that are especially open to adopting export-led growth models. Apparently, the successful adoption of an export-led model can be linked to the existence of favorable global economic and political conditions, as was the case with the Cold War that has been central to the rise of these models in both Germany and East Asia. To achieve success with export-led models, it is essential that there exist economies willing to accommodate considerable and lasting surpluses in their imports. In this sense, US foreign policy post-World War II—which gave priority to stabilizing major allies against the Soviet Union—can be seen as a fundamental stepping-stone for these export-led growth strategies to take off. Without these recipients of surplus exports, the efforts of nations striving for economic progress through export may be in vain. Unfortunately, this situation of coexistence can often result in a lack of consensus on major international economic regulations, due to the differing objectives between exportoriented and non-export economies (Kalinowski 2013, 2019). Even more concerning, the continual deindustrialization in countries with persistent trade deficits may lead to strong populist movements that are adamant about shutting down many trading activities, as we have witnessed during the Trump presidency in the US. Despite the obvious appeal of export surpluses, some very late industrializers are not so open to this strategy. Large countries like China and India in particular are more inclined towards a balanced or a domestic demand-oriented approach, due to their huge domestic markets that offer an alternative economic strategy with fewer risks (Nölke et al. 2020). Still, if security considerations become very prominent, an export-led model is tempting, as has also been documented for the case of Israel during the 2000s by Arie Krampf (2018a, 2018b). During this period (and roughly until the mid-2010s), Israel pursued a very pronounced

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export-oriented policy, with heavy social cost for large parts of the population. At the center of this policy stood measures such as reducing the public budget deficit, mobilizing inward foreign direct investment (FDI) and accumulating large amounts of foreign reserves. While Israel did not care much about its current account deficit in the preceding decades— mainly due to generous economic support by the United States—it was confronted by a far more fragile situation after the breakdown of the Oslo peace process and the Second Intifada. Rising tensions with the US then prompted the Netanyahu government to turn towards a policy of national economic self-reliance, in order to get by without civilian US aid. This policy of economic self-reliance prominently included the accumulation of a foreign account surplus (by the reduction of imports and the promotion of exports) in order to reduce its political dependence on the US, even if the social costs for this move were high. To wrap up, security considerations play an important role in the emergence of pronounced export-led growth models in small advanced emerging economies. Of course, these considerations are not the only cause for the emergence of export-led models in this type of economy. For example, export-led growth models in advanced emerging economies have to be accompanied by suitable supply-side institutions on the company level, in order to be successful on international markets. Without a certain degree of technological sophistication, export revenues will be too limited to maintain economic growth. Finally, concerns about external security may also play a role for changing growth models in large advanced emerging economies. For example, rising security tensions between the US and China have triggered intensified activities for technological upgrading and decoupling from global value chains in China (Gomes and ten Brink 2023), towards a “Techno-SecurityDevelopmentalism” (Hsueh 2022).

3.2 Second Image: Export-Led Capitalism and Foreign Policy4 After World War II, German foreign policy changed fundamentally. Whereas before 1945 the focus was on questions of political and military power and the state’s quest for security, the decades between the

4 The argument in this section draws on Nölke (forthcoming).

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founding of the Federal Republic and German reunification are characterized by a strong orientation towards economic issues. In this phase, foreign policy is often also foreign economic policy, although the latter should not be understood in a narrow technical sense (e.g. Hermes credit insurance), but also in a broader perspective as a question of European integration, monetary relations and global trade policy. The Second Image IPE approach lends itself to an analysis of the foreign policy of the Federal Republic of Germany in a very specific way. The Federal Republic of Germany has an economic structure that is clearly distinct from that of other large countries that can afford an independent foreign policy. Exports play a much greater role for the German economy than for any other large economy. It is therefore natural to use this specific economic structure as a starting point for an understanding of German foreign policy (Fioretos 2001, 2011; Hanrieder 1995; Staack 2000, 2007). A state whose economy is increasingly geared to exports must make efforts in foreign policy to open up and stabilize new export markets. At the same time, it runs into particular foreign policy risks and constraints, as demonstrated by the conflicts between the “values-based foreign policy” propagated by German Foreign Minister Baerbock and industries dependent on Chinese export markets. 3.2.1

Foreign Policy Prerogatives of Export-Oriented Growth Models

An exposed export growth model like Germany’s requires a number of interlocking elements to be successful (Nölke 2021a: 172–179). The core elements include a large industrial sector, a system of institutionalized labor cost moderation, and a system of fixed exchange rates, the latter with the goal of undervaluing one’s currency. The latter two institutions are essential for sustained success via low export prices. Wages and prices are in fact closely related, and wage moderation therefore leads to low prices, including for exports (Manger and Sattler 2020). Without a fixed exchange rate system, successful exports would lead to high demand for the national currency, which would then appreciate against other currencies and, via the correspondingly higher prices in international currency, cancel out the export successes. Strongly performing export economies therefore always strive to undervalue their own currency, for example, through a lagged adjustment in an exchange rate regime

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(Höpner 2019). Politically, within the “social blocs” (Amable and Palombarini 2009; Baccaro and Pontusson 2019) that dominate these growth models, leading sectors set the tone, in the case of Germany especially the automotive industry and mechanical engineering, based on a cross-class coalition of employers and unions in these sectors. Comparative capitalism (CC) research usually deals only with the comparison of economic models, not with their implications for foreign policy. In the case of Germany in particular, however, it can be used very fruitfully for such an application, as shown in particular by the studies of Fioretos (2001, 2011). The starting point of his argument is the need to ensure very extensive and long-term reliable access to markets in other countries for a very large export industry and to avoid protectionist measures by one’s own economy in order to prevent retaliatory measures by other countries, while at the same time preserving one’s own institutions of capitalism. This market access is best secured through international institutions such as the European Economic Community (EEC) or global trade agreements (Chapter 6). Unlike the other major European economies, Germany was an early advocate of these institutions after the war. From this perspective, Germany’s “Westbindung” takes on less of a political legitimacy strategy and more of an economic interest-driven one: Frequently presented as a means to gaining political legitimacy following the war, Germany’s support for multilateral designs was neither indiscriminate, nor merely oriented toward accommodating the wishes of the Allied powers. In matters pertaining to the economy, Germany’s support was informed by a distinct institutional rationale that promoted forms of multilateralism that would reinforce the domestic strategy of economic reconstruction. This institutional rationale led German governments to often promote more ambitious and less discriminatory arrangements than those sought by the Allied powers and to oppose initiatives they thought would undermine key features of domestic structural reforms. (Fioretos 2011: 137)

These considerations from the perspective of comparative capitalism research are similar to those made by Staack (2000, 2007) in his studies on the “trading state of Germany”, albeit for a much later time period, that of reunified Germany, and without taking into account the specific institutions of capitalism. Contrary to positions that expected an upgrading of military resources and a unilateral power policy for reunified Germany, he assumes that the preferences of a trading state will continue

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to dominate here as well, i.e. “…the continued readiness for European integration, for cooperation in the transatlantic, pan-European, and global framework, and the adherence to multilateralism as the preferred policy style” (Staack 2000: 19, my translation). However, the interests of the export sector do not automatically transfer to foreign policy, but require effective organization in business associations as well as close cooperation with those government agencies responsible for formulating foreign (economic) policy. In the Federal Republic, these factors have undoubtedly been in place for a long time, especially due to the strong position of the export sectors in the Federation of German Industries (BDI), which sets the tone for economic policy. In addition, there is a dominance of the trade unions by the employees in the export sectors as well as a willingness to support early losers of foreign trade liberalization—especially agricultural producers— through compensatory measures (Kreile 1977: 785–787). Only recently has the intellectual hegemony of the export industry seemed to erode with respect to the fundamental orientation of German foreign policy. In 2022, for example, an open conflict arose between the state government of Baden-Württemberg, which, in the spirit of a “value-based foreign policy”, called on the state’s industry to position itself far more independently of China and the corporate managements of the “Ländle”: “Industry is not thinking about it - and is fully committed to Beijing” (Theile 2022: 1, my translation). In order to be able to analyze the foreign policy of a distinct export nation like Germany, however, it is important to understand not only the trade-related cooperative orientation but also the potential conflictual nature of this special orientation of an economy. The focus here is on the trade surpluses achieved by exporting nations. This issue is at least as relevant today as it was in the postwar period, as exemplified by the US administration in the Trump presidency. Countries with a permanently high export surplus (besides Germany, currently China in particular) can lead to deindustrialization in other countries. The rise of China as the “workbench of the world” has led to the closure of factories in many other countries in recent decades. High export surpluses are therefore polemically referred to as an “export of unemployment” by the exporting country. Mirroring this, high trade surpluses can also be seen critically as a renunciation of imports, which also has a negative impact on the economies of other countries, which thus lack exports. Trade surpluses are not a modern invention. Adam Smith (1776 [2008]) already

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castigated mercantilist strategies aimed at maximizing trade surpluses as “beggar-thy-neighbor” behavior and emphasized their international conflict potential. A large economy with a high trade surplus (in relation to economic output) also represents a much greater burden for the world economy than a small one, because the large economies place a greater burden on others. Accordingly, China and Germany are particularly in the focus of such accusations, even though there are other economies where the trade surplus in relation to economic output is much higher (e.g. Singapore, Switzerland and the Netherlands, not to mention oil exporters such as Brunei or Kuwait). Even more important, however, is the permanence of trade surpluses. Occasional surpluses—and deficits on the other side—are not a problem as long as the status of surplus and deficit countries keeps changing. However, permanently high surpluses in the same countries, as in the case of Germany, logically force other countries in the aggregate to run equally permanent deficits—as long as we cannot export to Mars or the moon. Even though the problem of Germany’s trade surpluses was not as pronounced in the first years after World War II as it is today, it quickly became an object of conflict in German foreign policy even then. 3.2.2

Germany’s Foreign Policy in the European Single Market

In addition to focusing on export potential through technologically advanced products on the one hand and wage/price restraint on the other, the German export model depends for its success on access to other markets that is as comprehensive and reliable as possible. German foreign policy has consistently pursued this interest for decades, on the one hand in the context of the European integration process, and on the other hand in the multilateral economic institutions. With regard to the latter, the Federal Republic was a clear supporter of the General Agreement on Tariffs and Trades (GATT), adopted in 1947, and the precursor of the World Trade Organization (WTO), established in 1995, and joined GATT in 1951. However, since the multilateral GATT only very gradually succeeded in reducing tariffs and trade barriers, additional efforts were necessary. These were initially carried out within the framework of bilateral trade agreements, but soon mainly within the framework of European economic integration. The latter was initially quite controversial within the German government. The Economics Ministry, led by Ludwig Erhard, and the export industry feared that the close union into

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a “little Europe” of the six original member nations of the European Coal and Steel Community (ECSC) would run counter to efforts at multilateral trade liberalization. Chancellor Adenauer, however, prevailed by referring to the “primacy of politics”, motivated above all by the prospect of regaining West Germany’s full political sovereignty more quickly through close cooperation with France within the framework of the ECSC, which was founded in 1951 on the initiative of French Foreign Minister Schuman (Fioretos 2011: 145); West German heavy industry had been placed under international control in 1949 as part of the “Ruhr Statute”, as a precondition for France to establish the Federal Republic. However, supranational control over the production of coal and steel was only the first step in the integration process. The six ECSC member states—in addition to Germany and France, Italy, the Netherlands, Belgium and Luxembourg—negotiated the European Economic Community (EEC) from 1956, alongside the European Atomic Energy Authority. In this case, the initiative came from the Benelux countries. Their large companies were unable to establish efficient mass production on small domestic markets and therefore needed good access to export markets. The French government sought new political options after being disappointed by its previous allies, the United Kingdom and the United States, in the context of the Suez crisis (Herrmann 2019: 97– 98). Again, in Germany, the primacy of politics and Adenauer’s focus on “small European” unification institutionally prevailed over the multilateral orientation of Erhard and the German export industry (Staack 2000: 38); however, the latter were able to drive important pegs in the precise design of the EEC (Fioretos 2011: 146–148). The focus of the EEC, which was shaped in the 1957 Treaty of Rome, was clearly on internal trade liberalization, while French preferences for a common industrial policy and for social cushioning of economic liberalization were successfully fended off by Germany. France, however, was able to prevail with regard to the inclusion of the agricultural sector in the common market, against the protectionist interests of German agriculture, which was not very competitive at the time. Germany’s export industry, however, quickly turned out to be a major beneficiary of the common market, as can easily be seen from the rapidly growing share of exports to Western Europe in the 1960s (Staack 2007: 88), and supported further European integration processes to the best of its ability, much like the trade unions dominated by the export industries. Particularly significant for the German export sector was that, on the one

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hand, the EEC could be enlarged in the long run by new member states (Denmark, Ireland and Great Britain in 1973, Greece in 1981, Portugal and Spain in 1986) and, on the other hand, from the 1960s on, the EEC globally advocated the further deepening of the GATT within the framework of the common trade policy and, moreover, was able to obtain good conditions in external trade agreements due to its relatively large domestic market (Herrmann 2019: 101). Politically, however, the European integration process stagnated between the late 1950s and the late 1970s, especially since the EEC bodies had to decide under unanimity. Member states could not agree on any further integration steps, and temporarily, the EEC was even paralyzed by De Gaulle’s “empty chair policy” in 1965/1966—a complete absence of French representatives in decision-making bodies (Dinan 2010: 36–38). During these decades, the European Commission and especially the European Court of Justice (ECJ) mutated into the main drivers of the integration process. Particularly central were the ECJ rulings on Dassonville (1974) and on Cassis de Dijon (1979), which significantly intensified competition between European economic and social models (Höpner and Schäfer 2010). In Dassonville, the European Court of Justice established that member states could not adopt protectionist measures that restricted intra-community trade. In Cassis de Dijon, it obliged member states to recognize products that were legally distributed in other member states as well; previously, member states had repeatedly undermined the common market by excluding foreign producers, for example, through regulatory standards. These rulings ignited their political power in conjunction with the van Gend and Loos decision (1963), which postulated the primacy of union law over national law, a very unusual rule since classical international law—under which the Treaties of Rome were concluded—cannot generally claim such primacy. In contrast to inter-governmental negotiations, in the context of which domestic interest groups or opposition parties can successfully politicize (and thus derail) the surrender of political sovereignty, the deepening of the internal market could thus be advanced below the political perception threshold. Here, too, we find a development that particularly benefited the German export industry, especially since the relevant rulings and harmonization measures had so far had no impact on core institutions of the German model of capitalism, such as co-determination (Fioretos 2011: 154–156). It was not until the 1980s that the inter-governmental integration process then gained significant momentum again, with the plans to complete the

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single market and introduce a common currency, which were then finally adopted in the Maastricht Treaty in 1992 and led to a much more intensive influence of the EU on national models of capitalism (Höpner and Schäfer 2010). 3.2.3

External Monetary Policy: Germany, Bretton Woods and the European Monetary System

In addition to access to foreign markets, long-term stability of currency relations is one of the most important foreign policy objectives of the German “trading state”. In a system of flexible exchange rates, the prices of export products can fluctuate wildly in consumers’ currencies, making long-term investment in the production of these goods much more difficult. In addition to the stability of currency relations, a highly exportdependent economic model must also be concerned with the relative undervaluation of its own currency. Since, in addition to quality, price always plays an important role in export success, it is helpful if one’s own currency is undervalued in relation to those of the sales countries, i.e. the price of products in their currency is lower, in order to beat competitors out of the field. An analysis of monetary policy shows that the Federal Republic has consistently pursued such an undervaluation policy and has also been prepared to accept a wide range of foreign policy tensions in order to achieve this (Höpner 2019; Höpner and Spielau 2016). According to the simple economic model world, there should not be permanent large surpluses like those of Germany at all. The balance between deficit and surplus countries should be achieved via currency movements. Such simple models assume flexible exchange rates, which emerge in the interplay of supply and demand. Thus, if a country exports more goods abroad, the demand for its currency abroad will increase to pay for imports from that country. If the exporting country’s central bank does not increase the amount of its currency, the same supply will face increased demand. The “price” of the currency—i.e. its exchange rate—thus rises. But if the exchange rate appreciates, the products of the exporting country also become more expensive and products from other countries become competitive, so the export surplus falls. In addition, currency appreciation in the exporting country makes imports to that country cheaper—more foreign goods can now be bought with the “hard” currency. Since more is now imported, this effect also reduces the export surplus. In a mirror image, the appreciation of the currency

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of the export champion leads to a depreciation of the currency of the deficit country. Low-valued currencies (or moderate currency devaluations) can be very helpful for the country’s own industry; they increase its competitiveness. Exports of their own companies become cheaper in other countries. Imports from other countries become more expensive, which makes it easier for their own companies to compete with those. The incentives for currency devaluation associated with these mechanisms had led to a “devaluation race” in the world economy in the 1930s. In order to avoid similar developments in the future, a new monetary system was adopted at the 1944 Bretton Woods conference on the initiative of the USA, based in principle on stable exchange rates, with the possibility of minor adjustments in the event of profound imbalances. Germany was one of the biggest beneficiaries of the Bretton Woods system, because without the currency parities established there (originally 4.20 deutschmarks to a dollar), German export surpluses would have quickly led to a revaluation of the deutschmark, warding off export-driven prosperity. But even within the Bretton Woods system, Germany operated a systematic regime of undervaluation, insofar as it carried out the revaluations of the D-Mark, which were also inevitable at some point in this system—due to German surpluses—as late and as limited as possible (Höpner 2019). Behind this policy in favor of a weakly valued currency was massive lobbying by the export-oriented sectors of the German economy (Kinderman 2008). The export-oriented drive to undervalue the D-Mark continued after the collapse of the Bretton Woods system (1973). This collapse was followed by considerable currency turbulence and a sharp appreciation of the D-Mark. To prevent such developments in the future, the European Monetary System (EMS) was established in 1979 by the member states of the EEC. This system fixed the currencies of the participating European economies within relatively narrow fluctuation bands, but with the possibility of politically negotiated resetting of currency relations in the event of economic imbalances by the Council for Monetary and Financial Affairs (ECOFIN). The EMS functioned quite well economically, but led to considerable foreign policy stress in the event of potential redefinitions (Höpner and Spielau 2016). An exemplary illustration of this is provided by the reconstruction of the negotiations on an adjustment step in 1983 (which ultimately took place) based on the recollections of the then German Foreign Minister Stoltenberg and the French Minister of Economy and Finance Delors:

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In order not to give the financial markets any signals of an imminent realignment, this visit already took place under utmost secrecy. Stoltenberg landed at a military airfield and was escorted into the Elysée via a side entrance that was not normally used. Because – again for reasons of secrecy – an interpreter was to be dispensed with, a personal confidant of Mitterand translated the guest’s remarks, as Stoltenberg recalls, with great difficulty... That same week, the finance ministers and central bank governors involved met in Brussels to negotiate the modalities of the exchange rate adjustment...The 48-hour negotiations were repeatedly interrupted by individual bilateral talks and consultations between the negotiating partners and their governments. Twice alone, Delors had to interrupt the negotiations to travel to Paris for consultations. (Höpner and Spielau 2016: 289–290, my translation)

Although the EMS worked quite well economically, against the background of this political effort, it was a better alternative for the governments involved in the 1990s to replace it with a single currency, the euro (1999). Again, the harmony lasted only about a decade. The associated discontinuation of the devaluation option successively led to a loss of price competitiveness and excessive borrowing in Southern Europe, the core components of the euro crisis from 2010 onward (Nölke 2016). 3.2.4

The Relationship Between the German Export Model and German Security Policy

Even a “trading state” cannot completely neglect security policy issues, as illustrated in this subsection by the following four themes. First, the German export model directly benefited from the emergence of the new East-West system conflict after World War II. Second, an exporting nation is potentially susceptible to blackmail in terms of security policy, since it depends on unconditional access to foreign markets. Conflicts arose here not only with the United States and its costs for the military defense of Western Europe, but also with regard to German trade with the Eastern Block. Third, development cooperation regularly revealed a tension between export and security interests. Fourth, the German export model has so far played only a very minor role in the use of military resources to secure import or export routes. As already mentioned (Sect. 3.1.2), German export orientation—and thus also the German economy—was revitalized after World War II. The decisive factor for this revitalization, however, was—contrary to

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some popular myths—not Ludwig Erhard’s superior economic policy, but the Korean War, which led to a strong global increase in demand for capital goods and defense products: “The West German economy still had large free capacities and was thus in a position to take advantage of the worldwide increase in demand. The war in East Asia thus had a greater influence on the course of West German reconstruction than any economic policy planning” (Abelshauser 2004: 161–162, my translation). The Allies promoted the revival of Germany’s export industry—for example, by lifting limits on the steel production quota allowed to Germany’s economy and providing dollar loans from the Marshall Plan to procure intermediate products—in order to increase arms production (Herrmann 2019: 84–87). The prerequisite for this support from the Allies, however, was undoubtedly the westward connection of the Federal Republic, which Konrad Adenauer unconditionally championed, contrary to alternative concepts that at the time wanted to anchor Germany more as a pacifist bridge between East and West, also to facilitate German reunification (Möller 2019: 69). However, a pronounced export-oriented economy also goes hand in hand with an increased degree of political blackmailability, as Germany had to learn at the latest during the Trump administration, when the US president linked Germany’s foreign trade surplus to Germany’s contribution to NATO funding and demanded a significant increase in German military spending. This situation is not entirely new. As early as the 1960s, the contrast between Germany’s (then moderate) export surpluses and the very high costs to the United States of stationing American soldiers in Germany irritated the American government. After long disputes and tough negotiations, the US government got the German government to pay a corresponding compensation (“offset”) in 1961; in total, the Federal Republic paid more than 10 billion deutschmarks as “troop dollars” to the United States under the agreement, which ran until 1976, often for weapons that were not needed (Zimmermann 2002). A clear tension between trade and security policy is also evident with regard to the German export industry’s trade with the East (Kreile 1977: 788–792). The extent of trade with the East has historically depended relatively strongly on the “temperature” of East-West security relations. While the German export industry consistently had a strong interest in exports to COMECON (Council for Mutual Economic Assistance) member countries, these exports were not always permitted by foreign policy. In the 1950s, the corresponding regulations were initially

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extremely restrictive so as not to raise any doubts about the Federal Republic’s ties to the West. From the mid-1960s onward, the corresponding regulations were liberalized with US approval as part of the policy of détente, leading to a significant increase in trade relations, for example in the form of the natural gas-tube deal in 1970. When East-West tensions in the US intensified again under the Reagan administration, however, the Federal Republic was no longer willing to drastically restrict such transactions and resisted American wishes. The tension between trade policy and security policy then became particularly clear in the Ukraine War in 2022. The interests of German industry in raw material imports and market access for exports—represented, among others, by the Ost-Ausschuss der Deutschen Wirtschaft (Committee on Eastern European Economic Relations)—arguably were partly responsible for the fact that Germany was much more hesitant than many of its allies with regard to sanctions against Russia and arms deliveries for Ukraine. In the development cooperation of the Federal Republic of Germany, too, a tension between export promotion and security interests (Korff 1997; Schmidt 2015) repeatedly emerged, in addition to the original development motivation that was also present. Until the end of the 1960s, development cooperation was primarily dominated by strategic interests, especially in the global containment of communism and in preventing the recognition of the GDR under international law (Hallstein Doctrine). In addition, however, an interest in using development cooperation to promote exports increasingly developed, symbolized, for example, by the founding of the German Development Corporation/ DEG to promote private-sector cooperation. Particularly during the above-mentioned recessions of the German economy, German export interests moved more clearly into the foreground of development cooperation, for example through the so-called supply tying, i.e. the linking of aid payments with the obligation to use them to purchase German products. An even more far-reaching link between trade and security policy would be conceivable if the Bundeswehr were deployed directly to secure import and export routes, as, for example, the navy has been doing since 2008 as part of the EU’s Operation Atalanta off the coast of Somalia. Here, however, the limits of the trade-security nexus seem to be reached, at least for the time being. This had to be realized by the then German President Köhler in 2010, who spoke out in favor of precisely this deployment of the military to secure free trade routes and resigned

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in the ensuing public controversy. The relationship between foreign trade and security policy corresponded more to the “common sense” of an intellectual hegemony of economic interests than to their explicit articulation in political disputes (Koddenbrock and Mertens 2022). In the context of the Ukraine War and the articulation of a “value-based foreign policy” towards China, however, even this hegemony may no longer be unchallenged. To conclude, the study of German foreign policy in the period between the founding of the Federal Republic and reunification is well suited to demonstrate the explanatory power of a “second image” approach to foreign policy research informed by comparative capitalism. The pronounced export orientation of the West German economy repeatedly played an important role in German foreign policy. Already the rapid integration into the West was motivated by using the production capacities of the German export industry for the Korean War. Involvement in trade and monetary multilateralism as well as in the policy field-related shaping of the European integration process also corresponded to a great extent with the interests of the export industry. Once it had established itself politically, the Federal Republic was also prepared to fight out considerable foreign policy tensions with its closest allies in order to promote the export industry, as was evident in the tough negotiations over the troop dollar and the adjustment decisions in the EMS. However, the interests of the German export industry—represented politically in the postwar period by Ludwig Erhard in particular—were not always able to prevail in foreign policy. Particularly in the early phase of European integration, the founding of the ECSC, Konrad Adenauer asserted the “primacy of politics” in foreign policy in order to achieve a rapid establishment of the political sovereignty of the Federal Republic; the same applies to the restrictions on trade with Eastern Europe. Moreover, the analytical approach used here is not equally fruitful in all constellations. Export-oriented growth models are characterized by much clearer foreign policy instructions for action than domestic market-oriented or balanced ones. Moreover, Germany is the only large (and potentially powerful) economy with an extreme export orientation; other extreme export economies lack the corresponding power resources. The assumption of a general transition to a world of “trading states” (Rosecrance 1986) is therefore misleading. Nevertheless, other analytical applications of Second Image IPE to security questions are useful. These include, for example, the need for the United States and the United

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Kingdom to maintain the status of the dollar and the pound as international reserve currencies and the globalization of financial markets, including through foreign and security policy means, in the face of persistently high trade deficits and high foreign debt (Kalinowski 2019).

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CHAPTER 4

Finance

4.1 Second Image: Liberal Market Economies and Postnational Economic Norms While the impact of the German export model on the global economy remains modest, due to the limited size of its economy, the imprint of the United States economy on the global economic order is much bigger. In this section, I will demonstrate how the financialized US economic model had a major influence on the postnational global financial order, i.e. the order after the breakdown of the Bretton Woods system. The differences between the national growth models during the Bretton Woods order of “embedded liberalism” were less substantial—and the explanatory value of a Second Image IPE approach thus more narrowly circumscribed. The process of financialization after the breakdown of Bretton Woods, starting in the US, however, has increased the differences between growth models (Chapter 2). The subsequent three subsections demonstrate how this feature of the US economy has affected global economic norms during the last four decades. Starting in the 1980s, the World Bank and the International Monetary Fund (IMF) became important conduits that imposed core prerogatives of the US economic model on emerging and developing economies (Sect. 4.1.1). Next to these international organizations, we can also identify the importance of US financialization preferences with

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Nölke, Second Image IPE, International Political Economy Series, https://doi.org/10.1007/978-3-031-37693-1_4

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regard to the (interconnected) content and mode of norms of international regulation in finance. In terms of content, I will demonstrate the competing preferences of coordinated and liberal market economies—and the predominance of the latter—for the case of hedge fund regulation during the 1990s and 2000s (Sect. 4.1.2). In terms of mode of governance, the focus is on the rise of transnational private governance over the last decades, in line with the preferences of a financialized economy— and against the preferences of coordinated and statist forms of capitalism (Sect. 4.1.3). 4.1.1

The US Economic Model and Policy Prescriptions of World Bank and IMF1

The powerful role of the United States with regard to the Bretton Woods Institutions (BWI) is well known. In contrast to approaches that focus on the instrumental power of the US with regard to the World Bank and the IMF (e.g. Woods 2003), the Second Image IPE perspectives highlight how their policy prescriptions are in line with the US economic model. The focus thus is less on the US foreign policy priorities towards individual countries (e.g. during the Cold War), but on the way in which the policy prescriptions of the BWI are modeled after the US economic model and how their implementation also is conducive to the functioning of this model. As we have seen (Sect. 2.2.2), the US economy has undergone a profound process of financialization, starting in the late 1970s. This process has substantially increased the importance of the US financial sector within the US economy. The focus is on financial markets and investment banking, not on traditional savings banks. The Varieties of Capitalism approach (Hall and Soskice 2001) reflects this development by highlighting the important role of deep financial markets for the US economic model of the 1990s, particularly for the provision of venture capital for radical innovations. Since the 1990s, the financial industry increasingly has become the center of the US economy, to the detriment of the previous focus on manufacturing. At the same time, a growing US financial sector becomes interested in selling its services to other economies, given that

1 The argument in this subsection draws in part on Nölke (2019).

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the domestic economy becomes too small to sustain a strongly growing financial sector. A major precondition for sustaining a large financial sector is the free capital flow across borders, in order to maximize the number of profitable transactions. This has important consequences for the development of international norms with regard to the financial sector: The USA, both directly and indirectly, through its dominance of international financial institutions (IMF and World Bank), put pressure on countries around the world to open and liberalize their financial markets and thus allow US financial service companies to enter these markets. (Kalinowski 2013: 482)

Whether it was US pressure that has led to the liberalization of financial sectors in other rich countries of the Global North, or the self-interest of the latter not to miss the commercial advantages associated with a liberalized financial sector, is a matter for debate (e.g. Helleiner 1994: 146–168). However, many of the poorer countries of the Global South only liberalized their financial sector under external pressure, given the potential dangers for these economies stemming from speculative financial flows (Sect. 4.2.3). This is where the BWI come in. The Bretton Woods Institutions have a long history of promoting financial liberalization, going back some four decades. During the 1980s and 1990s, the abolition of restrictions towards cross-border financial flows—such as capital controls—was important ingredient of the structural adjustment programs imposed on countries with balance-of-payments problems, based on the so-called Washington Consensus (Williamson 1989). In marked contrast to other international organizations—particularly from the UN system—the World Bank and the IMF during the 1980s and 1990s routinely exercised subtle forms of coercion, “channeling resources selectively to states that follow their rules and withholding resources from states that do not” (Babb 2012: 274), a practice that has become very controversial (Barya 1993; Beckman 1991; Walton and Ragin 1990). While a focus on the financial sector as one element of macroeconomic stabilization was an established practice on the side of the IMF (even during the Bretton Woods system), this was a new activity for the World Bank. The World Bank originally was established as an organization for the funding of infrastructure projects (and later for poverty alleviation projects), not for program lending. This changed during the 1980s, at

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the same time as the financialization of the US economy was taking off (Babb 2012: 275–277). The World Bank witnessed a strongly decreasing demand for its traditional activities during the late 1970s, due to the global economic turbulence caused by the end of the Bretton Woods System and the oil crisis, as well as a blockade of US contributions to the bank by Congress. The subsequent “reinvention” of the World Bank was considerably supported by the Baker Plan, an initiative to solve the 1980s debt crisis involving World Bank loans made conditional inter alia upon the liberalization of domestic capital markets in the debtor countries (Babb 2012: 275–277). With regard to the financial sector, core elements of the structural adjustment programs as sponsored by the World Bank included the abolition of barriers to external capital flows (such as capital controls) and the deregulation of domestic financial markets, with the target to provide positive real interest rates for savers (Taylor 1997: 149). The World Bank has furthered and intensified this agenda ever since, increasingly with a focus on the micro level. For more than a decade now, the bank has promoted it under the heading of “financial inclusion”, with the target of providing all adults globally the access to a formal financial institution, for savings and for loans (Correa 2019; Demirguc-Kunt and Klapper 2012). Making the savings of a large number of people in the Global South accessible to the financial sector—and to boost the availability of credit for these people—is not only a boon for the financial sector institutions in these economies, but also—and particularly—for many institutions of the US financial sector. The same applies even more strongly for the more recent World Bank/IMF strategy “Maximizing Finance for Development”, where the focus now is on using development assistance and public funds to leverage private finance in very large numbers. Now, the World Bank and its cooperation partners are asked to mainly provide a risk insurance for the private financial sector, in order to increase the number of bankable projects (Jomo and Chowdhury 2019). Another major precondition for the “subordinated financialization” of countries of the Global South (Bonizzi et al. 2020; Kvangraven et al. 2021) was the promotion of capital account liberalization by the IMF. This was a particularly controversial move, given that it supports highly speculative flows of finance in and out of countries of the Global South. While coercive pressure by the IMF only explains part of the pattern of liberalization reforms in Southern economies, these reforms nevertheless often were associated with IMF stabilization programs (Mukherjee and

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Singer 2010). After the Mexican financial crisis of 1994/1995 and the Asian crisis of 1997/1998, the resulting unfettered financial liberalization became even more controversial. This was inter alia based on the experience of Malaysia, which imposed comprehensive capital controls instead of seeking an IMF program and the related conditionality imposing further liberalization (Jomo 1998; Kaplan and Rodrik 2002). After the 2007/2008 Global Financial Crisis, the IMF began to reconsider its position on capital controls, arguing that the latter may be useful under certain conditions (Moschella 2015). Arguably, the IMF’s earlier move to favor the liberalization of the capital account was motivated by pressure from the US Treasury, with the latter, in turn, lobbied by Wall Street. This observation has led prominent observers to coin the notions of the “Wall St.-Treasury complex” (Bhagwati 1998) or even the “Wall St-Treasury-IMF complex” (Veneroso and Wade 1998). This is not to argue that the World Bank and the IMF put naked pressure on their lenders upon the explicit behalf of the US financial sector—although the powerful role of the US government with regard to the Bretton Woods institutions is well established (Wade 2002; Woods 2003), similar to the lobbying of the Treasury by the financial sector (Veneroso and Wade 1998). However, we need to assume broader perspective. The role of the US is not limited to the formal voting power of its representatives within the BWI, the informal tradition that the US names the president of the World Bank, or the occasional covert pressure to fire prominent dissidents from the Bank, such as chief economist Joseph Stiglitz and the director of the 2000 World Development Report Ravi Kanbur (Wade 2002). There are more subtle forms of influence as has been confirmed recently by large-scale quantitative research, demonstrating that “U.S. influence operates indirectly when World Bank staff – consciously or unconsciously – design programs that are compatible with U.S. preferences” (Clark and Dolan 2021: 36). Even more important is the “soft power” of the US economic model, transferred inter alia by the US higher education system, where a great share of the economists working at these two institutions was educated and which is “… disseminating the notion that the US financialized market economy is the most advanced form of capitalism that other countries should emulate” (Kalinowski 2013: 483).

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4.1.2

Liberal Versus Coordinated Economies in the Regulation of Hedge Funds

The financial liberalization of the 1980s and 1990s did not lead to completely free and unregulated markets. Part and parcel of the process were activities to newly regulate financial markets, given that central banks and governments were well aware that financial liberalization and the abolition of capital controls lead to more instability in the global financial system (Helleiner 1994: 169–192). While most regulatory efforts focus on the banking sector, more recently the shadow-banking sector has attracted increased attention, given that shadow banks (such as securitization vehicles) played a central role in the 2007/2008 Global Financial Crisis. However, the shadow-banking sector is even more diverse and far more difficult to regulate than the banking sector. Within the shadowbanking sector, hedge funds—due to their high leverage—stand out as particularly risky entities, as witnessed by the collapse of Long-Term Capital Management in 1997, by then the largest US hedge fund. After the Global Financial Crisis, many issue areas of global finance were newly regulated. In 2009, the G20 came to an agreement on the international regulation of hedge funds, in a marked contrast to previous developments in 2000, where the Financial Stability Forum (FSF) was not able to develop an international regime on this topic (Fioretos 2010). Following a German initiative, the G7 reached a first private selfregulation regime in 2007, based on a report by some London-based hedge funds (Hedge Fund Working Group). After the Global Financial Crisis, the regulation of hedge funds was intensified, given that private self-regulation was deemed insufficient (Pagliari 2012: 58). The 2009 G20 agreement contains two elements. For one, either hedge funds (direct supervision) or hedge fund advisors (indirect supervision) have to be registered nationally. Second, the successor of the FSF, the Financial Stability Board (FSB) has been given the task to supervise the risk involved with large hedge funds. The FSB tasked the International Organization of Securities Commissions (IOSCO) with a further study, which resulted in some vague recommendations on the regulation of hedge funds (IOSCO 2009), but not a prudential regulation comparable to those exercised on banks. Orfeo Fioretos (2010) explains the failure of the 2000 agreement, the genesis of the 2007 self-regulation and the conclusion of the (weak) 2009 inter-governmental agreement by recourse to a traditional Varieties of

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Capitalism approach. The German government, representing the perspective of a coordinated market economy (CME) where hedge funds did not play an important role, consistently favored a model of direct international regulation as well as comprehensive disclosure and transparency norms. France sided with Germany. The United States government (often joined by the British government), representing the approach of a liberal market economy (LME), preferred a light-touch regulation via an indirect model and preferably self-regulation by the industry itself. The collapse of a large hedge fund (Amaranth Advisors) in 2006 and the 2007/2008 Global Financial Crisis contributed to shifting global regulation somewhat to the CME preferences, although global regulation of hedge funds remains superficial. More specifically, the indirect model governs hedge funds by regulating the counterparties providing the large amount of leverage necessary for hedge fund strategies, usually investment banks. A direct supervision of hedge funds is not undertaken in this model, in order to avoid limitations for the growth of this industry (or a relocation to less regulated jurisdictions), which has expanded considerably during the process of financialization since the 1990s. The German CME, in contrast, still did not harbor large hedge funds, and its representatives did not share these concerns. Here, the financial sector was more limited and still focused on the provision of long-term credit for small and medium-scale enterprises. Hedge funds rather were seen as a distortion of the traditional funding of industry. However, the loosening of ties between the large universal banks and the major German companies increased the interest of the latter into retail securities markets, including funds of hedge funds. Strong investor protection in the German model, however, would require direct supervision of hedge funds for the sale of their funds (Fioretos 2010: 701–705). Germany, together with France, also succeeded with EU-internal legislation, against vehement British opposition. In 2010, the European Union adopted the Alternative Investment Fund Managers (AIFM) directive. The AIFM does not only regulate the managers of hedge funds, but also of private equity funds and real estate funds. It includes rules for these managers, including their authorization and registration, as well as reporting and a minimum level of capital, thereby going somewhat further than the 2009 international agreement (Quaglia and Spendzharova 2023: 3). Still, early steps in the implementation of the AIFM directive indicate

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that the latter only poses mild restrictions on the UK hedge fund industry (Buller and Lindstrom 2013). Later research has fine-tuned the path-breaking research by Fioretos. Constructivist scholarship (Quaglia 2011: 677) agrees that a Varieties of Capitalism perspective is able to explain why certain countries supported and other opposed a more stringent international regulation of hedge funds. However, its rather static approach fails to explain why the FrancoGerman axis has been able to overcome the complete opposition of the UK-US axis against any regulation and succeeded to reach industry self-regulation first and a (weak) inter-governmental arrangement later. Here, instances such as the failure of individual hedge funds and notably the Global Financial Crisis—developments in the international political economy—strengthened the movement in favor of regulation, together with domestic politics considerations in the UK (Buller and Lindstrom 2013) and the US (Helleiner and Pagliari 2010). In a similar vein, a more detailed study of the positioning of the French government demonstrates that the high issue salience of the topic of hedge fund regulation for the French government after the financial crisis was important for the cohesion of the Franco-German alliance, given that the French MME preferences were not so clear-cut as in case of the German CME (Woll 2013). Jan Fichtner (2014, 2016) further developed the argument about the LME countries involved by identifying a third node in the AngloAmerican network, which is hosting nearly all hedge funds. This third node is located in the Caribbean offshore financial centers, most prominently the Cayman Islands, where most hedge funds are legally domiciled. Research on the “varieties of financial capitalism” (Howarth and Quaglia 2013, 2016; James and Quaglia 2019) also explained why the roles regarding strict regulation are reversed in case of banking regulation (Basel III). Here, the LMEs are in favor of strict regulation (high capital requirements), because the latter does not restrict the provision of corporate finance to industry, since it is mostly provided via securities. CMEs, in contrast, prefer a somewhat more lenient banking regulation, given that banks still are very important providers of corporate finance. Finally, Thatcher and Vlandas (2016) highlight that the CME opposition to hedge funds does not relate to all new sources of external capital. In contrast to hedge funds, sovereign wealth funds are welcome in Germany

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(and the French Mixed Market Economy), because they could be considered new sources of patient capital, in line with the requirements of the CME model of corporate finance. 4.1.3

Anglo-American Financialized Economies and the Rise of Transnational Private Governance2

During the rise of financialization, transnational private governance was not only the preferred option of the Anglo-American economies with regard to hedge funds, but also for other issue areas of financial regulation. These include the role of rating agencies within Basel II/ III banking regulation, the International Accounting Standards Board (IASB) in accounting regulation, the private regulation of payments by the Clearing House Interbank Payments System (CHIPS) and the Society for Worldwide Interbank Financial Telecommunication (SWIFT), or the underwriting of Eurobonds regulated by the Association of International Bond Dealers and the International Primary Market Association (Brummer 2012; Mosley 2009; Mügge 2006; Porter 2005; Underhill and Zhang 2008). Arguably, this unusual form of governance has triggered a whole research program of self-regulation by the private sector (Cutler et al. 1999; Graz and Nölke 2007; Strange 1996). How can we explain the preference for private-sector self-regulation in the combination of LMEs and financialization, thereby complementing research focusing on different—technocratic versus inter-governmental—forms of public sector regulation (Büthe and Mattli 2011; Reisenbichler 2015)? The original Varieties of Capitalism (VoC) approach (Hall and Soskice 2001) does not deal with questions of international regulation. Later comparative research misinterpreted VoC insofar as it simply assumed that LME would prefer to regulate with minimal government interference, whereas the latter was supposed to be an important feature of CMEs (Drezner 2007: 42). However, the VoC approach has been written as a thoroughly firm-centric approach, neglecting the role of the state. This can be explained by the opposition of the VoC approach to the previous discussion in Comparative Political Economy—mostly on modernization and on neo-corporatism—which was very (union- and) state-centric (Hall and Soskice 2001: 3–5). In order to understand the rise of transnational 2 The argument in this subsection draws on Nölke (2003, 2006, 2010a, 2011a), Nölke and Perry (2007a, 2007b), and Perry and Nölke (2006).

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private governance, we thus need to combine the high importance of financial markets in the LME model of capitalism with the transnational process of financialization since the1980s. As we have seen (Sect. 4.1.1), a growing financial sector in the US and the UK requires the integration of other economies in global financial markets. Internationally harmonized rules and regulations are important preconditions for a seamless integration. For example, managers of companies seeking a listing on the global (i.e. London or New York) stock markets would be put off by complying with different sets of standards for the measurement of the same activity. However, US financial market participants harbor objections against inter-governmental (public) regulation. The latter takes too long—an important factor in an environment of rapidly developing new financial instruments—and potentially provides protectionist domestic interests in other economies means for blocking the process, or bringing in concerns detrimental for the financial sector (“to politicize regulation”). Transnational private governance, in contrast, is not only faster, but also usually safeguards a dominance of AngloAmerican financial sector participants, because only the latter control the highly specialized expertise necessary for operating and regulating a very dynamically developing financial sector (Underhill and Zhang 2008: 539–542). The latter fact also helped to isolate the development of financialization-friendly regulations against interventions of business and society outside of finance (e.g. labor unions, small manufacturing companies). Public regulators often are glad about private self-regulation in finance, since they are missing the necessary expertise and are afraid of the high costs involved in acquiring the latter. However, they often are involved in an indirect way, such as the incorporation of rating standards in US prudential regulations for pension fund investments or stipulating external assessments by rating agencies for less sophisticated banks in Basel II banking regulation (Sinclair 2005: 42–49). Moreover, self-governance by the financial sector is aided by oligopolies of a few large coordination service firms (usually of Anglo-American background)—as in case of the three dominating rating agencies or the “Big Four” auditing companies—because this practice leads to the easy accumulation of highly specialized expertise. It also prevents struggles about market segments between smaller numerous companies, which might be tempted to call in the public sector as arbiter (Mügge 2006: 182–187).

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Given the overwhelming analytical and financial clout of the US/UK financial sectors in the early phase of financialization, the dominance of transnational private self-regulation based on the Anglo-American model was relatively easy to achieve in many issue areas, against competing proposals for inter-governmental regulation. It first expanded to the European continent and later to the Global South. During the 2007/ 2008 Global Financial Crisis, transnational private governance in some issue areas came under fire, but was able to shrug off public demands for re-regulation by largely symbolic maneuvers, such as the installation of an inter-governmental monitoring board for accounting standard setting. The rise of emerging economies in global finance, however, now challenges this form of global order in a more fundamental way, asking for a more prominent role for governments (Sect. 8.2). We can illustrate this mechanism with the case of accounting standards. The harmonization of the ways companies report upon their economic situation is a major precondition for the globalization of financial markets. However, the evolution of different models of capitalism has led to very different accounting standards (Sect. 4.2.2). These different standards sometimes have led to strikingly different outcomes for the financial situation of the same company. This became generally obvious when the German company Daimler-Benz decided to list on the New York Stock Exchange and its financial statement according to United States Generally Accepted Accounting Principles (US GAAP) showed substantial losses, in contrast to the significant profits reporting under German standards based on the “Handelsgesetzbuch” (Ball 2004). Several decades of inter-governmental negotiations for the harmonization of accounting standards within the United Nations and later the European Union were not successful (Katsikas 2008: 113–116). In the 1990s and early 2000s, the demand for harmonized standards strongly increased in the context of rising volumes of cross-border investments and stock exchange listings. Moreover, the evolving international standard setter International Accounting Standards Committee (IASC)—later renamed into the International Accounting Standards Board (IASB)—in a move of institutional entrepreneurship had re-modeled itself upon British initiative (Zeff 2012: 808–810). It morphed from a loose association of national associations of accountants into a tightly knit London-based organization based on individual expertise of its members (often with careers in the Big Four), very similar to the United States Financial

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Accounting Standards Board (FASB) and in close liaison to IOSCO (Martinez-Diaz 2005). Finally, the European Union gave up its previous attempts to harmonize accounting standards between its member states and endorsed the IASB as pan-European standard setter. This move was triggered by strongly rising numbers of European companies seeking a listing at the New York Stock Exchange and, therefore, forced to report upon the basis of US GAAP. In this situation, the European Union was afraid to lose any influence on accounting standard setting and tasked the private IASB to do the job of European accounting harmonization. Subsequently, the regulations developed by the private IASB replaced public law (e.g. the German “Handelsgesetzbuch”) with regard to accounting standards of stock exchange-listed companies from 2005 onwards. This effectively isolated standard setting from contestation of interest groups outside of finance. For example, a survey of all comment letters published on the IASB website in August 2004 found that of the 900 different organizations that had commented on draft accounting standards, none could be identified as a trade union (Perry and Nölke 2005). This isolation was also to the dismay of the domestically very powerful German “Mittelstand” (small and medium-scale manufacturing companies). The latter reacted with setting up a new lobby organization (“Verband zur Mitwirkung an der Entwicklung des Bilanzrechts für Familiengesellschaften/VMEBF”) in 2006, in order to retain at least a minimum opportunity for influencing these standards. Given that the IASC/IASB had not only been modeled upon the example of the FASB, but also had developed some core accounting principles—such as the fair value approach—in close consultation with the FASB, the two bodies were able to conclude the Norwalk agreement for mutual cooperation in 2002 (see Sect. 6.1.2). Fair value accounting is not only in line with LME perspectives on accounting (Dewing and Russell 2008: 257), but also pivotal for deepening the process of financialization (Barlev and Haddad 2003; see also Sect. 4.2.2). The Norwalk agreement paved the way to nearly global accounting standards, in line with the substantial requirements of the UK-/US-based LME model and the process of trans-border financialization. Thus, we can summarize the argument in line with a comprehensive account of the spreading of accounting standards towards the Global South:

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As this study shows, US Treasury Department officials saw accounting reform as a component of their efforts to further global financial integration, and the spread of western capital markets to emerging economies in East Asia and the developing world. Accounting harmonization, thus, played a constitutive role in the financialization of the world economy and US-led efforts to shape the world economy in the image of AngloAmerican finance-led capitalism. (Arnold 2012: 377)

To conclude, a Second Image IPE approach is able to explain important features in the evolution of norms in the postnational financial order, ranging from the policy prescriptions of international financial institutions over the establishment of international regimes to preferences for transnational private self-regulation. Particularly, the interaction of the process of financialization with the globally powerful role of the American and British LMEs has made this an important perspective during the last decades. As we shall see, the importance of the financialized LME model may change in the future, due to the rise of the large emerging economies (Sect. 8.2).

4.2 Second Image Reversed: Financialization and the Destabilization of National Capitalisms Financialization leads to the potential destabilization of models of capitalism that do not approach the LME ideal type. Mostly starting in the United Kingdom and the United States, the process has expanded globally since the 1990s. This global expansion was based on different mechanisms. Anglo-American institutional investors exported their conceptions of corporate governance by acquiring stakes of large companies in CMEs such as Germany, destabilizing their integration in the CME-type model (Sect. 4.2.1). In order to support this process, investors (and managers of investment-receiving companies) mobilized in favor of harmonizing accounting standards. This took place during the early 2000s along the line of Anglo-American financialization, further contributing to the destabilization of the CME model for large German companies, but not for small ones (Sect. 4.2.2). However, not only CMEs were affected by erosion processes driven by financialization. The related abolition of capital controls and—somewhat more recently—the loose monetary policies by the major central banks of the Global North have led to highly speculative short-term financial flows that tended to undermine the model of state-permeated market economies (SME) in countries such as Brazil (Sect. 4.2.3).

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4.2.1

The Erosion of Traditional Rhenish Corporate Governance3

Systems of corporate governance are central to the ideal-typical distinction of varieties of capitalism (Hall and Soskice 2001). The LME model emphasizes the control of companies by owners who are not actively involved, through the use of active markets for corporate control such as takeovers. The managers have some degree of freedom but are influenced by incentives that are linked to share prices, such as share options. On the other hand, the CME model discourages hostile takeovers and relies on major shareholders (blockholders) to have control over the company. In this model, managers need to have the approval of their supervisory boards for important decisions, which means involving blockholders and worker representatives in the decision-making process. However, we should add that this is a snapshot at a specific moment in time. The LME model, for example, has changed tremendously in this regard during the twentieth century (Hollingsworth 1997; Stearns 1986). In the late 1990s, outsider control was the most important factor, whereas from the 1930s to the 1960s, managers enjoyed a comparatively high degree of autonomy. Since the mid-1970s, however, external control by financial institutions has increased significantly, especially in the form of institutional investors. Institutional investors can roughly be separated in three groups, depending upon the fees they are charging for their investment activities (Fichtner 2020): (1) The “medium fee” segment, consisting of actively managed mutual funds. These are the “traditional” institutional investors, taking off during the 1980s, particularly due to the introduction of the “401(k)” pension plans in the United States. Traditionally, these institutional investors exercised influence in corporate governance by selling their shares if the development of share prices did not match their expectations. (2) The “high fee” segment, which is mainly constituted by private equity and hedge funds. These institutional investors charge high fees to their investors, in exchange to their (not always realized) promise of “beating the market”. Both private equity and the subgroup of “activist” hedge funds take a far more active perspective 3 The argument in this subsection draws on Nölke (1998, 2003).

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with regard to the corporate governance of the companies they are invested in if compared with mutual funds. They demand strategies for maximizing shareholder value, for example by selling less profitable company segments. (3) The “low fee” segment, which is the most recent, but also most dynamically growing one, is comprised of passive index funds, most notably exchange traded funds (ETFs). Three companies— BlackRock, Vanguard and State Street—dominate this segment and therefore lead to a high concentration of corporate control in a few hands. While this concentration potentially allows for a particularly high degree of influence over corporate governance, passive index funds tend to side with management, in contrast to activist hedge funds (Fichtner et al. 2017). The importance of these investors (compared with individual investors) has increased rapidly in recent decades, particularly in the financialized LME economies of the United States and the United Kingdom. The figures are striking: “During the 1970s, individuals still held roughly 80 percent of listed corporations in the United States, while institutional investors only held 20 percent. Since then the positions have turned, individual investors now hold less than 20 percent” (Fichtner 2020: 273). Since the 1980s, this has led to a high degree of concentration of power in the hands of institutional investors, vis-à-vis both, other companies (especially manufacturing companies) and the state. Furthermore, institutional investors are characterized by a high degree of collective (“herd”) behavior, be it through common valuation criteria for the evaluation of corporate activities, the orientation on the actions of other, in particular well-known investors (“noise trading”) or through automated buy/sell systems that follow the price signals of other market participants (Harmes 1998). Since the 1990s, the increasing concentration of corporate finance with institutional investors has also led to qualitative changes, starting in the US, but later spreading to Europe as well. Since then, mutual funds who are dissatisfied with the performance of a company no longer “vote with their feet” and sell their shares, but rather take a direct influence on the company’s management. Due to the increasing concentration of wealth among institutional investors, the exit option is now becoming too risky, because the sale of shares on a large scale threatens a substantial drop

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in prices. This creates direct effects on the production sector, primarily through an increased emphasis on short-term “shareholder value”: Since American management during the past half century has been evaluated more and more by the current selling price of the stocks and bonds of the company it manages, the American corporate structure has increasingly become embedded in an institutional arrangement placing strong incentives on short-term considerations.... Thus, American management is preoccupied with boosting stock prices. (Hollingsworth 1997: 138)

The increasing prominence of institutional investors has been leading to serious consequences since the late 1980s. The “anticipatory obedience” of managers with a view to share prices is increasingly joined by direct interventions. Institutional investors—especially in comparison with individual shareowners—have increasingly been influencing issues such as the acquisition of stakes in companies, the remuneration of management or the spending on research and development. At the same time, they have been forcing management of these companies to undertake restructuring measures, with the goal of increasing the return for shareholders (Mizruchi and Stearns 1994: 327). While this behavior of mutual funds—later joined by activist hedge funds—has become controversial in the process of financialization of LME capitalism (e.g. Lazonick and O’sullivan 2000), it has caused particular problems when transplanted to German CME capitalism since the 1990s. In the traditional twentieth-century CME model, the institution of the “Hausbank” (house bank) is decisive for corporate financing in German capitalism (Albert 1991; Hall and Soskice 2001; Streeck 1997). As a rule, companies do not finance themselves by issuing shares on the stock exchange, but through bank loans from their principal bank and other banks. House banks in this model not only provided a relatively high proportion of short- and long-term corporate financing, but also frequently held—in the case of a stock corporation—a significant proportion of the shares in the relevant companies. They held even more voting rights based on the shares that shareholders were deposing with these banks (Brickwell 2002). The personal and financial links between German banks and companies were strengthened by the industrial groups’ shareholdings in the banks, even if these are somewhat smaller in proportion.

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This form of market structure had substantial consequences for decision-making in German companies listed on the stock exchange. According to this model, managers had to come to terms with wellorganized representatives of labor and capital, who often participated directly in the decision-making process. The decision-making process may have taken longer as a result, but the implementation of the jointly reached decisions was all the easier. In addition, this form of corporate financing led to a comparatively long-term perspective with regard to the well-being of the company. The same applies to small and medium-scale companies. Here, house banks—typically local savings banks or cooperative banks—do not hold shares of their clients, but have long-term credit relationships. Stable ownership structures—often families—protect these companies against takeovers, thereby further supporting the long-term perspective. Since the late 1990s, however, financial globalization has led to a loosening of the close ties between companies and their principal banks and thus to a change in the structure of the German capitalism model for large listed companies. German manufacturing companies were taking advantage of the globalization-driven expansion of the range of potential sources of finance to free themselves from the supervision of their principal banks and to obtain the funds they needed for the globalization of their production on the most favorable terms possible. At the same time, German banks were trying to find additional sources of income on globalized financial markets, for example in investment banking. The loosening of ties keeping the “Deutschland AG” together was surprisingly dynamic, as can be demonstrated in case of the Deutsche Bank: In 1996, 29 of the supervisory board chairmen of the 100 biggest firms were representatives of the Deutsche Bank. Only two years later, this number has declined to 17. Indeed, in 2001, Deutsche Bank announced that it would resign from supervisory board chairs altogether. (Lütz 2005: 147–148)

The dissolution of the “house bank” relationship for major German companies provided ample inroads for Anglo-American institutional investors during the mid-1990s. These investors increased their shareholdings very quickly, for example in then VEBA (today part of E.ON) from 1 to 13% or in then Hoechst (today part of Aventis/Celanese) from 35 to 51% within only four years (Balzer and Nölting 1997:

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72–89). At the same time, German banks expanded quickly into investment banking—witnessed, e.g. by the takeovers of Morgan Grenfell by Deutsche Bank in 1990 and Kleinwort Benson by Dresdner Bank (today part of Commerzbank) in 1995—and into institutional investing. The assets of equity funds managed by German investment companies had more than quintupled in the five years, amounting to DM 65.2 billion at the end of 1996, a good half of which was invested in German equities (BVI 1997: 10). The increased involvement of German banks in the investment sector was leading to a change in their corporate culture, e.g. through greater independence and higher salaries for investment bankers compared with their colleagues in the credit departments. German investment funds, which are primarily managed by German banks, have also been changing their traditionally cautious behavior and have been taking an increasingly critical stance at the annual general meetings of the companies they finance (Balzer and Nölting 1997: 80). At the same time, the changes in the financing of German manufacturing companies were unmistakable. More and more large companies have been going public and are using the stock market—including foreign stock exchanges—to finance their investments, instead of meeting their financing needs via “house banks”. Managers of these companies have been embracing the option to link their remuneration to their company’s success through the granting of stock options—also an import from the LME model. German companies have started to set up offices for investor relations and to communicate profitability targets. During the late 1990s and early 2000s, these developments were supported by German public policy in a comprehensive way, for example by changes in taxation exempting gains from the sale of company stakes from taxation, mass privatization (e.g. Deutsche Telekom) and a whole series of laws for the promotion of domestic capital markets (Beyer and Höpner 2003; Lütz 2005). Anglo-American institutional investors have further amplified these changes via political lobbying and corporate activism (Cioffi 2000: 585; Lannoo 1999: 287–290). For example, the “International Corporate Governance Network” supported by these investors vehemently criticized the practice of corporate governance and the insufficient consideration of “shareholder value” in German companies. It has lent weight to these concerns in various ways, whether by drawing up recommendations for the design of corporate control

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(e.g. abolishing multiple or maximum voting rights that favor traditional owners) or by calling for transparent and internationally comparable accounting standards. Whereas foreign institutional investors originally failed in their interventions at the annual general meetings of German stock corporations and board members refused to meet with them, they have increasingly been given considerably more attention by the management of these companies, so that, for example, shareholdings are sold or parts of the company are restructured on their recommendation. However, most of these changes are only relevant for large companies in CME-type economies. For small companies, in contrast, most of the tenets of the “Varieties of Capitalism”-approach regarding corporate finance still hold. Here, the “house bank relationship” with local banks is still intact, helping stable (family) owners with the provision of stable capital. The potentially high pertinence of the changes in CME-style corporate governance (of large companies) stems from the institutional complementarities of the latter with other core institutions of this type of capitalism (Hall and Soskice 2001). From a classical CC standpoint, economic institutions like corporate governance and industrial relations can only be successful if they are able to complement each other (Chapter 2); that is, it assumes that “the functionality of an institutional form is conditioned by other institutions” (Höpner 2005: 331). A patient system of corporate finance and governance allows for long-term training in company-specific skills and for continuing the employment of qualified personnel also during periods of crisis. It also supports long-term investments and employment in order to support incremental innovation. These CME complementarities have come under pressure by the rise of LME-style institutional investors during the process of cross-border financialization. The “short-termism” involved in a pronounced shareholder value orientation can easily work against the long- term incremental innovation strategies typical for CMEs, for example by triggering cost-cutting layoffs of qualified personnel or limiting investments for research and development. Given these (theoretical) concerns about the implications of the erosion of the “German model”, it does not surprise that the increasing prominence of institutional investors in German corporate finance since the late 1990s has led to very lively debates during the 2000s (e.g. Beyer 2009; Goyer 2006; Hoffmann 2004; Kellermann 2005; Klages 2006; Lütz and Eberle 2008). It has also stimulated very comprehensive

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empirical research. For example, Martin Höpner’s (2001, 2003) study of corporate governance in the 40 largest exchange-listed German companies demonstrates a varying degree of the shareholder value orientation among these companies, depending upon external investor pressures and internal management motivation. His study also shows that companies with a high share of foreign institutional investors do not completely disengage from the German system of industrial relations, including institutions such as co-determination and collective agreements. Still this high share leads to a higher importance of market mechanisms for individual wages (e.g. by the introduction of variable pay) and to the shedding of non-essential company activities. Later research has validated and qualified the concerns about the erosion of the coordinated German model articulated during the late 1990s and the 2000s. Sigurt Vitols and Robert Scholz (2021) have tested the impact of a large share of institutional investors among the owners of German exchange-listed companies on the volume of longterm capital investments of these companies and found a negative impact. Christoph Scheuplein (2021) investigated the implications of extending a kind of corporate finance, private equity, typically associated with financialized LMEs to CMEs; his research focused on Germany’s automotive sector. As this type of “impatient capital” is so closely linked to financialized LME capitalism, it stands to reason that there would be plenty of contention with regard to the patient capital system employed by CMEs. Indeed, Scheuplein has uncovered a plethora of problematic issues due to private equity financing in German industries, including shorter ownership period, weakened labor rights on the corporate level and general instability. Jan Fichtner (2015) has studied the impact of the other type of “high fee” institutional investors, hedge funds, upon German CME-style capitalism. He demonstrates the potentially profound impact of activist hedge funds upon German companies, particularly with regard to the break-up of conglomerate structures and the shedding of less profitable activities, thereby increasing the share prices of the core company— but also its exposure to short-term developments. However, Fichtner also demonstrates that nearly half of the 160 largest listed German companies still had a blockholder and, therefore, were sheltered against the most aggressive activist hedge fund strategies. Benjamin Braun and Richard Deeg (2019) demonstrate that the process of dissolution between large German industry corporations and large German banks has further intensified since the 2000s, but now for different reasons. The highly

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profitable intensification of the German export-focused growth model since the millennium—inter alia supported by the shedding of non-core company activities discussed above—allowed for the accumulations of a large volume of internal reserves. Thus, it made large shares of the remaining provision of credit to large manufacturing companies superfluous. Correspondingly, large German banks intensified their search for alternative sources of revenues—and some tragically found the latter in securitizations of US subprime mortgage credits and in lending to other Eurozone economies, as become obvious during the Global Financial Crisis and the euro crisis. Meanwhile, the extremely high concentration of share ownership in the “low fee” segment based on the success of index funds may potentially change the relationship between institutional investors and companies harbored by economies close to the CME ideal type again. Since the “Big Three” funds that are dominating the ETF market are not able to disengage from companies that are included in the core indices, they are motivated to develop a long-term perspective regarding the well-being of the latter, similar to the traditional German “house banks”. They become a new form of patient and management-friendly capital, very different from the external pressure and volatility exercised by early institutional investors in the medium fee segment. At the same time, they also tend to pursue a passive approach—given the high costs of dealing with individual companies—thereby contradicting the activist approach taken by institutional investors in the high fee segment. Correspondingly, the new “asset manager capitalism” (Braun 2016, 2021, 2022) may even lead to a form of corporate governance that is more compatible with the traditional institutional complementarities in CME-type capitalism, if compared to institutional investor activism. 4.2.2

Fair Value Accounting Standards and Coordinated German Capitalism4

The transnational erosion of CME capitalism via processes of financialization driven by the LME-style economies of the US and the UK can be illustrated in more detail by zooming in at changes in accounting standards during the last decades. At the core of these changes is the shift 4 The argument in this subsection draws on Nölke (2011b, 2013), Perry and Nölke (2006) and Nölke and Perry (2007a, 2007b).

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from historic cost to fair value accounting. In contrast to the traditional approach of historic cost accounting that values assets upon acquisition, fair value accounting (FVA) assesses current market prices when possible (mark-to-market). If a real-time market price is not available, then a model is utilized in order to reach an estimated simulated equivalent. The transition from historic cost to fair value is intended to limit the management’s discretion in estimating assets’ worth, particularly those with active markets. FVA necessitates a perpetual assessment of an asset’s current market price for appropriateness and reasonableness. Therefore, regular justification must be provided for any utilization of the asset based on its up-to-date valuation. To understand the relevance of this distinction, we need to incorporate the far more advanced process of financialization in the US (and the UK) in the early 2000s (Chapter 2). Financialization is heavily dependent on the use of fair value accounting (Barlev and Haddad 2003). At least until the Global Financial Crisis, financial assets had yielded considerably higher returns than production assets. As a result, fair value accounting increased their significance in corporate balance sheets compared to an approach based on historic costs of acquisitions. This shift has further amplified the financial sector’s dominance and established its primacy over other industries. Moreover, FVA and financialization are closely connected in yet another way. Lurking beneath the arguments concerning fair value/ mark-to-market versus historic cost bookkeeping exists a deep disagreement on the part of businesses in relation to society. Fair value accounting views firms as belonging to their owners. This approach adopts the point of view of an investor. Accounting in this perspective is essential to empower investors in making the most informed decisions when choosing a company for their investments. It provides an accurate representation of the present value of each asset, enabling them to make profitable choices. In addition, fair value accounting breaks down companies into their distinct assets and calculates their current market worth. This enables investors to pressurize management to maximize the profitability of this projected value. Unlike fair value accounting, historic cost accounting places comparatively greater emphasis on other stakeholders of an organization— primarily creditors, but also management and employees. By using historic cost accounting principles, a company can create hidden reserves on its books. When struggles arise, management can use these funds to alleviate the strain, resulting in decreased risk of defaulting on loans. In this

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way, such strategies help protect against major disruptions while ensuring financial stability. Moreover, management can smooth their books to avoid pressure from shareholders. However, this advantage can also come with a cost. Not only can it lead to a lack of transparency for regulators, but it may also lead to slower responses when it comes to upcoming financial issues. Nevertheless, employees benefit from the steadiness generated by historic cost accounting in times of crisis since there is less pressure for immediate restructuring and layoffs. The European Union made a major shift from historic cost accounting to fair value in 2002 when it forced European listed companies to adopt accounting standards as devised by the IASB. Before, the standards governing the accounting of these companies were set by national legislation, in Germany for example by the Bundestag. However, this shift was not only an institutional one, but also a substantial one, given that the IASB has moved many core accounting standards to FVA. In order to understand the potentially far-reaching implications of this shift, we need to put in the context of the CME-LME-distinction. Every model of capitalism has accounting standards that work harmoniously with other institutions. The German Handelsgesetzbuch [Corporate Codified Laws and Regulations] perfectly echoes the interrelated components of CME’s framework. To safeguard investors and the stability of the organization, these standards center around astute stewardship and thriftiness. This accounting model takes into consideration an organization’s long-term progress as well as its stakeholders’ interests. CME companies are able to pursue proactive long-term strategies such as investing in production and human resource development, due to the sound accounting standards along with their corporate governance and financing arrangements. CMEs should be able to hold their export quality edge due to their utilization of expertly trained labor, which enables them to manufacture exceptional quality items that are often custom-made (Heidhues and Patel 2012). Traditionally, the German Handelsgesetzbuch accounting standards enabled Hausbanken [House Banks] to safely provide long-term bank loans which were an essential element of the CME model. Hausbanken in the CME model were often seen as insiders to the firm due to their presence on the supervisory board of these companies. As a result, they and other blockholders (e.g. members of founding families holding paid-in equity on a long-term basis) had exclusive methods of obtaining information about a company’s performance and internal processes beyond just

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financial reports. Official accounting statements, which provide the public with financial information within a CME capitalist model, are often given limited attention. Instead of being used to inform individuals or businesses on the condition of their finances, these reports primarily serve to reassure bankers that firms will have enough revenue and collateral for loan repayment. This is done by overstating liabilities and “hiding reserves” (Ball 2004: 103; Biondi 2011; Richard 2005). Conversely, accounting reports tackle a more critical part of LMEs since investors are usually outsiders. Consequently, open financial information is indispensable for the investment decisions made by economic actors in the market. The introduction of IFRS standards based on fair value accounting techniques—by the UK-based IASB—is therefore consistent with the basic features of the contemporary Anglo-American model under financialization, since fair value accounting is supposed to strengthen the position of shareholders vis-à-vis managers, although it is also controversial in LMEs (Benston et al. 2003; Holthausen and Watts 2001; Kothari et al. 2010). However, given the already powerful role of finance in economies close to the LME type, its impact is far less disruptive than in CME where it can have destabilizing consequences, given that it takes away “the primary accounting tool available to reduce earnings volatility” (Ball 2004: 125). The character of the IASB as a case of transnational private governance, isolating accounting standard settings from national legislatures, considerably supported the profound shift towards fair value accounting and governments. It isolated accounting standard setting from politicization in domestic politics and gives a premium for professional expertise (Nölke and Quack 2013). Only very large (and financialized) German companies thus participate in the governance arrangements of the IASB, as has been indicated by a comprehensive network analysis (Perry and Nölke 2005). These companies increasingly make use of capital markets for the financing of investments. Smaller German companies that still rely on Hausbanken had hardly any means to influence the substance of accounting standard setting, in contrast to finding an open ear in the German Bundestag that is responsible for the Handelsgesetzbuch. However, there are limits to the power of the transnational spread of fair value accounting based on private governance. These became obvious when IASB standards were proposed to be made obligatory for (not exchange-listed) small and medium-scaled companies as well. After an

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abundance of debate and resistance from German medium-scale companies (see Nölke and Perry 2007b for a detailed account), the proposal to obligatory introduce IFRS for small- and medium-scale enterprises in the EU was abandoned in 2011; it now is merely optional. This occurred mainly because of an “accounting standard pressure group” sponsored by several sizable and very powerful German medium-scale firms back in 2006 (Verband zur Mitwirkung an der Entwicklung des Bilanzrechts für Familiengesellschaften). 4.2.3

Transnationally Mobile Capital and State-Permeated Capitalism in Brazil5

Financialization is a challenge not only for continental European economies close to the CME ideal type, but also for large emerging economies of the SME type, unless the latter have chosen a stringent state-capitalist management of cross-border financial flow such as China (see Sect. 8.2). In emerging markets, financialization poses particular challenges, in particular regarding external financial openness. To create sustained industrialization, these countries are striving to establish a longterm development strategy. The high degree of risk introduced by the mobility of capital across borders through financialization could destabilize these economies. Volatility renders long-term investments quite precarious and is thus a significant roadblock to successful industrialization. Moreover, to succeed economically, newly emerging economies desire to foster their homegrown industries. The global capital markets, which play a key role in managing and controlling industrial endeavors, often have competing short-term ambitions that can be at odds with longer-term economic development goals. Let us explore these two major obstacles—volatility triggered by global capital movement and shortterm viewpoints due to the potent influence of international financial markets—separately. Macroeconomically, extreme capital mobility across countries can result in financial crises in developing economies. Of great concern is the sudden halt of foreign investments when investors become worried about a struggling nation’s economic state (Calvo 1998). The worldwide interconnectedness of capital market participants creates a “herd effect”, 5 The argument in this subsection draws on Nölke (2010b, 2018), Nölke et al. (2020, 2022), May and Nölke (2018) and May et al. (2019).

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meaning that when investors sense potential for risk, their collective action can create this very reality. This is especially true if the country in focus carries large volumes of short-term debt. When this happens, the emerging market currency experiences severe devaluation and inflation (particularly for imported goods) rises. This can be devastating to future investments in these markets as central banks are forced to increase their rates to combat inflation. Banks are facing a surge of loans that cannot be repaid and become even more wary when it comes to giving out additional credit. If companies that owe money go bankrupt due to higher rates or the absence of fresh credit, they could potentially not only cause huge losses in terms of human capital but also affect other businesses through inter-enterprise credits. Sudden capital outflows can be a significant issue for emerging markets during their industrialization process, but strong inflows over an extended period can also prove to be problematic. When foreign financial investments enter an emerging market on a big scale, the value of its currency is likely to increase. Unfortunately, this appreciation proves detrimental to domestic industries in these economies since they become less competitive with imports and on global markets. The Western central banks’ low-interest rate strategy during and after the Global Financial Crisis has enticed financial investors to search for higher interest rates in emerging economies, which is a major component of the massive capital inflow into these financial markets (carry trades). To conclude, drastic currency devaluations and strong appreciations both have unfavorable repercussions for the industrialization of emerging markets. For this industrialization process to be successful, it is paramount that currency relations remain stable over a long period. In addition to these large-scale trends, cross-border capital mobility due to financialization brings forth significant micro-economic difficulties for companies in emerging economies. Here, the emphasis is on how foreign direct investments and stock markets have been used to control production companies financially. Particularly relevant in this discussion is how these instruments are applied across national boundaries. Unlike short-term speculative flows, these types of mobile capital are often regarded much more favorably in terms of their economic effects. Contrary to the popular notion that financial deepening leads to an increase in corporate growth, however, this type of financialization can also be a hindrance to business expansion (Singh 1996; Singh and Weisse 1998). It is difficult to align the short-term focus of financial investors

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on quarterly profits with the long-term strategies required for any major industrialization efforts. If external investors hold a prominent position in the corporate governance of firms in emerging economies, they are likely to favor financial investments over industrial ones. Additionally, these investors have the inclination to show less interest in the longterm development of the institutional economic context within emerging economies. For instance, they are not as eager to invest in initiatives that may strengthen their general educational systems (Schneider 2013). To illuminate these points, we can look to Brazil as an example of a financially relatively open SME, in contrast to the more closed—and stable—cases of China and India. Brazil has a long tradition of an alternation of developmentalist and liberal phases of economic policy, leading to a unique form of “liberal neo-developmentalism” (Ban 2013). While Brazil had seen long phases of state-led import-substitution industrialization (ISI) between the 1930s and 1970s, the 1980s and 1990s witnessed liberal economic policies, including broad campaigns for privatization and industrial denationalization (Schmalz 2012: 266–269; Schneider 2013: 76–77). However, important ISI institutions were preserved and later became core instruments of the next turn towards developmentalism after the millennium driven by the Brazilian Labor Party (PTB), one example being the national development bank BNDES (Banco Nacional de Desenvolvimento Economico e Social/Brazilian Development Bank). To simplify, the turn towards a SME in Brazil was based on a twopronged strategy. On the one side, a growth model based on stimulating domestic demand was pursued by increasing minimum wages, creating subsidized lending (the “Crédito Consignado” program) and supporting the poor via social programs, for example the “Bolsa Familia” cash transfer program. As a result, domestic consumption expanded 24 quarters in a row between 2003 and 2009 (Melleiro and Steinhilber 2012: 219). On the other hand, the Brazilian government attempted to balance this strategy by stimulating exports, mainly in natural resources, but also in technologically more demanding goods. For the purpose of the latter, it invested considerable resources in the upgrading of its education and research system (Schedelik 2023). Similar to other SMEs such as China and India, control over the large majority of Brazilian companies still rests in national hands. Families, often via pyramid schemes (Aguilera et al. 2012: 326), control most of the exchange-listed firms. The state often acts as minority shareholder,

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often with the ability to block politically unwelcome decisions (Musacchio and Lazzarini 2014). Given this high importance of insider control, other minority shareholders including foreign institutional investors play a minor role with regard to these companies. Thus, Brazilian companies are well sheltered against quarterly demands for rising shareholder value and thus are able to pursue long-term strategies for investment and expansion. On the micro-economic level, the Brazilian government during the first rule of the PTB between 2002 and 2014 has tried to avoid some of the problematic effects of financialization by supporting major Brazilian companies for mergers and their international expansion via a very large program implemented by the national development bank BNDES in a highly autonomous way (Boschi 2013: 131). BNDES also compensated Brazilian companies with a massive credit expansion during the financial crisis, given the decline in credits by private banks (Arnold 2011: 20–21). Temporarily, BNDES lending approximated 7.5% of Brazilian GDP and disbursed four times the number of loans of the World Bank (Lazzarini et al. 2011: 32). Another source of patient (national) capital for Brazilian manufacturing is—often union-dominated—pension funds (Schneider 2013: 172). “Impatient” business financing via international capital markets, in contrast, increased only incrementally (Kaltenbrunner and Painceira 2018), also due to the focus of international investment funds in Brazil on government bonds (Bin 2016). However, Brazil was much less successful in isolating its SME model against the macroeconomic effects of (subordinated) financialization. Although it guarded itself against the “old” dangers of foreign sovereign debt by paying back the latter and accumulating large foreign currency reserves, it did not succeed with regard to the “new” dangers of large speculative flows enabled by the very loose monetary policy of the Northern central banks. High real interest rates—in part a remnant of the fight against the high inflation of the previous two decades—attracted massive capital inflows. Hence, the Brazilian currency drastically overvalued against other currencies such as the US Dollar—it appreciated 74% against the US dollar between 2003 and 2010 (Thompson 2011)— before plummeting during the 2013 taper tantrum caused by the US Fed (Bresser-Pereira 2015; Kaltenbrunner and Painceira 2015). In April of 2011, UNCTAD (United Nations Conference on Trade and Development) found that the Brazilian Real was 80% overvalued in comparison with its long-term optimal value (Nassif et al. 2011). The Brazilian government had introduced very modest capital controls (including taxes

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on speculative financial flows), but these were unable to manage the tide of speculative flows (Alami 2019; Dierckx 2015: 149–150). Limited protection against speculative cross-border financial flows had devastating effects on large parts of the Brazilian SME. Whereas the exporters of natural resources were able to weather the overvaluation well (due to low production costs) and service-providers faced only very limited foreign competition, Brazilian manufacturing suffered greatly. It lost competitiveness not only in exports, but also (primarily) against cheap imports, for example from China. Overvaluation is considered to be one of the core reasons for the weakness of Brazilian manufacturing (Nassif et al. 2015: 1314–1315). The process of deindustrialization intensified and—together with the later speculative fall of the Real, which forced the central bank to tighten monetary policy—contributed substantially to the demise of the rule of the PTB and to the rise of the right-wing populist Temer government. For domestic manufacturing—a core pillar of the SME model in Brazil—wild currency swings are highly problematic, given the need for stability to undertake longer-term investments (Casanova and Kassum 2014: 48; Kaltenbrunner and Painceira 2015: 1301). To conclude, the transnational process of financialization has demonstrated considerable potential for the destabilization of forms of capitalism that clearly deviate from the LME ideal type. This applies both to CMEtype Continental European economies such as Germany where financialization has eroded the connection between large exchange-listed companies and other institutions of coordinated capitalism, and to economies partially moving towards a state-permeated type, where financial flows have thoroughly destabilized the whole model of capitalism.

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Stearns, Linda B. 1986. Capital Market Effects on External Control of Corporations. Theory and Society, 47–75. Strange, Susan. 1996. The Retreat of the State: The Diffusion of Power in the World Economy. Cambridge: Cambridge University Press. Streeck, Wolfgang. 1997. German Capitalism: Does It Exist? Can It Survive? In Political Economy of Modern Capitalism, eds. Colin Crouch, and Wolfgang Streeck. London: Sage. Taylor, Lance. 1997. The Revival of the Liberal Creed—The IMF and the World Bank in Globalized Economy. World Development 25 (2): 145–152. Thatcher, Mark, and Tim Vlandas. 2016. Overseas State Outsiders as New Sources of Patient Capital: Government Policies to Welcome Sovereign Wealth Fund investment in France and Germany. Socio-Economic Review 14 (4): 647–668. Thompson, Lyndon. 2011. Brazil’s Economy: Reaching New Heights. OECD Observer 287: 26. Underhill, Geoffrey, and Xiaoke Zhang. 2008. Setting the Rules: Private Power, Political Underpinnings, and Legitimacy in Global Monetary and Financial Governance. International Affairs 84 (3): 535–554. Veneroso, Frank, and Robert H. Wade. 1998. The Asian Crisis: The High Debt Model Versus the Wall Street-Treasury-IMF Complex. New Left Review 228 (3). Vitols, Sigurt, and Robert Scholz. 2021. Unternehmensmitbestimmung und langfristige Investitionen in deutschen Unternehmen. WSI-Mitteilungen 74 (2): 87–97. Wade, Robert H. 2002. US Hegemony and the World Bank: The Fight over People and Ideas. Review of International Political Economy 9 (2): 215–243. Walton, Jon, and Charles Ragin. 1990. Global and National Sources of Political Protest: Third World Responses to the Debt Crisis. American Sociological Review 55 (6): 876–890. Williamson, John. 1989. What Washington Means by Policy Reform. In Latin American Adjustment: How Much Has Happened?, ed. John Williamson, 18– 23. Washington DC: Institute for International Economics. Woll, Cornelia. 2013. Lobbying under Pressure: The Effect of Salience on European Union Hedge Fund Regulation. JCMS: Journal of Common Market Studies 51 (3): 555–572. Woods, Ngaire. 2003. The United States and the International financial Institutions: Power and Influence within the World Bank and the IMF. In US Hegemony and International Organizations, eds. Rosemary Foot, S. Neil MacFarlane, and Michael Mastanduno, 92–114. Oxford: OUP Oxford. Zeff, Stephen A. 2012. The Evolution of the IASC into the IASB, and the Challenges It Faces. The Accounting Review 87 (3): 807–837.

CHAPTER 5

Regional Integration

5.1

Second Image Reversed: E(M)U and the Erosion of European Varieties of Capitalism Among the most powerful international influences on national models of capitalism is the supranational setting of the European Union (EU), particularly since the establishment of the Economic and Monetary Union (EMU) in 1992. While other regional integration schemes have only very limited means for influencing the national institutional setup of member state capitalisms, the comparatively strong centralization of power on the European level has increasingly shaped these institutions during the last decades (Sect. 5.1.1). The gravity of this influence became obvious to the larger public during the Eurozone crisis of the early 2010s, which was caused by problematic interactions between different types of capitalism on the national level that were very densely coupled in a currency union lacking means to assist member economies in crisis (Sect. 5.1.2).

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5.1.1

The European Integration Process and Pressure on European Varieties of Capitalism1

Even after more than five decades of European integration, national economic and social models in Europe still differ considerably, as was vividly demonstrated during the Eurozone crisis. However, heterogeneity is not a bad thing per se, as there is no “one best way” of capitalism. On the contrary, the different models of the export-led coordinated market economies (CMEs) in North-Western Europe, the Southern European consumption-led mixed market economies (MMEs) and the dependent market economies (DMEs) in the former transition countries of Eastern Europe all have their specific advantages and disadvantages. In recent decades, however, the European Union has increasingly built up pressure to level out these differences—following the guiding principle of a liberal-supranational model. In this intensification of European economic integration, a simplified distinction can be made between three phases (Höpner and Schäfer 2010): • Coexistence of the European models of capitalism (late 1950s to mid-1970s); • Competition between European models of capitalism (mid-1970s to late 1990s); and • Convergence of European models of capitalism, or attempts to enforce this convergence (since the late 1990s). In contrast to the customs union in the first phase, the Common Market for goods in the second phase already intervened somewhat more deeply in national capitalisms. Based on the European Court of Justice (ECJ) rulings on Dassonville and Cassis de Dijon, as well as the Single European Act’s push for integration which itself was implicitly based on these decisions, the sovereignty of member states in product market regulation was circumscribed by the principles of mutual recognition. While this significantly magnified competition between European corporations and the national institutions that supported them, the existence of these institutions was not fundamentally challenged. This changed in the third phase, when the scope of liberalization expanded beyond just markets for

1 The argument in this subsection draws on Nölke (2019a, 2021a).

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goods to include markets for services, capital, and people. The convergence towards a liberal mode of capitalism now reached very deeply into other models, particularly felt in CMEs. These interventions have become evident, for example, in the original proposal for the Takeover Directive, which was presented by the Commission with the aim of creating a Europe-wide market for corporate control. In liberal market economies like the former member United Kingdom, the threat of a hostile takeover is important for ensuring that management is held accountable to shareholders and institutions such as pension funds and activist hedge funds. In other European economies (coordinated, mixed or dependent), by contrast, corporate control is exercised by other institutions, such as corporate interlocks, house banks, blockholders, headquarters of multinationals, or by the state (Sect. 2.1.2). In these economies, hostile takeovers are not compatible with other institutions for corporate control such as employee participation or state governance. Accordingly, the attempted imposition of a market for corporate control—somewhat wared down during the legislative process—has moved corporate power relations quite substantially to the side of shareholders in many European countries, as is already generally the case in favor of liberal models of economic organization (Höpner and Schäfer 2007: 15–18). The most important initiators of this process towards liberal economic models were the European Commission (EC) and the European Court of Justice (ECJ), both non-majoritarian institutions. Typically, the Commission’s initiatives have only been hindered by opposition from member state societies, as in the case of the “country-of-origin principle” of the Services Directive (Höpner and Schäfer 2007: 12–14). Many European societies resisted the Commission’s initial proposal because they were concerned that it would compromise the safety and quality standards, or result in lower wages due to dumping—for example, in relation to the discussion about the “Polish plumber” during the debate on the European Constitutional Treaty in France in 2005. Due to this societal resistance, the principle was removed from the directive. In the face of social resistance from the member states, the actual liberalization steps were then pushed through by the case decisions of the ECJ. These include the decisions on corporate governance—with a potential threat to German co-determination (Centros, Überseering, Inspire Art)—and on the restriction of trade union rights in competition with freedom of establishment and freedom to provide services (Viking, Laval,

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Rüffert). The problematic effects of the ECJ on national institutions of capitalism can be seen, for example, in the case of the Laval decision (in 2008), which led to the restriction of the strike rights of trade unions that wanted to protect Swedish (CME) industrial relations standards against cheap labor from Latvia. Germany also faced an attack against one of its most important economic institutions. At issue was co-determination, one of the most important institutions of Germany’s coordinated economic model. In 2017, a case was heard by the European Court of Justice (Erzberger versus TUI) which, in the worst case, would have led to co-determination no longer being compatible with European fundamental freedoms in the future and having to be abolished in this form. Now, there have always been opponents of co-determination in corporate circles in Germany who have opposed employee co-determination rights. However, they have never had a realistic chance in the German political framework. The exaggeration of fundamental freedom resulting from the ECJ’s ruling practice, which has been lasting for decades, now threatened to change this situation, even though the ECJ—against the Commission’s vote—finally came out in favor of co-determination. The preferences of the supranational EU institutions for liberal models of capitalism are not due to the influence of the (then) EU member United Kingdom. Instead, the legal basis of the liberal-supranationalist practice is a fundamental design flaw of the European Union, which was instated already in the Treaties of Rome. Unlike the German constitution (“Grundgesetz”), the European quasi-constitution (the treaty system) is not economically neutral. The liberal economic freedoms enjoy constitutional status in the EU (Grimm 2017). It is this economic liberal slant of the European Union that has led to many attacks on deviant economic institutions in the past, be it trade union rights or public banks. By radicalizing the harmonization of European economic and social models under a liberal guiding principle, the EU not only endangers workers’ rights in CMEs, but even before the Eurozone crisis led to a negative politicization of European integration, as was evident, for example, in the French, Dutch and Irish referenda on the constitutional treaty. The introduction of a common currency (Sect. 5.1.2)—and the steps taken to try to save it (Sect. 5.2.1)—follow from now the same logic of a forced homogenization of heterogeneous models of capitalism under the aegis of a non-majoritarian institution (now the ECB), with even more problematic consequences. Again, this process becomes particularly clear from the perspective of Comparative Capitalism (CC).

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The Euro and the Destabilization of Southern European Capitalism2

A whole range of approaches have been developed to explain the euro crisis of the early 2010s, operating at different levels of abstraction. On the one hand, there are abstract theories such as those of “optimal currency areas” (Mundell 1961; McKinnon 1963; Kenen 1969), which attribute the crisis of the euro—even before its introduction—to the absence of central structural prerequisites for such an association. These preconditions include, in particular, strong geographic mobility, very flexible labor markets and a common system of risk-sharing through massive fiscal transfers for crisis regions—all factors that are not present in the near future for the euro area. On the other hand, we find very pragmatic stock takes that highlight in particular the rising debt and the buildup of large imbalances in the first decade of the euro, as well as failures in euro stabilization, without major theoretical pretensions (Baldwin and Giavazzi 2015). In the social sciences, an explanation of the euro crisis has become established in recent years that essentially draws on findings from CC research and operates at an intermediate level of abstraction (Hall 2014; Hassel 2014; Höpner and Lutter 2014; Johnston and Regan 2016, among others). An important basic assumption of CC research is that very different economic models have emerged in Europe over the last decades, which can be summarized into four basic types. These types include the (export-led) CME in Germany and Austria, the DMEs in Central Eastern Europe, the LMEs in the United Kingdom (before Brexit) and the (consumption-led) MMEs in Southern Europe and France (Sect. 2.1.2). While several decades of European integration had already increased the tensions between these models, the introduction of a common currency and the related dissolution of the important pressure valves of devaluation and independent national monetary policy have led to the fundamental destabilization of the Southern model. From this perspective, a whole series of aspects of the euro crisis can now be explained. First, however, it must be clarified what exactly “the euro crisis” is. In the German media, for example, it is also referred to as the “sovereign debt crisis”. However, a sharp increase in government debt in relation to economic output actually only affected Greece (and to 2 The argument in this subsection draws on Nölke (2016, 2019b).

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a lesser extent Italy). In Spain, for example, it was more a crisis of private debt, which has only become a sovereign debt crisis later, as a result of a bank bailout. In addition to these debt crises, however, it is above all a crisis of price competitiveness, i.e. a problematic divergence of inflation rates and unit labor costs within the euro area. Finally, in some Southern European countries—Italy in particular—we also find a crisis of product competitiveness (especially in relation to the rise of emerging economies such as China), which is also partly due to the euro. A comprehensive explanation of the euro crisis must cover all four facets, government and private debt, price competitiveness and product competitiveness (see also Bibow 2013; Johnston and Regan 2016). One can derive four concrete arguments from CC research that explain the euro crisis. These four explanations start from classical categories of Varieties of Capitalism research—the institutions of industrial relations, the innovation system and the financial system, as well as the general coordination mechanism that runs across these institutions—but also build on insights from the later streams of CC research, such as the growth model perspective. The first two explanations focus on the interaction of different forms of capitalism, the third on the development of further forms of capitalism beyond CME and LME, and the fourth explicitly on the demand side. At the heart of the first explanation of the euro crisis is the problem of price competitiveness, especially in sectors with internationally tradable goods. Behind this problem is the problematic coexistence of coordinated and mixed market economies in one monetary union. The central institution here is the system of wage determination. In the German CME, this system is highly coordinated; as a rule, there is only one DGB (Deutscher Gewerkschaftsbund/German Trade Union Confederation) union in each economic sector, whose collective agreement is binding for the entire industry; competing unions, as with the train drivers, are a very rare exception. These wage agreements take into account the competitive situation of German industry—for example, the metalworker union (IG Metall ) refrained from demanding wage increases at all during the 2009/2010 financial crisis. These institutions are lacking in the mixed economies of Southern Europe, where several unions of different political hues often compete in one economic sector and try to push through the highest possible wage agreements for their individual members. While a coordinated economy like Germany’s thus can easily adopt an orchestrated strategy of wage restraint, the economies of Southern Europe, with

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their competing trade unions and correspondingly fragmented system of wage setting, lack this ability. Furthermore, the introduction of the monetary union encourages wage moderation in CMEs since it offers job security and potentially higher wages over time due to expanded exports. In contrast, with fluctuating exchange rates any long-term advantages of controlling compensation was potentially diminished by changes in currency values (Höpner and Lutter 2014: 7). However, in a currency union with mostly intraregional trade, steady wage moderation by only one group of economies automatically creates an imbalance in the international market (Armingeon and Baccaro 2012: 272–273; Johnston et al. 2013: 10). Before the formation of EMU, such economic disparities were rectified through nominal exchange rate adjustments or individual inflation rates set by national central banks. However, this has now been eliminated leading to perpetual crisis we see today throughout Southern Europe (Johnston and Regan 2016). A unilateral strategy of wage restraint by a very large member country in a monetary union leads to the divergence of unit labor costs observed in the euro crisis and inflation rates, which rose far more in Southern Europe than in Germany (Collignon 2009; Scharpf 2011; Hancké 2013; Johnston et al. 2013; Ramskogler 2013; Hall 2014; Höpner and Lutter 2014; Johnston and Regan 2016). In view of the virtually insurmountable difficulties of establishing a coordinated system of wage determination on the national level in the short term, after the outbreak of the Eurozone crisis the countries of the South—instigated by the EU institutions and following the blueprint of the German economy—therefore tried a wage reduction strategy that is institutionally easier to implement, namely liberalizing labor markets and weakening trade unions, albeit with tragic consequences for the development of domestic demand. However, the introduction of the common currency has not only structurally changed the economies of Southern Europe, but also the German one. It was only with the introduction of the euro that Germany became an extreme export economy, which is completely atypical for large (as opposed to small) economies. A comparison of Germany’s export ratio with that of the other large economies in the Eurozone demonstrates that the German economy structurally decoupled from the latter with the introduction of the euro (Fig. 5.1). While the fall of the Iron Curtain and the opening of the Chinese economy had led to an increase in exports in relation to economic output (gross domestic product/GDP) in all three

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countries during the 1990s, only in Germany did the increase continue unabated after 2000. Against the background of CC research, the divergence in export ratios between Germany on the one hand and France and Italy on the other can be explained. Before the introduction of the euro, the advantage of German system of coordinated wage setting and the resulting ease of wage moderation was compensated regarding export advantages by currency revaluations in favor of cost competitiveness of other European economies. Particularly Italy used occasional devaluations as “periodic injects of stronger competitiveness” (O’Neill 2014: 1). After the introduction of the common currency, this dampening effect then abruptly fell away. The German economy subsequently aligned itself even more with a strongly export-oriented growth model (Scharpf 2018), with a high degree of dependence on developments on world markets. A divergence in competitiveness between Germany and the Southern Eurozone can be observed not only in terms of prices, but also in terms of products, the second explanation for the crisis provided by CC scholarship. Here, the German model of coordinated capitalism has developed a system of incremental innovation that leads to particular advantages in 50 45 40 35 30 25

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products such as high-end mechanical engineering and luxury automobiles—products that enjoy strong demand but so far limited competition from large emerging markets such as China. In this respect, there is a clear contrast with Southern European economies (Italy, for example), whose innovation systems have traditionally been more specialized in price-sensitive products in the mid-innovation segment, such as textiles, shoes or furniture. In these segments, the large emerging economies (and Eastern Europe) are now increasingly emerging as competing suppliers, which would have led to increased competitive pressure for the Southern European producers even without monetary union (Chen et al. 2012: 8, 21). However, a common currency with the successful German export economy intensifies the competitive problems of the Southern European companies vis-à-vis their competitors in emerging countries quite considerably since the exchange rate of the euro is much higher against extraEurozone economies than an imaginary Southern European currency (or the previous Italian Lira which was devalued quite frequently). The latter is a serious problem for Southern Europe’s price-sensitive products, not so much for German luxury cars (Baccaro and Pontusson 2016; Chen et al. 2012; De Ville and Vermeiren 2016; Hall 2018; Vermeiren 2014). With regard to the increase in government debt after the introduction of the euro, CC studies focus—in their third explanatory perspective— their analysis on the reduction in risk premia (and interest rates) for Southern European borrowers after the introduction of the common currency. Particularly with regard to Greece, the overarching coordination mechanism in mixed market economies comes into play here. The central point of contact for companies and trade unions in these countries is the state (Molina and Rhodes 2007; Schmidt 2002). In a difficult economic situation, the state is approached for protective and supportive measures. Traditionally, the demand for a currency devaluation was a suitable means. After the introduction of the common currency, this state resource disappeared, but it was replaced by an alternative option, fiscal support by increasing state debt. This phenomenon could be observed most clearly in Greece with its particularly high degree of clientelism, if not state capture (Beramendi et al. 2015; Hassel 2014). The elimination of risk premiums (in relation to the possibility of devaluation) associated with the introduction of the euro was also helpful for the increase in private debt in the Southern Eurozone, insofar as it allowed companies and households to lend at reduced

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interest rates. In view of their much greater willingness—compared with the German export model—to stimulate the economy through creditfinanced consumption, this was also used abundantly in the mixed economies, especially in the Spanish real estate boom. This “dependent financialization” (J. Becker 2014: 25–32), the fourth explanatory perspective of CC scholarship for the Eurozone crisis, led to further problematic consequences for the convergence of inflation rates in the euro area. It contributed to far greater increases in unit labor costs in the South compared to Germany, and, through the accompanying loss of competitiveness, to further deindustrialization in the South of the euro area (J. Becker 2014; Gambarotto and Solari 2014; Hall 2018; Johnston and Regan 2018; Stockhammer et al. 2016). Both the increase in public and private debt after the introduction of the euro have led to the economies of the Southern Eurozone towards focusing on a (domestic) consumption-oriented growth model with relatively high employment growth in sectors not exposed to international competition, such as the construction industry in Portugal and Spain, or the public sector in Greece. Throughout the years, private economic activity shifted from industry to fields such as finance, real estate and construction. This shift also included a transformation from producing goods for export markets to managing imports (Chen et al. 2012: 8; Becker and Jäger 2013: 171; Schweiger 2014: 163–165). The related employment growth over-compensated for the loss of employment in the internationally exposed sectors of industry. Although public perception tends to focus on the issue of government debt in the context of the euro crisis, for many academic observers private debt tend to be at least as important a plight of the Southern Eurozone (Chen et al. 2012: 20–21; De Grauwe 2013: 11–16; Regan 2015). While the share of government debt in the gross national product in the Eurozone has slightly decreased from about 70% after the introduction of the euro until the financial crisis, the share of private debt has steadily increased: from 50% in 1999 to 70% in 2008, where it even exceeded the share of government debt (De Grauwe 2013: 13). This development has emerged in the course of the establishment of the Eurozone. For example, while Portugal was among the Eurozone countries with the lowest ratio of household debt to GDP in 1995 (26.1% of GDP), it was among the leaders here in 2009 (95.4%). In Spain, the ratio of loans to the private (nonfinancial) sector rose from 64.8% of GDP in 1995 to 175.4% of GDP in 2010, and in Greece, bank loans to the private sector rose from 28.2%

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of GDP to 115.3% in 2011 (Brown et al. 2015: 33–34). After 2008, private household debt as a share of GDP fell somewhat in most Eurozone countries, with the exception of Greece and Finland. However, there were still clear differences between the Southern and Northern countries of the euro area: while Spain, Portugal and Greece had private debt ratios of between 69 and 95% of GDP in 2013, this figure was only 55% in Germany and 50% in Austria (Drometer and Oesingmann 2015: 59). Financialization in the sense of a strong increase in cross-border financial flows—in this case, in the form of increased involvement of, say, German and French banks in Southern European credit markets—was able to avoid the potential balance-of-payments problems of a creditbased growth regime for some time (Baccaro and Pontusson 2016). This situation changed with the reevaluation of credit portfolios after the Global Financial Crisis, which has put an end to the era of financialized growth in the Southern Eurozone. To sum up, the euro crisis can be explained by the coalescence of institutionally very different economies in a common currency zone. In particular, the different systems of wage setting have led to a massive loss of price competitiveness for Southern European companies in the face of the German strategy of wage restraint. Added to this was the loss of competitiveness vis-à-vis economies outside the Eurozone due to the harsher valuation of the euro against an imaginary “Southern currency”. This loss was not noticeable in the first decade after the introduction of the euro, as it was even overcompensated by the debt-based boom in Southern Europe in terms of gross domestic product growth rates. However, from 2009 onwards, the Global Financial Crisis led to a drastic curtailment of credit in Southern Europe and subsequently to an economic collapse of domestic demand-based growth regimes in this region, based on reports of public debt levels in Greece that were higher than generally known.

5.2 Second Image: The German Economic Model and EU Economic Stabilization Regional integration arrangements such as the EU are not only molding national types of capitalism, but also are informed in their design by these types of capitalism, particularly those of their most powerful economies. In this section, I will discuss this mechanism by looking at how the German economic model has influenced the process of the stabilization

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of the Eurozone after the crisis of the latter in the early 2010s. In a first step, I will demonstrate how core institutions of the German economic model influenced the prescriptions of the European Commission for the post-crisis adjustment of the Southern European economies (Sect. 5.2.1). In a second step, I will explain how the apparent U-turn of the European Union during the stabilization in the Covid-19 pandemic—fiscal solidarity instead of austerity—again can be reconciled with the prerogatives of the German economy during this second crisis (Sect. 5.2.2). 5.2.1

The German Economic Model as Blueprint for Eurozone Crisis Rescue Prescriptions3

The Global Financial Crisis of 2007/2008 triggered a reassessment of the economic situation of the Southern European countries as well as Ireland. High current account deficits, which had previously been tolerated without any problems, suddenly looked dangerous. At the same time, the financial market crisis forced government to undertake bank rescue packages. Extensive economic stimulus programs were also launched to alleviate the recession. Government debt, which had previously been unproblematic—with the exception of Greece—rose sharply and was now viewed very skeptically. Investors demanded significantly higher risk premiums on Southern European government bonds. In May 2010—following the bilateral loans for Greece in April 2010— an euro rescue umbrella was institutionalized for the first time, initially in the form of the European Financial Stabilization Mechanism (EFSM) and the European Financial Stabilization Facility (EFSF), then from 2012 as the European Stabilization Mechanism (ESM). All of these institutions provide loans to member states in need in exchange for strict economic policy conditions, such as budgetary austerity and the liberalization of labor relations. So far, such loan programs have been provided to Greece, Cyprus, Ireland, Portugal and Spain. Following the disbursement of the last installment for Greece, no new disbursement is scheduled for the foreseeable future. However, the euro bailout fund is only one element of the wide range of measures taken to stabilize the single currency. In addition to the measures to stabilize the European financial sector (banking

3 The argument in this subsection draws on Nölke (2019b, 2020, 2021b).

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union), which are omitted here, there are in particular the Commission’s economic policy monitoring and the European Central Bank (ECB)’s expansionary monetary policy. These two core pillars of euro stabilization are interlinked: the ECB was only prepared to adopt a significantly more expansionary monetary policy after the member states submitted to stronger surveillance by the European Commission in 2011/2012, especially with regard to budget deficits. Furthermore, in 2011 Germany succeeded in getting most EU member states to implement a debt brake in their constitutions (European Fiscal Compact), in return for the potential provision of funds via the European Stability Mechanism. On this basis, the ECB was finally prepared to intervene massively in the markets for government bonds in favor of the crisis countries (Draghi’s “whatever it takes”), so that in 2012 the dramatic escalation of the euro crisis with its high risk premiums on government bonds was overcome. Economic surveillance was already part of the treaty framework establishing the euro, based on German demands (Bulmer 2022: 171–172). Under the Stability and Growth Pact adopted in 1997, the member countries of the Eurozone agreed to limit their annual budget deficits to 3% and the aggregate to 60% of GDP and agreed on sanctions in the event of a breach. However, these rules were not strictly enforced, and corresponding violations by France and Germany in 2002/2003 were not punished. Following the financial crisis—with a large number of further violations—the pact was further tightened as part of the “Sixpack” and the “Twopack” in 2011. The “Sixpack” also strengthened the surveillance of member states economic policies under the yearly European Semester. In addition, the European Fiscal Compact was agreed at the end of 2011, in particular at Germany’s instigation, under which the majority of EU states introduced a “debt brake” in their constitutions based on the German model. Approval of the fiscal pact is now a precondition for obtaining ESM bailout loans in the event of a crisis. Between October 2014 and December 2018, the European Central Bank purchased additional bonds worth around EUR 2.6 trillion as part of its “Asset Purchasing Program”; since the beginning of 2019, only the proceeds from these bond purchases have been reinvested, before the Covid-19 pandemic led to another asset-purchasing program. The official justification for this policy was that the inflation rate in the euro area had been well below the ECB’s target of just under 2% for some time (before the Ukraine War) and, with a key interest rate of zero, the usual instruments of an expansionary monetary policy are no longer available.

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The results with regard to a stabilization of the Southern European economies were mixed. Unemployment receded only slowly. Restrictions resulted on the one hand from the fact that a less expansive fiscal policy has led to companies in Southern Europe investing little due to a lack of demand. On the other hand, lending by Southern European banks has not been as expansive as expected, especially as Southern European banks still held many non-performing loans on their balance sheets. However, the effects of loose monetary policy on the external value of the euro had been economically stimulating: the latter was undervalued against the US dollar, especially compared with the former DM exchange rate (Bundesbank 2017: 13–37), which stimulated exports from the euro area and hindered imports into the euro area. A visible achievement were slight current account surpluses in the countries of the Southern euro area, with the exception of Greece (Fig. 5.2). However, a closer analysis of these data shows that this was mainly achieved by a reduction of imports by the Southern European economies and a stimulation of their exports to economies outside the euro area, not by a rebalancing within the area. Despite their common currency, the Eurozone nations have significantly dissimilar economic foundations. Germany’s export-oriented model of growth has long been at odds with the debt-reliant methods adopted by its partner countries in Southern Europe. The worldwide economic crisis has pushed a significant shift in the way credit is provided to Southern European economies, ultimately leading to the breakdown of the economic model pursued until the crisis. Correspondingly, EU conditionality asked for a modification of this model. The euro rescue packages were centered on austerity for public budgets and holding back wages for private sectors with an aim of reducing imports and stimulating exports, in order to overcome the balance-of-payment deficits. The price of this restructuring has been borne primarily by the populations of the Southern European countries, which now suffer from lower social benefits, lower wages and worse employment conditions. Moreover, it is also taking place to the disadvantage of other global economic regions, which now have to compensate for the Eurozone’s current account surpluses with corresponding deficits. The euro rescue strategy pursued since the crisis (until the Covid-19 pandemic) can be well explained from the perspective of CC research, if we take into account that countries with a balance of payment surplus are in a far more powerful role than deficit countries in a sovereign debt crisis. Thus, power rested with Germany and its smaller allies. The

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German government has taken advantage of this situation and played the crucial role during the solution of the Eurozone crisis (Bulmer 2022: 175), “bending Europe to German preferences and interests” (Ferrera et al. 2021: 1343). Correspondingly, the Southern European economies have been remodeled after the German example—but with limited success. While the debt-based macroeconomic growth models in Southern Europe could be adjusted fairly easily—although with high social costs—by private and public austerity measures, it is very difficult—if not impossible—to change the company-related institutions on the micro level. Strongly export-oriented economies such as Germany’s have a clear preference for stable exchange rates, fiscal restraint, low wage increases as well as low inflation rates and a restrictive monetary policy in order not to jeopardize their export successes and to avoid a devaluation of foreign assets accumulated through current account surpluses (Kalinowski

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2013: 486–489). Germany was able to adeptly intertwine core principles of export-focused philosophies in the treaties that marked the arrival of the common currency. The Stability and Growth Pact of 1997 is a crucial component in the mission to maintain low inflation. It sets limits on annual public deficits at 3% and a maximum volume of 60% of GDP. While these regulations were not previously enforced or even supported by other central points of an export-led model, this has changed since 2010. Although the new rules naturally apply to the entire euro area, in practice they amount to a restructuring of the Southern European economies in the direction of German export orientation, in particular by dampening wage developments and government spending. Characteristic of the dominance of German ideas in setting up these institutions is, for example, that the so-called “Macroeconomic Imbalance Procedure” treats current account surpluses differently from current account deficits, granting the former a much higher limit than the latter (Moschella 2014: 1283–1284). Since the strong role of the export sectors has become entrenched in Germany (also politically) and it was therefore not to be expected that German employers and trade unions would voluntarily contribute to convergence in these sectors through a multi-year strategy of strongly disproportionate wage increases (and political support for fiscal stimulation of the domestic economy), an attempt at “forced structural convergence” of the other economies on the German model was an obvious consequence—if the monetary union was to be maintained (Scharpf 2016). In the foreground of this strategy, in addition to the reduction of public debt, is in particular an “internal devaluation” by reducing wage costs. It is not without irony, however, that the structural convergence strategy focused on atomizing the system of wage bargaining in Southern Europe. This is not only the opposite of the coordinated German system, but also the nail in the coffin for any conceivable system of transnational wage coordination in the euro area (Höpner and Seeliger 2017). The latter system would be indispensable to prevent further divergence of wage costs and inflation rates between heterogeneous economies in the future, as was the case in the first decade of the euro area (see Sect. 5.1.2). From the perspective of CC research, this adjustment in the Southern Eurozone is also not just about changes in economic data such as the development of unit labor costs, inflation and debt. It is also about a shift in the political balance of power. In this respect, too, the other

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Eurozone economies are to be adjusted to the German model, with an expansion of the share of the population working in sectors exposed to international competition and a reduction of those working in protected sectors—such as the state apparatus. This shift is also intended to create lasting social majorities for a competitive economic policy a la Germany in Southern Europe and France (Scharpf 2016). In the long term, this structural convergence should ultimately lead to the prevailing homogeneity in the euro area that is necessary for the smooth functioning of a monetary union. The main problem will then rather be on the global level where the trading partners of the Eurozone might grow tired of permanently running balance-of-payment deficits against the latter. Although the ECB’s expansive monetary policy did not completely suit the German export-oriented model, its stabilizing effect on Eurozone economies overall should be acknowledged. These policies have helped to prevent a collapse of the common currency and led to an undervaluation of the Euro, resulting in enhanced exports outside of the Eurozone from participating countries. However, continuing on this course increasingly was met with opposition. Right-wing populist parties were using aversion in Southern Europe to EU requirements and in Northern Europe to the liability risks of the euro bailouts for their mobilization. In Germany and other Northern euro states, there was also growing criticism of the consequences of the ECB’s expansionary monetary policy. This relates to the associated asset price inflation and low interest rates on savings, but also to the potential risks to long-term monetary stability and the reduction in adjustment pressure for Southern states. In the Southern European economies, on the other hand, resentment against the austerity requirements was growing. In response, the Southern European governments were increasingly again relying on stimulating domestic demand towards the end of the 2010s, in a departure from the strict import reduction strategy. In order to take some of the wind out of the sails of the increasing resentment of the population in the Southern member states towards the EU, the Juncker Commission, which saw itself as “political” (i.e. with considerable discretion), has repeatedly refrained from strictly enforcing European fiscal rules on the member states. Finally, substantial opposition to this policy was also coming from outside the Eurozone, where the Trump administration was showing increasingly less patience with the Eurozone’s corresponding trade surpluses.

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5.2.2

The U-turn: German Export Capitalism and NextGenerationEU

When the Covid-19 pandemic hit in 2020, the European Union chose a different strategy than during the Eurozone crisis. The turn towards establishing the NextGenerationEU fund—and its centerpiece, the Recovery and Resilience Facility—was essentially a “deal” in which further surveillance and coordination of national economic policies (the interest of Germany and its allies) was exchanged for substantially increased fiscal transfers (the interest of France and the Southern European members). However, fiscal transfers still remained limited in size (Höpner 2021: 496; Armingeon et al. 2022: 147–148) and a number of additional proposals were not adopted. The latter were ranging from a pan-European unemployment insurance scheme to various models of Eurobonds or Eurocredit securitization (“European Safe Bonds/Esbies”) as well as a pan-European deposit insurance scheme for banks, to direct transfers from an euro area’s own tax-financed budget (“fiscal capacity” or “macroeconomic stabilization function”). In addition to NextGenerationEU, only two further fiscal instruments were introduced, namely the rather uncontroversial re-insurance program for national job-retention schemes “temporary Support to mitigate Unemployment Risks in an Emergency” (SURE) and a new credit line for the ESM, called “Pandemic Credit Support”; the latter was never utilized. Fiscal support measures for member states are always linked to additional European intervention rights in the national policies of the recipients. The latter are all the more draconian the more money is involved. “The larger and more generous the mechanism, the more national discretion will need to be limited”, according to the then head of the most important EU think tank Bruegel (Wolff 2017). Every assistance package in the history of the euro bailout had come with drastic conditions for the receiving side, from the first aid package for Greece to the establishment of the ESM, the use of which was made conditional on the ratification of the fiscal compact. Democracy at the national level—in particular the “royal right of parliaments” in budget preparation—thus was impaired by EU conditional transfers. Moreover, the politically enforceable volume of transfers usually is far too small to achieve a significant improvement in the position of the Southern European economies. A monthly report by the German Ministry of Finance (BMF 2017) made the German government’s aversion to any kind of large-scale transfers via the EU

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abundantly clear. It was not alone in this, given the low popularity among the German, Dutch, Finnish or Austrian populations of the tax increases, borrowing, or spending cuts needed here. Moreover, there is always a risk of the emergence of a large European Mezzogiorno permanently dependent on transfers, with a frequent—and not very conducive to European unification—squabbling between “stingy” donor countries and “impudent” taker countries (Scharpf 2017). Still, when the Covid-19 pandemic led to massive economic consequences starting in 2020, the member states of the European Union agreed upon the establishment of the NextGenerationEU (NGEU) fund. The fund combines 360 billion euros in loans with 390 billion euros in grants. The fund follows the usual setup as witnessed during the Eurozone crisis (Sect. 5.2.1), by linking disbursements to domestic reforms. However, the enforcement of EU reform priorities is now more pleasant than before, since it is combined with substantial transfers. Moreover, member states can count on a far more lenient assessment on the side of the Commission, if compared to those of the European Stability Fund or even the Troika in the case of Greece: “conditionality is minimal (and the term is avoided)” (Schelkle 2021: 51), although NGEU is linked to the European Semester. The previous “stick” has largely been converted into a “carrot”. In order to avoid the most virulent political opposition on the domestic level of the countries that are to provide the highest volume of contributions, the grant contributions of NextGenerationEU are not funded by transfers from the richer EU member states, or from the general EU budget. Instead, they are to be financed by new EU level sources of income, such as a new tax on plastic waste, and revenues to be raised in emissions trading. The establishment of the NextGenerationEU fund is a major deviation from the long-term position of Germany and several other exportled northwestern member countries. Germany has a long tradition of opposing greater fiscal risk-sharing in the EU. In the early stages of the pandemic, Germany—and its northwestern European allies—had opposed a major EU-financed fund. Still, the German Chancellor Angela Merkel—together with French President Emmanuel Macron—officially took the initiative for a major Covid-19-related fund on May 18, 2020 (Schramm 2023: 84–85). This was following earlier footwork between the German and French Ministers of Finance, Olaf Scholz and Bruno Le Maire (Ferrera et al. 2021: 1339; Krotz and Schramm 2022: 533) and within the Commission (Smeets and Beach 2022; Smeets and Bekius

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2023). There is wide agreement that the surprising U-turn of the German government was pivotal to the establishment of NextGenerationEU (Armingeon et al. 2022: 157; Becker 2022: 11; Bulmer 2022; Camous and Claeys 2020: 336; Crespy and Schramm 2021; de la Porte and Jensen 2021: 396; Ferrera et al. 2021: 1342; Hacker 2022: 1; Krotz and Schramm 2022; Schelkle 2021: 45; Schramm 2023; Smeets and Beach 2022: 11; Tesche 2022: 488). How can we explain this move by the German government and its allies? While historical developments never can be explained in a mono-causal manner, arguably the most important reason was a reassessment on the side of the German export industry (Armingeon et al. 2022: 157–158). While the latter previous had been in favor of fiscal prudence—in order to retain the cost competitiveness of the Eurozone (see Sect. 5.2.1)—it has reversed its position during the Covid-19 crisis. After two years of very weak exports in 2018/2019—caused inter alia by Brexit, the US-China trade war and difficulties with car pollution norms— German exporters were worried that the pandemic would lead to another major slump, given the heavy health exposure of its important markets in Southern Europe. Due to the severe crises that have hit Europe during the last years—the Covid-19 pandemic since 2020 and the Russian war against Ukraine since 2022—the crisis of the German export model in 2018/2019 is almost forgotten. Even in Germany large parts of the population are not familiar anymore with this crisis, since labor markets had only been affected quite mildly, due to demographic change—and unemployment still is the most direct crisis experience. However, particularly sensitive indicators for the development of the German economy have already been showing a clear downturn between the end of 2017 and the outbreak of the pandemic in 2020. The number of employees in temporary employment, for example, had already been in continuous decline since 2017 (Statista 2020). Since the beginning of 2018, the most important indicators had also been in a systematic decline, be it incoming orders in the manufacturing sector recorded by the Federal Ministry of Economics (BMWi 2020) or the ifo business climate (Ifo 2020). Expectations for the further development of the German economy—surveyed by the Mannheim Center for European Economic Research (ZEW)—were decidedly negative in Fall 2019, the worst since the height of the euro crisis in 2011, having already been virtually consistently negative since the second quarter of 2018 (ZEW 2019). The number of job vacancies had been declining since the second

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quarter of 2019, and in the heavily export-dependent sectors of mechanical engineering, electrical engineering and car production it had already been falling since the end of 2018 (Kubis 2019). According to Creditreform (2019), the number of corporate bankruptcies also increased already in 2019, again very significantly in the industrial sector. A study by management consultants Ernst & Young (EY 2020) indicated that 2019 even saw a new record for profit and revenue warnings issued by companies listed on the stock exchange, with a particular focus in the car industry. In this situation, the effects of the pandemic on the German export sector were shocking: While German businesses in Italy and elsewhere directly experienced the negative consequences of the local shutdowns, important export sectors like the Automotive industry reported record sales collapses (VDA 2020). Studies like the one reported by Handelsblatt on 8 May showed that German exports to other EU countries in March 2020—the first month of the EU-wider lockdown—declined by eleven per cent, the biggest drop in 30 years, putting at risk hundreds of thousands of jobs and billions in tax revenues. According to a business representative, the lockdown and at times closure of entire economic sectors made clear the interdependence—and vulnerability—of German enterprises inside the single market, reinforcing the impression that economic recovery in Europe would have to happen together… (Schramm 2023: 92)

To put it more succinctly: “Germany’s vested interest in the EU as a vehicle for its industrial exports was at risk” (Bulmer 2022: 177). In contrast to previous EU economic crises—in particular the Eurozone crisis—German exporters were not able to compensate shrinking exports to European markets by exports out of Europe (particularly to rising emerging markets such as China), since the pandemic led to global lockdowns. Already during the 2017–2019 crisis, parts of the export industry had pleaded for European fiscal transfers, since they saw a waning of markets in China, the United Kingdom (Brexit) and the United States (Armingeon et al. 2022: 158; Ryner 2022: 8). Moreover, Covid-19hit Italy is a far more important market—and supplier—for the German export industry, in comparison to Greece, which was at the focus of the Eurozone crisis (Karnitschnig 2020).

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The German export industry mobilized its lobbying power, both behind the scenes, but also openly. The most important industry association, the Voice of German Industry (Bundesverband der Deutschen Industrie/BDI) issued a first public appeal that German industry is in danger on March 27, 2020, followed by a second one—jointly with the French and Italian associations—on May 12. Still, whether industry pushed the government towards NextGenerationEU support, or the industry statement was meant to legitimize a prior government decision in favor of the overall stability of the German growth model cannot be determined with certainty. After all, the then German Chancellor Merkel had referred to the interests of the German car industry already in one of her first Covid-19-related speeches on March 17, 2020. German economic interests became clouded behind more political arguments in later speeches (Ferrera et al. 2021: 1344–1346). Several leading German government representatives joined the Chancellor with publicly making the export argument in April 2020 (Baccaro et al. 2022: 17), to be joined by representatives of the conservative wing in the Christian-Democratic-Union (Karnitschnig 2020). The linkage of the U-turn to the German export model is highlighted by in-depth research, including interviews with policy-makers during the time (de la Porte and Jensen 2021: 392; Schramm 2023: 92–94). Moreover, the export industry at least contributed by publicly supporting the government in its agreement with the NextGenerationEU fund, although this decision was quite unpopular with the German electorate, in spite of positive media reporting. Germany witnessed a major Eurosceptic turn in public opinion between April 2020 and April 2021, more than in any other EU member state (Leonard and Puglierin 2021: 2–3). Most of this Eurosceptic turn was related to the Covid-19 recovery fund (Leonard and Puglierin 2021: 26–27), matching a German public opinion that has been consistently very hostile to fiscal integration for years (Baccaro et al. 2022: 4). To wrap up, we can explain fundamental decisions for the course of EU economic integration by looking at the growth model of its most powerful member state, namely Germany. When the Eurozone crisis hit the Southern European member economies of the European Union, the German government used its particularly powerful position as the most important donor for the various Eurozone stabilization funds. It demanded that the policy prescriptions for the needy southern governments were modeled after the German export-led growth model, i.e. an

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internal devaluation via a reduction of public spending and of wages, in order to reduce imports and inflation (and to increase opportunities for cost-sensitive exports). When the Covid-19 pandemic hit during a crisis of the German export sector, German industry turned towards the government and demanded a different approach, since it could not afford a further reduction of demand for its exports. Correspondingly, the German government switched position and agreed to a multi-billion reconstruction program—instead of the previous recovery strategy based on internal devaluation.

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CHAPTER 6

Trade

6.1 Second Image: Regulatory Diversity of Capitalisms and Transatlantic Cooperation The core topic of contemporary trade agreements is not the reduction of tariffs, but regulatory harmonization: “Deep integration is the future of trade policy…” (Maggi and Ossa 2021: 35). Since tariffs between the most important trading partners have been substantially reduced, different national standards for various goods and services have become the prime locus of contention in modern trade negotiations. Modern trade policy is not about traditional trade liberalization anymore, but about international regulatory coordination (Maggi and Ossa 2021: 20). While the old politics of tariffs were very well suited for an explanation based on the analytical concepts of Open Economy Politics (OEP) with its focus on the cost-benefit calculation of individual companies and interest groups (exporters versus protectionists), the new politics of deep integration lend themselves particularly well to a study based on the concepts of Comparative Capitalism (CC). Deep integration trade agreements are about the harmonization of regulations that are deeply embedded in domestic institutions of capitalism that have emerged over centuries. The European Union is a particularly interesting case with regard to deep integration in foreign trade. On the one hand, it is a powerful exporter of regulations into small and/or less rich economies, with potentially far-reaching implications for national economies in the near abroad © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Nölke, Second Image IPE, International Political Economy Series, https://doi.org/10.1007/978-3-031-37693-1_6

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(e.g. Eastern Europe) and in the Global South. On the other hand, it is much less successful with exporting its regulations to large and/or rich economies, as demonstrated by a study of its “new generation” preferential trade agreements (Young 2015). The latter observation is supported by the fact that the EU and the US were not able to agree on regulatory harmonization across the Atlantic, the focus of this section. Subsequently, I will demonstrate the explanatory potential of a Second Image IPE approach for the study of trade cooperation based on two cases. First, I will employ CC research on technical standards to shed light on a major reason why the last initiative for transatlantic trade cooperation failed (6.1.1). Second, I will investigate one of the rare cases of successful regulatory cooperation, by looking into the reasons why accounting standards on both sides of the Atlantic have converged in substance (6.1.2). 6.1.1

Comparative Capitalism, Technical Standards and the Failure of the TTIP Negotiations

The Transatlantic Trade and Investment Partnership (TTIP) was a highlevel initiative to intensify trade between the European Union and the United States. In a superficial perspective, it failed because of the election of President Trump in the USA and opposition by a powerful civil society mobilization in the European Union. In a more fundamental perspective, it failed because it did not succeed in reducing the so-called technical barriers to trade (TBT), which were the structural basis of the conflict (Bürrbaumer 2021: 1069). The importance of diverging processes of technical standard setting for national capitalisms was highlighted by Varieties of Capitalism (VoC) scholarship from the very start. The basic distinction is between “codebased” standardization in coordinated market economies (CMEs) and “common-law” standardization in liberal market economies (LMEs) (Tate 2001: 443–446). The former is based on a national code that specifies in much detail the process of standard setting, standard testing and standard certification, with a particular emphasis on producer negligence and liability. Companies cooperate very closely in association to establish common standards. Standardization under common-law systems—particularly in the US—is much more fragmented and often based on the competitive market position of individual companies (or quasi for-profit

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standards institutions), whereas inter-company collaboration is discouraged via stringent antitrust laws. Issues of liability usually are left to the courts. Two types of reasons are given for the disparate evolution of these two systems. On the one hand, early industrializers (mostly LMEs) preferred a market-based approach, given their competitive advantage on the latter, whereas late industrializers (mostly CMEs) built on a coordinated approach in order to catch up. On the other hand, the difference is based on the legal systems of both types of economies, with the codelaw systems of CMEs preferring comprehensive written regulations and the common-law systems of LMEs importantly based on previous court decisions. Although the European Union combined member states with different traditions of standardization systems—with the UK tending to the common-law model and Southern European economies having a codelaw model with an important role of the state—its systems for technical infrastructure differs widely from those of the US and is largely based on the German example (Bürrbaumer 2021). German companies and industry associations are particularly active in international standardization (Barker and Hagebölling 2022; Fuchs and Eaton 2022). Germany had established a private-sector standards association (Normenausschuss der Deutschen Industrie/NDI) as early as 1917 and later had given the successor association in the Federal Republic of Germany (Deutsches Institut für Normung/DIN) a public role as official standardization institution (Tate 2001: 452–454). Based on industry resources, effective coordination and public recognition, DIN later reached a central role in standards committees of the EU (European Committee for Electrotechnical Standardization, or CEN/CENELEC) and on the global level (information technology–security techniques–information security management systems–requirements, or ISO/IEC): “German firms host more technical committees, both within CEN/CENELEC and within ISO/IEC, than do firms from any other country” (Tate 2001: 469). During the last two decades, German dominance has been partially eroded by China, but Germany still wields over-proportional influence in global standardization organizations (Barker and Hagebölling 2022). Here also lies an important link to the macroeconomic growth model perspective. Contemporary export-oriented economies— such as Germany—spend much more public attention and resources on issues of technical standardization than domestic consumption-oriented economies, given that it is imperative for the former to support the

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ability of their companies to penetrate global markets. Standards can be an important instrument in this regard. Research in the VoC-tradition remained limited to a comparison of national models of standardization. However, Institutional Complementarity Theory (Mattli and Büthe 2003; Büthe and Mattli 2010, 2011) links domestic differences to international institutions of standardization, loosely based on the notion of institutional complementarity prominently used in VoC research (Chapter 2). Its core argument—more in line with company-focused OEP than with the CC focus on national institutions— is that the hierarchical/nonhierarchical character of domestic standard setting is crucial for the success of national companies in international standard setting. Companies based in a hierarchical system of standard setting are more successful in shaping international standards than companies based in nonhierarchical settings. Büthe and Mattli support this argument with a comparison of the success of European and US companies in two fields of regulation, namely accounting standards and technical product standards in the International Organization for Standardization (ISO). Whereas the European (particularly German) companies are more influential in ISO, the US are more successful in accounting standards, based on the high degree of centralization around the US Financial Accounting Standards Board (FASB) (Sect. 6.1.2). Different approaches towards technical standards played a central role for the very slow and protracted TTIP negotiations, which collapsed completely after the election of US President Donald Trump (Bürrbaumer 2021; Egan and Pelkmans 2015). Different approaches towards technical standards were important both for the difficult technical negotiations and for the public mobilization against the agreement, particularly in Europe. The importance of technical barriers to trade (TBT) should not be underestimated. Whereas import-weighted tariffs have been reduced to less than 4% (Egan and Pelkmans 2015: 1) and therefore play a minor role in most negotiations about free trade agreements (FTAs), “… the TBTs relevant for trade negotiations in bilateral FTAs carry costs equivalent to anywhere from 10 to 80% of the invoice price” (Egan and Pelkmans 2015: 4). In spite of the potential gains, several attempts for transatlantic cooperation have failed over the last three decades, next to TTIP including the New Transatlantic Marketplace initiated in 1995 and the Transatlantic Economic Council from 2007 onwards. It is “difficult

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and very costly to alter engineering traditions based on familiar standards. The issue of adjustment costs and enormous structural change in designs, production lines, materials, etc. for literally thousands of companies… would seem the root of EU/US friction in the debate over the use of ‘international standards’” (Egan and Pelkmans 2015: 13). Moreover, the institutional complementarities of specific standards and standardsetting processes with the overall setup of the economic systems they are based upon make compromises very difficult, since compromises might negatively affect both systems (Bürrbaumer 2021: 1072). The task to agree on common standards—or to decide whether a specific foreign product conforms to the domestic standard—is made particularly difficult by the different standardization traditions discussed above, namely the important role of competition considerations in US standard setting and the importance of order in EU standard setting. TTIP negotiations were so difficult because both sides wanted to impose their system upon the other side (Bürrbaumer 2021: 1078–1081). In a few cases, additional frictions have been caused by public mobilization about public health concerns on US agricultural products (chlorinated chicken, hormone treated beef and genetically modified organisms), again linked to these different systems. The core issue is the EU’s precautionary approach (Garcia 2018: 233). When there is not enough scientific evidence to properly evaluate the risk of a product, it is best for regulators to stop its distribution to avoid any potential harm. In the US, in contrast, the authorities have to be able to prove the harmful nature of a product to stop its production, thereby leaving most liability issues to the courts. TTIP-related compromises on the side of the EU could have undermined the precautionary principle in general (Garcia 2018: 235). This feature has posed considerable problems for a swift conclusion of the agreement—problems that became nearly unsurmountable when public mobilization started to focus on said agricultural products. While the final breakdown of the TTIP negotiations has to be attributed to the election of US President Trump, the protracted and largely unsuccessful attempts to eliminate TBTs have been a crucial factor preventing a conclusion of the agreement in the Obama presidency.

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6.1.2

The Exception to Prove the Rule: Transatlantic Harmonization of Accounting Standards1

Of course, not all attempts for transatlantic regulatory cooperation supporting trade were unsuccessful. One notable exception is the case of accounting standards, where substantial convergence of EU and US regulations was achieved on many issues, although not comprehensively. The fact that the US authorities have accepted foreign—and de facto EUbased—standards as equal to their own, despite long-term confidence in the superiority of American financial reporting regulations, is incredibly unexpected when compared with past transatlantic disagreements over regulatory principles and practices. The importance of accounting standard harmonization for international trade is not well known. The latter standards are not among the most controversial topics during the negotiation of agreements. Still, there is substantial evidence that harmonized accounting standards support international trade (Márquez-Ramos 2011; Dhaliwal et al. 2019). The importance of this harmonization is even going to increase in the future, given a (relative) decrease of trade in goods and the growing importance of services trade, most notably digital and financial services (Straubhaar 2021). Particularly trading with securities is hampered by the absence of comparable financial information on companies. Given the crucial importance of harmonized accounting standards for the trade of financial services, it does not surprise that the European Union has given great importance to accounting standards harmonization in the context of the Common Market. It finally succeeded in 2002, by requiring all companies listed at an EU Stock Exchange to use the International Financial Reporting Standards (IFRS) as devised by the International Accounting Standards Board (IASB) from 2005 onwards. The process of accounting standard harmonization, however, not only has an EU-internal dimension (Chapter 4), but also a transatlantic—and even global—one. In 2002, the IASB concluded a Memorandum of Understanding with its US pendant, the FASB, called Norwalk agreement, since it was signed in Norwalk, CT. Although the convergence process has stalled since 2016, when the IASB and the FASB issued their standards on lease accounting, the first years of cooperation led to considerable achievements (Ong 2018; Harris 1 The argument in this subsection draws on Nölke (2010, 2011, 2015).

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et al. 2022). Temporarily, the FASB and IASB held regular joint meetings of their boards and pooled staff for technical work (Whittington 2016: 184). Particularly important was the 2007 decision of the US Securities and Exchange Commission (SEC) to accept financial statements from foreign issuers in the US without reconciliation to the US Generally Accepted Accounting Principles (GAAP), if the latter are based on IFRS. There are still numerous differences between GAAP and IFRS (Ong 2018; Harris et al. 2022). These differences do relate not only to specific regulations, but also to the general format. As opposed to the rules-based US standards, IASB norms are defined by a set of principles that provide broad guidelines. Consequently, American GAAP is more comprehensive due to its highly specific regulations—making it much lengthier than IFRS. Nonetheless, these disparities are based more on the form of accounting standards rather than their substance when we look at individual IFRS and GAAP standards. In substantial terms, there is a remarkable convergence around core concepts, in particular the principle of fair value/mark to market accounting. This is remarkable, given that this accounting paradigm is highly controversial (Whittington 2008, 2016, see also Sect. 4.2.2). For example, its orientation on current market prices for assets leads to a lot of earnings volatility as represented in the books (Ball 2004: 125). How was this (temporal) process of transatlantic regulatory convergence possible? I assert that this convergence was not primarily due to the SEC’s dedication to following EU (IASB) standards, but rather because of the European Union’s prior adaptation of an Anglo-Saxon accounting regulation model in terms of content and mode of regulations. Content of regulation refers to the substantial impact of accounting standards. In what ways do they impact economic activity, and which individuals or organizations benefit from them? Mode of regulation refers to the institutional setup of accounting standard setting. Which actors decide about standards? The content of regulations and the method of formulation are intimately connected, as standards often favor those parties who have a hand in its creation. To understand this process of regulatory convergence, we need to embed it into a CC perspective, both concerning content and mode of regulation. The function of the content of accounting standards across different capitalistic models varies immensely (Sect. 4.2.2). In LME-type countries, accounting standards are of great significance due to the top

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priority given to capital markets for company finance. These standards— the content of regulation—provide investors with a transparent and realistic understanding of the companies they invest in, which is fundamental to both the IASB and fair value accounting (FVA) concepts. By comparison, in CME economies, accounting information is not as significant because major sources of business finance (e.g. Hausbanken) have access to alternative methods for gathering data on corporate performance. Moreover, the design of accounting standards is tailored to creditors’ preferences by allowing for hidden reserves that allowed companies to honor their loans during times of crisis. This strategy—based on historic cost accounting principles—aids management in pursuing long-term business strategies and retaining skilled labor even under economic duress. How the setting of accounting standards is governed—the mode of regulation—also varies significantly between LME and CME economies. The former is heavily reliant on self-regulation by private entities along with a tight partnership between the standard setters and financial market individuals, while the latter prioritizes public regulation as well as potential incorporation of more stakeholders (Sect. 4.1.3). The core reasons for convergence lie on the side of the EU and the IASB, not on the US side. Over decades, attempts to consolidate accounting regulations between governments in environments such as the European Union and United Nations had proven largely unsuccessful. Then, around the millennium, the IASB solidified itself as an international standard setter. This rising power was not instantaneous; it was instead the result of years worth of labor within the global accounting space that kicked off during the mid-1970s (Martinez-Diaz 2005). Although the IASB (established 2001) and its predecessor, the International Accounting Standards Committee/IASC (since 1973), began their work in the UK, they developed a strong collaboration with FASB and SEC from the start. The IASC conceptual framework, published in 1989, was strongly influenced by the FASB (Whittington 2016: 181). This partnership was further fostered by an endorsement of the IASC from IOSCO in 2000. Perhaps the most decisive action for the rise of influence for IASB was when the European Union declared that all publicly listed companies must submit IFRS-based accounts after 2004. However, this was a defensive move. As a result of the growing number of European businesses that opted for public listing on the New York Stock Exchange and its demand to adhere to US GAAP, the Union was fearful it would forfeit any control

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over establishing global (and European) accounting standards, unless it took decisive action (Katsikas 2008: 154). Thus, the EU was willing to adapt both the Anglo-Saxon content of regulation (FVA) and its (private) mode of regulation (Dewing and Russell 2008: 257), although both went against the traditional content of regulation on the Continent and the EU principle of representation by constituencies on a regional basis. The rise of the IASB—and the strong role of its board members with a background in Anglo-Saxon accounting traditions—made the harmonization of European and US accounting standards attractive to the US. The US’s support for harmonization with IFRS was partially due to the institutional setup of IASB, which is modeled after the FASB’s mode of regulation. The IASB has undergone a series of constitutional changes, which has moved it away from a part-time decision body based on the representation of various elements of the accounting/auditing profession, to an expert-driven organization where meaningful participation depends on considerable analytical resources (Botzem 2008). This structure allows a small number of professionals to develop accounting standards with assistance from committees made up mostly of statement preparers and users. Geographical representation matters little within this corporate framework; public oversight only plays a minor role. This networked financial sector expert community is managed by the biggest investors and by coordination service firms such as the Big Four auditing companies. This type of private-sector self-regulation does not require a formal inter-governmental organization or intense public scrutiny. Instead, these experts have come together to create solutions for the financial industry, without much government interference. In terms of content of regulation, the convergence on FVA was the crucial feature for FASB/IASB rapprochement. Whereas FVA had become an established concept in US GAAP, it was an unusual feature in Continental Europe (Sect. 4.2.2). Somewhat ironically, the principle of FVA even played a highly problematic role during the Global Financial Crisis. Fair value-based accounting standards have been one driving force behind exacerbating the financial crisis due to their tendency to amplify business cycles. Throughout an economic downturn, the value of financial assets based on FVA declines far more than under traditional historic cost accounting. Consequently, it has been argued—inter alia by the American Enterprise Institute (Wallison 2008) and the International Monetary Fund (Novoa et al. 2009)—that FVA standards have procyclical effects

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and contribute to a deepening recession as companies are compelled to sell their assets in already weakened markets. As the losses on US subprime mortgages accumulated, participants in the markets demonstrated a reticence to engage with these structured securities. This only compounded anxieties as to their true worth, leading to further instability across markets. According to the International Accounting Standards Board and FASB regulations, establishments like banks must value certain assets according to current market prices. For many banks, this created a significant challenge in their financial records. As market liquidity began to evaporate, the books of financial institutions were loaded with devalued assets due to IASB/FASB stipulations. Consequently, investors chose to avoid these firms completely. Interest associations of the banking industry pleaded for modifications (IBFed 2008: 3). Subsequently, IASB and FASB came under considerable political pressure to make exceptions from FVA for banks—inter alia from US Congress and EU authorities—but largely succeeded to uphold the consistency of their accounting principles in the short term, although the fair value paradigm lost attractiveness later on (Whittington 2016: 188–196). From a growth model perspective, it does not surprise that the principle of FVA is important to international institutions strongly influenced by countries such as the US and the UK. While the prudence of historic cost accounting has played an important role in the historical process of catching up by (comparatively) late industrializing countries such as Germany, today the stimulation of financialization via FVA is essential for debt-based economies such as the United Kingdom and the United States (Nölke and Perry 2007). However, the same consideration leads to substantial frictions about accounting standards with large emerging economies, which are undergoing a process of late industrialization today. In China, the adoption of FVA is very limited (Zhang et al. 2012), echoing reservations regarding the use of the latter in Brazil (Silva et al. 2021), India (Chadda and Vardia 2020), Russia (Combs et al. 2011) and South Africa (Peng and Bewley 2010). Over the last decade, the IASB has gradually retreated from a fair value perspective, partially motivated by the less intense cooperation with the US and the more important role of emerging economies (Whittington 2016). Still, the process of incorporating the views of the latter in the day-to-day work of the institution has been progressing very slowly. While the representation of emerging economies on the board and in the various

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bodies of the IASB has increased substantially after the Global Financial Crisis, a study of the biographies of these representatives demonstrates that most of them have spent a large part of their careers in AngloAmerican universities or multinationals. Moreover, the participation of organizations based in emerging economies in the comment letter process still is very limited, if compared with those based in Western economies (Nölke 2015). In a wider sense, it is not surprising that issues of regulatory harmonization stand at the center of the largest economic conflict of our times, namely the trade war between the United States and China. The latter originally was triggered by US (and EU) concerns about industrial policy, intellectual property right protection and technological security on the Chinese side, not by Chinese tariffs (Maggi and Ossa 2021: 21). In the field of 5G mobile telecommunications, companies such as Huawei and ZTE not only have won major market shares within Western economies, but also become powerful players at formerly Western-dominated international standardization bodies (Rühlig and ten Brink 2021). Still, this conflict now seems to have mutated into a geopolitical hegemony conflict, thereby somewhat less suited for an explanation by a Second Image IPE perspective (and more for mainstream International Relations approaches).

6.2 Second Image Reversed: Deep Integration and Emerging Market Capitalism2 Also in North-South relations, deep integration focuses on the incorporation of “behind the border” regulatory issues in bilateral and multilateral trade agreements, in contrast to traditional tariffs and other measures that are exercised at the border. Multinational corporations (MNCs) expect this form of trade policy to facilitate market access in the Global South and smaller companies in the Global South to facilitate integration into global value chains. Deep integration agreements include areas such as product standards, intellectual property rights, regulation of direct investment and competition policy.

2 The argument in this section draws on Claar and Nölke (2012a, 2012b, 2013) and Nölke and Claar (2012, 2013).

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Compared to traditional trade policy, changes in these policies potentially have a deeper imprint upon national capitalist institutions in the Global South. In order to highlight the potential implications, this section first discusses the relationship between deep trade integration and national capitalisms on a general level (6.2.1), before further specifying these concerns in two brief case studies: regarding the USA the Dominican Republic and Central America Free Trade Agreement (6.2.2) and regarding the EU the EU-Southern Africa Economic Partnership Agreement (6.2.3). 6.2.1

Deep Trade Integration and National Institutions of Capitalism

For many decades, global trade policy has meant reducing or eliminating barriers to free trade at borders in order to facilitate trade in goods. Traditional trade policy in goods trade has focused on reducing tariffs and non-tariff barriers to trade, such as quotas. Over the past 20– 30 years, there has been an increasing shift in this policy area towards the harmonization of national regulations that can be restrictions on trade, particularly on the increasing exchange of services and on investment. Trade facilitation through regulatory harmonization and the functional integration of different economic areas is referred to as “deep integration”. Alternatively, the related topics are often called “WTO Singapore issues” or “WTO plus” or “WTO extra” (Ahearn 2011; Holmes 2010; Horn et al. 2009). The main difference between the two notions is that the WTO-related notions refer to international trade law, whereas deep integration can also be imposed by the EU or the US bilaterally (Ahearn 2011: 14–17; Holmes 2010: 6). Furthermore, WTO plus measures fall under the current mandate of the WTO, whereas WTO extra measures are outside of that mandate (Gómez-Mera and Varela 2021: 607; Hofmann et al. 2017: 5). Lawrence (1996: 8) first defined deep integration as “integration that moves beyond the removal of border barriers.” In 1996, the Singapore Ministerial Conference of the World Trade Organization (WTO) addressed the policy areas of deep integration. The aim was to harmonize public procurement, investment regulations, intellectual property rights and competition policy within the WTO framework. Implementation failed primarily due to objections from countries in the Global South, such as India, Indonesia and Tanzania, which feared disadvantages

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for their national development. Subsequent attempts to negotiate these issues in the context of the WTO were also unsuccessful (Khor 2004). Accordingly, initiatives on deep integration issues are forming primarily at the bilateral and regional levels, in order to avoid the WTO stalemate (Shadlen 2005). Today, the USA and the EU in particular include such issues in their negotiations on regional trade agreements with third countries, in order to export their regulatory standards (Holmes 2010: 15, Horn et al. 2009: 36). The background of this bilateral (more precisely: bi-regional) approach is the failure of the deep integration agenda on the global level. At the WTO Ministerial Conference in Singapore in 1996 and in Cancún in 2003, it became clear that big semi-peripheral states from the Global South, such as India or Brazil, are opposed to the inclusion of deep integration issues in the WTO rules and regulations (Drexel 2004: 419; Khor 2004: 1). According to their argumentation, the inclusion of these regulations, and the associated transfer of certain structures, ideas and procedures from the Global North, is not only an encroachment on the national sovereignty of the respective states, but would also renege the states from the Global South a future development path. In order to avoid the opposition by powerful emerging economies such as Brazil, India or China, the EU and the USA have moved the deep integration agenda from the WTO to their bilateral/bi-regional trade agreements (Asche 2023: 231–232) or to other global institutions without participation of these large emerging economies, such as the “Compact with Africa” (Banse 2019). Deep integration projects, however, are not limited to North-South relations. Internal deep integration has been on the agenda of the European Union at least since the Single European Act of 1985. The European Union is considered a pioneer in this regard (Lloyd 2008: 31; Young and Peterson 2006: 799). An essential component of the internal EU agreements was the harmonization of various, nationally different regulatory systems, especially in the area of trade in goods, and later of labor, services and capital markets. In North America, the United States-Mexico-Canada Agreement contains many elements of deep integration, whereas several attempts for transatlantic agreements failed (Sect. 6.1.1). Typical regulatory areas of deep integration in modern trade agreements are product and process standards (including environmental and

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labor standards), investment rules, intellectual property rights, competition policy (firms and government subsidies), government procurement and institutional safeguards for further harmonization, for example through dispute settlement (Ghoneim 2008; Lawrence 1996: 8; Lloyd 2008: 17f). In this respect, deep integration differs from classical trade liberalization because new policy areas and institutions that were previously regulated only at the national level are now affected by trade agreements. Moreover, it is no longer just about trade in goods, but also increasingly about the free movement of capital and labor (Young and Peterson 2006: 797–799). Correspondingly, the negotiation of a deep integration trade agreement cannot be limited to the highly specialized offices of traditional trade policy, but has to involve a broad array of public policy institutions (Gómez-Mera and Varela 2021: 611–612). Deep integration in North-South relations differs from the—historically much more advanced—integration within the European Single Market, as the differences in the policies and institutions of the participating states are much more pronounced. Correspondingly, the implementation of these agreements can be institutionally very challenging for governments in the South (Gómez-Mera and Varela 2021). Moreover, in North-South relations, deep integration negotiations often are based on serious power asymmetries (Gallagher 2011). Given these power asymmetries, there is a considerable possibility of incompatibilities for the economic institutions in the participating countries of the South. Economic and political dependencies may be used to impose institutions on the capitalisms of the South that do not do justice to their development requirements, particularly as deep integration clauses on issues such as inward investment or intellectual property go much further than within the WTO (Shadlen 2005). Correspondingly, there are serious concerns that a strict protection of intellectual property rights, the opening of capital accounts, investor-friendly dispute settlement and the transfer of Northern regulatory standards are well suited for the economies of the South (Rodrik 2018: 77–78). Deep integration-related frictions can be easily identified by taking a CC conceptual lens. In the context of the inclusion of elements of deep integration in North-South trade agreements almost universally only institutions close to the ideal type of LMEs are used as a standard, even if within the EU member states such as Germany or Austria are much closer to the coordinated market economy ideal type. While there are indeed significant differences in detail between the standards of deep

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integration championed by the EU and the US, both are united by their fundamental orientation towards LME-type institutions, such as Chicago School-informed competition policy or the preponderance of capital markets for corporate finance. This raises the question whether these standards are institutionally optimal for economies in the Global South. Here, different models of capitalism collide, so that considerable institutional compatibility problems may arise, which, from the perspective of CC research, may inhibit national economic development (see also Sect. 8.2.1). Potential conflicts between the standards of liberal market economies transported within deep integration trade agreements and the institutional requirements of semi-periphery economies with some proximity to the ideal type of state-permeated capitalism (SME) arise primarily in relation to three areas: first, transparency-oriented corporate governance standards in the LME-style—as part of clauses targeting the removal of restrictions to cross-border capital flows—aim at protecting minority shareholders as well as creating active markets for corporate control (with foreign participation), thus putting pressure on family businesses in countries of the South aiming at long-term corporate strategies. Second, the onesided orientation of competition policy in LMEs towards low consumer prices does not fit with the practice of many emerging economies to permit temporary monopolies or oligopolies, in order to allow national champions the chance to expand globally, or to use competition policies for other national development policies. Third, the high standards for intellectual property rights in LMEs transported by deep integration agreements may not be compatible with the practice of reverse engineering often followed in the South as part of technological catch-up processes. Subsequently, we will discuss whether these potential institutional incompatibilities matter in the practice of the negotiation and implementation of deep integration agreements. As we shall see, the EU and the US often did not succeed with their liberal deep integration agenda (Ahearn 2011; Holmes 2010; Horn et al. 2009). This stands in clear contrast to the ability of the European Union to impose its deep integration agenda upon neighboring states, particularly those with an ambition to join the EU. “If we are to be realistic […] we have to accept that very little progress has actually been made in deep integration so far, other than with the EEA and candidate countries. The EU has commissioned a survey of deep provisions in its own and other FTAs and found them wanting.

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Strong agreements have been signed with the EU’s neighbors and with accession candidates but with hardly any other partner” (Holmes 2010: 4). As we shall see, one of the prime political problems for imposing a deep integration agenda is their wide reach into the economies and societies of the affected countries. Correspondingly, their negotiation does not remain in the usual narrow technocratic circle of trade diplomats, but involves other institutional and political actors as well. Thus, the politics of deep integration are very different from the politics of classical trade in goods, with a much higher likelihood of popular backlash against these agreements (Maggi and Ossa 2021; Rodrik 2018). Subsequently, two brief case studies demonstrate how this feature assists societal mobilization against trade agreements with a substantial deep integration agenda. 6.2.2

Controversies About Deep Integration in Central America

The Dominican Republic-Central America-United States Free Trade Agreement was negotiated between the contracting parties (United States, Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica and Dominican Republic) between 2003 and 2004 and entered into force in 2009. In addition to the usual trade facilitation measures (reduction of tariffs and quotas), it also contains elements of deep integration, in particular the facilitation of foreign direct investment, but also protection of intellectual property rights (IPR) that went further than the WTO agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Hicks et al. 2014; Walker 2011: 190). Deep integration issues were also responsible, among other things, for the fact that the negotiations of the agreement took longer than originally planned. Here, main issues were the opening up of the previously state-organized insurance and telecommunications sectors (Craig 2010: 227) and tensions between IPR protection and the access to affordable medicine (Walker 2011). In Costa Rica in particular, the negotiation of the trade agreement provoked a very intense domestic political debate through the mobilization of a social movement (“No al TLC”), which led to, among other things, the first referendum in the country’s history—which at the same time makes CAFTA-DR the first trade agreement to be endorsed by a referendum globally (Craig 2010: ii; Hicks et al. 2014). President Oscar Arias had called for a referendum due to an impasse in the National

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Assembly and very broad social mobilization (Cupples and Larios 2010: 96). The referendum was very close—51.6% of the vote supported the agreement, while 48.4% opposed it, with a turn-out of 59.2% of voters, similar to presidential elections (Urbatsch 2013: 199). Opposition to the trade agreement consisted primarily of trade unions (Asociación Nacional de Empleados Públicos y Privados and Asociación Nacional de Educadores), the umbrella organization of environmental NonGovernmental Organisations/NGOs (La Federación Costarricense para la Conservación del Ambiente) and grassroots groups, some of which formed directly in protest against the agreement, for example the women’s organization Mujeres contra el TLC (Craig 2010: 213). It also included small farmers and entrepreneurs (Craig 2010: 233) and parts of the church (Cupples and Larios 2010: 97). An important background to the relatively broad opposition was long-standing Latin American experience with liberalizing structural adjustment programs, in the continuity of which the agreement was placed (Craig 2010: 231). With regard to issues of deep integration, there were fears—in addition to the privatization measures and access to affordable medicine mentioned above—that the investor protection rights and measures to protect intellectual property rights planned here would lead to the exploitation of natural resources, which are so important for the country (Craig 2010: 238). Indeed, Costa Rica had to amend its intellectual property laws after the agreement was concluded (Gómez-Mera and Varela 2021: 612). Apart from the Ministry of Commerce, which drove the negotiations, the trade agreement was supported primarily by large exporting companies, by large sections of the trade associations and by the chambers of commerce (Craig 2010: 224–235). Foreign MNCs in the pharmaceutical sector provided financial support for the campaign in favor of the agreement (Cupples and Larios 2010: 96). Generally, the campaign in favor of the agreement had the advantages of much higher financial resources as well as the backing of government institutions and major media (Cupples and Larios 2010: 96–97). Faced with declining public support during the ratification process, a number of export-oriented companies threatened to relocate their production to other countries in the region or to abandon planned investments (Craig 2010: 230; Cupples and Larios 2010: 97; Hicks et al. 2014). Workers in districts with a high degree of manufacturing and communities with much pensioners mostly voted in favor of the agreement (Urbatsch 2013: 207, 211). Analyses of the referendum

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results also suggest that workers in industries with high levels of foreign direct investment (FDI) and relatively high levels of education supported the agreement (Hicks et al. 2014). Nevertheless, opposition in the country was so massive that not only were a number of the protest movement’s demands included in the agreement, but several ministers lost their posts, including the minister of trade and the minister of finance, who had been particularly supportive of the agreement (Craig 2010: 236). Political opposition was aided by two corruption scandals indirectly linked to the trade agreements that also toppled two of the country’s previous presidents: one involving the privatization of telecommunications (payments from a French company) and another involving the healthcare system (payments from a Finnish company). Both the privatization of electricity and telecommunication had failed in 2000 (Cupples and Larios 2010: 96). Still, social mobilization narrowly lost against the campaign of government and most of the business sector. Compared with South Africa (Sect. 6.2.3), Costa Rica was in a much weaker negotiating position, since about 45% of its imports and exports are transacted with the United States and renegotiation of the agreement was presented as impossible (Hicks et al. 2014). The United States government even issued a statement on the day before the referendum that Costa Rica might lose access to the existing trade agreement with the US, should CAFTA not be accepted (Cupples and Larios 2010: 97). Unlike South Africa, finally, Costa Rica also benefits less from the global power shifts resulting from the rise of the major emerging economies (particularly the Brazil, Russia, India, China, South Africa, or BRICS grouping) and was therefore more open to be persuaded to accept a trade agreement with difficult deep integration clauses in comparison with South Africa. 6.2.3

Opposition to Deep Integration During the Negotiations of the EU-Southern Africa Economic Partnership Agreement

The European Union traditionally cultivates preferential relations with a group of countries in Africa, the Caribbean and the Pacific (ACP), mostly former colonies of Belgium, France, the Netherlands and the United Kingdom. This cooperation takes place in a number of agreements called after the place of signature, the first four at Lomè (starting in 1974) and the fifth at Cotonou (1990). With regard to trade policy, the main change between the agreements is that Cotonou generally is

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based on reciprocal trade agreements, since the non-reciprocal (preferential) trade agreements of the Lomé agreements were considered to contradict WTO law. Within the Cotonou Agreement, trade is not regulated on a general basis between the EU and the ACP countries, but is supposed to be based on regional Economic Partnership Agreements (EPAs) since 2008. However, the negotiations of these agreements have proven to be extremely cumbersome and most regional agreements even today are only being implemented on a provisional basis, since they have not been ratified by all parties involved. Moreover, the countries forming EPA negotiation groups do not coincide with the existing regional organizations in Africa. Correspondingly, they distort intra-regional trade cooperation (Krapohl and Van Huut 2020). So far, the only case where a complete EU-Africa regional agreement has been signed, ratified and implemented is the so-called SADC-EPA (Asche 2023: 241). In contrast to its name, however, it is not an agreement with the whole SADC (Southern African Development Community) group, but only with 6 of the 15 countries, namely the members of the Southern African Customs Union (SACU) plus Mozambique. Other SADC member states, some of which have multiple memberships in regional alliances, negotiate in a different negotiating group. Still, this EPA is the best option to study the issue of deep integration in EU North-South trade agreements, not only because of its regionally coherent character, but also because of the inclusion of South Africa as a major emerging economy. South Africa was only an observer at the beginning of the EPA negotiations by the European Union, as the state was denied accession to the Lomé Convention and thus also to the later Cotonou Agreement by the EU in the early 1990s. Instead, the EU negotiated a reciprocal free trade agreement with South Africa, the Trade, Development and Cooperation Agreement (TDCA), which entered into force in 2000. In terms of content, this agreement deals primarily with trade liberalization in agricultural and industry goods. However, South Africa opens its market more than the EU, particularly with regard to wine (Meyn 2003: 4–7, Venter and Neuland 2004: 194–197). This trade agreement also had farreaching effects on SACU, as members of the customs union also fell under the agreement without being able to participate in the negotiations beforehand. South Africa was eager to seize the opportunity to gain better market access than in the TDCA as well as strengthen regional integration within

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the framework of the EPAs. In 2007, the European Commission (EC) approved South Africa’s request to participate actively in the EPA negotiations. The EU had developed a proposal for a full EPA for the SADC group, including trade in services, investment regulation and other areas of deep integration. However, the South African government refused to sign the Interim EPA at the end of 2007, particularly because of deep integration issues. Since 2010, the South African government—together with the other members of the SACU—again negotiated an Economic Partnership Agreement with the EU. This agreement was signed in 2016, but it looks very similar to the old TDCA, and does not include issues such as investment and services (Krapohl and Van Huut 2020: 577). Moreover, the Southern African negotiation partners also have fought hard to avoid any binding clauses on further deep integration issues such as competition policy, intellectual property rights or public procurement, to the dismay of the EC (Berends 2016: 421). Since South Africa has successfully fended off the inclusion of any deep integration elements into the EPA, we can only assess potential effects of the latter in a counter-factual manner. Still, the SADC-EPA is the best test case for reflecting upon potential institutional complementarities raised by the EU deep integration agenda, since South Africa is the only advanced emerging economy involved in these negotiations. Moreover, by linking EPA negotiations to the specific institutions of an economy that at least to some extent approximates the SME ideal type (Nölke et al. 2020: 135–174, 202–209), the case of South Africa gives us a more informed basis than general speculations about the relationship between deep integration and African capitalism (Brücher 2008: 209; Shadlen 2005: 766–768). Leaving more conventional problems of trade in goods aside (for the latter see Asche 2023: 249–303), I will illustrate the tension between EU deep integration proposals and South African capitalism with two institutions that would have been affected by an incorporation of deep integration provisions in an EPA, namely corporate governance and competition policy. The way different capitalist production systems handle corporate governance issues is a key aspect of CC. This is especially relevant for South Africa, where affirmative action policies introduced after Apartheid have a significant impact on the issue. The South African government implemented Black Economic Empowerment (BEE) and its later version, Broad-Based Black Economic Empowerment (BBBEE), with the intention of reducing inequality and poverty by giving more people

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ownership opportunities and access to better jobs. The Johannesburg Stock Exchange (JSE) requires corporations to increase the representation of black directors, share ownership, suppliers and management (Southall 2006: 182). This applies to both public and private sectors under the Code of Good Practices. Any company wanting to do business with the government must follow this code as well (Krüger 2011: 210)—an obvious reason for a clash with a part of the EU deep integration agenda, the one on public procurement (Claar 2018: 199–200). The empirical results of BEE are mixed—while it has indeed contributed to the emergence of new black elites, it also has contributed to new inequalities and did not break the preponderance of white capital (Hirsch 2005; Padayachee 2008). BEE policy is important politically in the country but has not been received positively by the international capital markets. Although international companies are exempt from the ownership requirement, they must still fulfill the remaining BEE objectives to conduct business in South Africa (Mebratie and Bedi 2011: 8). According to Veloso’s analysis (2008: 77–78), the amount of FDI in South Africa has decreased following the implementation of BEE policies. Furthermore, some of the BEE policies do not fully comply with the demands made by WTO law. Management control and employment equity requirements contradict the regulation that prohibits employment discrimination based on citizenship. In addition, multinational companies usually are not obliged to invest in the development of local human resources (Mortenson 2006: 5). Correspondingly, the issue of BEE is highly controversial in terms of investment regulations and deep integration, as also shown by the discussions on South Africa’s bilateral investment treaties (Yazbek 2010: 111–113; Chigara 2011). Finally, BEE considerations are also reflected in South Africa’s system of corporate governance more generally, as documented in the King Reports on corporate governance, which were published by the Institute of Directors in Southern Africa (Armstrong et al. 2005: 20–22). The King Reports are emphasizing that in South Africa (at least on paper), companies are regarded as social institutions that serve a broader purpose beyond generating profits for their shareholders: “South Africa must carefully balance the interests and rights of shareholders with the needs and demands of a wider range of stakeholders in society” (Andreasson 2011: 666). The King Reports are suggesting a corporate governance system that recognizes the valid concerns of various stakeholders, such

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as employees, labor unions and beneficiaries of black economic empowerment, in marked contrast to the sole focus on shareholder value prominent in financialized LME-type economies. In June 2007, the EU proposed a comprehensive EPA that includes a chapter on investment. Indeed, this chapter requires the liberalization of rules regarding FDI and the removal of “performance requirements.” This would have included the abolishment of Black Economic Empowerment regulations (Müller 2011: 124). Turning to competition policy, an important deep integration ingredient of EU trade agreements, including the EPAs, we are witnessing similar problems. Historically, economic concentration was very high within the South African economy and a few large conglomerates controlled most capital at the end of Apartheid (Fine and Rustomjee 1996; Kaplinsky and Manning 1998: 144; Roberts 2004: 227). Barriers to market entry thus were considerable for new players. Correspondingly, the new Competition Act of 1998 had a strong focus on the promotion of small- and medium-sized enterprises (OECD 2003: 52). The Competition Act in South Africa includes public interests and social goals as notable features. These features are “not always compatible with the explicit goals of regular competition policy” (Chabane 2003: 5) in the mainstream understanding of the latter, informed by the LME model. More specifically, there is a strong link to Black Economic Empowerment because the Act also refers to the promotion of “a greater spread of ownership, in particular to increase stakes of historically disadvantaged persons” (Republic of South Africa 1998: Sec 2). This is not an empty and largely symbolic formula, but an important legal feature that has informed several decisions on merger control and on exemptions for the cooperation between companies (Mncube and Ratshisusu 2022). However, this practice contradicts the EU understanding of competition policy since its reform two decades ago. In 2004, the European Union reformed its competition policy towards a US (LME) approach, in contrast to the previous approach, which was much closer to the German CME-type model (Wigger and Nölke 2007). This included eliminating the previous ex-ante-notification procedure (in favor of enforcement by private litigation) and adopting policies in line with the Chicago School competition policy. The focus of EU competition policy post-2004 is mainly on anti-competitive conduct by groups of companies. It is much more tolerant of economic concentration within single companies. More specifically, it has abolished the previous

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multiple-goal approach—also including targets such as protection for small companies and exemptions for the cooperation between companies for the purpose of research and development—by a single goal, price reduction for consumers (Wigger and Nölke 2007). The South African competition policy system clearly contradicts this single-goal approach. It features several goals, including BEE (Mncube and Ratshisusu 2022). Given the unique character of the South African approach, the global dominance of the EU (and US) approach and the powerful negotiations position of the EU, the South African side was afraid of an erosion of its domestic model. Correspondingly, the South African opposition to an EPA-inclusion of competition policy within a broader deep integration agenda is understandable. To conclude, deep integration is not yet an integral part of NorthSouth trade agreements across the board. The relevant aspects have so far been anchored only very selectively in the relevant agreements, and sometimes not at all, due to domestic opposition in the affected countries of the Global South. The practical effects of the relevant agreements are even less apparent, since it takes many years to build up an effective competition policy or a comprehensive protection of intellectual property rights. Still, a discussion from the perspective of CC demonstrates how a comprehensive implementation of deep integration provisions—as proposed by EU and the US trade policy—would undermine important national economic institutions in emerging market capitalism.

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CHAPTER 7

Foreign Direct Investment

7.1 Second Image Reversed: Multinationals and Types of Emerging Market Capitalism Foreign direct investment (FDI) by multinational corporations (MNCs) is an important source for capital and innovations, particularly for emerging economies. Still, emerging economy governments treat FDI very differently, from highly open to highly restrictive. Subsequently, I will demonstrate that the differential treatment of FDI is at the heart of the establishment of two of the most widely established types of emerging economy capitalism, the dependent market economies (DMEs) in East Central Europe (7.1.1) and the state-permeated market economies (SMEs) in large emerging economies (7.1.2), with China as the poster child of the latter. Both types of emerging economy capitalism have been economically very successful in the last two decades, but with very different strategies with regard to FDI.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Nölke, Second Image IPE, International Political Economy Series, https://doi.org/10.1007/978-3-031-37693-1_7

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Embracing FDI: The Emergence of Dependent Market Economies in East Central Europe1

FDI dominates the DME-type economies of East Central Europe more than any other form of capitalism (Chapter 2). Very important sectors, particularly state-of-the art production lines, are controlled by MNCs situated in countries such as Germany and Austria. Consequently, these countries have limited economic autonomy and rely heavily on decisions made beyond their borders—such as in Wolfsburg, Frankfurt, Munich or Vienna. In contrast, for example to economies close to the coordinated market economy (CME) ideal type, major company decisions are not negotiated between the representatives of capital and labor, but between managers of the foreign headquarter and the local subsidiary. “Foreign companies […] have applied tight budgets […] exercised close control on managerial decisions and relied heavily on their appointees to the board of directors” (Czaban and Henderson 2003: 182). This is a very peculiar economic model, with many potential drawbacks. The influx of FDI can forcefully impact the internal structures of a country, as “other people’s money” is often accompanied by expectations for control. This is even at the center of how UNCTAD (2019: 1) defines FDI: “Foreign direct investment (FDI) is defined as an investment reflecting a lasting interest and control by a foreign direct investor, resident in one economy, in an enterprise resident in another economy (foreign affiliate).” The upside for the host economy is contingent. Regarding capital streams, high imports evoke a corresponding reliance on foreign resources, which can critically destabilize emerging economies due to several potential hazards. Firstly, international actors may have interests that clash with those of local citizens, for example with regard to the appropriation of profits created by the affiliate. Secondly, foreign investors are often able to pull their resources out of the host nation at a moment’s notice, particularly in case of investments in the financial sector. Lastly, foreign capital can create an economic landscape that does not prioritize the institutional complementarities optimal for catch-up industrialization. In other words,

1 The argument in this subsection draws on Nölke and Vliegenthart (2009), Nölke (2018), and Sallai et al. (2023).

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this firm integrates the Polish economy with the Western European ones, while simultaneously making it dependent on the decision of a firm with operations in many countries, making investment decisions with its global empire, not Poland’s development, in mind. (King and Sznajder 2006: 781)

Given these potential problems, how was the evolution of the extreme model of FDI dependency in East Central Europe possible? The decision concerning this economic strategy was taken in the particular context of a fundamental crisis, similar to the crises that stood at the origin of other socioeconomic models (Höpner 2005: 343; Streeck and Yamamura 2001). Following the dissolution of the Cold War, most citizens and high-ranking officials within these countries had a strong desire to reconnect with the West after years of being restrained by Soviet forces. Simultaneously, Soviet reign had significantly weakened the upper-middle class, which is usually the primary force that opposes foreign economic control. Unlike nations like China and India, Central Eastern European countries thus lacked powerful national elites that forcefully objected to foreign investors or competitors acquiring their nation’s industry (Eyal et al. 1998). Additionally, the move towards a more open relationship with the West was done in an environment, which placed great value on economic liberalism—something Fukuyama (1992) famously referred to as “the end of history”. Finally, yet importantly, international organizations like the European Union and the European Bank for Reconstruction and Development put their full support behind liberalizing Central and Eastern Europe’s markets because of their fundamental economic ideologies; economic liberalism was at the height of its ascent during the 1990s (Shields 2012). Given these circumstances, it does not surprise that there was not much opposition to the acquisition of freshly privatized companies by Western MNCs. At the same time, the economies of the region had a lot to offer to foreign MNCs. The latter are always searching for combinations of low labor costs with a skilled workforce (Morgan and Kristensen 2006, 2007). There was a high emphasis on education and training during the years under Soviet control and the average qualification of the labor force was much higher than in other emerging economies. Moreover, the region is very close to the large markets of Western Europe and stood to gain from comprehensive economic assistance, not the least in the process of EU accession. MNCs on the hunt for regions with optimal resources and low

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labor costs thus had favorable conditions that enabled them to become more prominent in Central and Eastern Europe when compared to other areas of the world. Some thirty years after its establishment, however, the popularity of the DME model in East Central Europe has waned considerably. Although it has led to a continuous period of high growth—compared to most other emerging economies and to the established economies close to the CME and LME ideal types—tensions in the model are increasing. For one, it has been difficult to move the economies of the DME type higher on the hierarchy of global value chains. DMEs have to come to terms with the reality that MNCs keep their most lucrative and inventive activities within headquarters outside of local countries. The DME-type economies mainly serve as a global assembly platform (Pickles et al. 2006). However, for the success of advanced industrialization, it is essential to allocate very substantial resources not only to education and training, but also to research and development (R&D). Due to their constrained fiscal resources, DMEs are unable to increase their spending on R&D as well as on education and training to levels witnessed in CMEs, LMEs and SMEs such as China (Chapter 2). The acquisition of fiscal resources in these economies is restricted due to the ongoing competition for FDI (Bohle and Greskovits 2006: 20–21). MNCs have many options when choosing where to invest. Attracting FDI can be made more appealing by offering incentives such as tax rebates. More immediately pressing, however, is a second challenge of the DME model. Even in a steadily growing economy, significant disparities between those who benefit from FDI-driven growth—notably in urban areas—and those who don’t have emerged (Bohle and Greskovitch 2006: 20–21). These inequalities fueled political dissent, contributing to the rise of non-liberal governments as in Hungary and Poland. Moreover, local national managers—including the later Polish Prime Minister Morawiecki—became increasingly frustrated about their very limited decisionmaking autonomy in foreign-owned companies (Naczyk 2022). Actually, the fight against foreign dominance—political as well as economic—has been part of the core rhetoric in the campaigns that have brought these governments into power (Devinney and Hartwell 2020). Sometimes, anti-FDI rhetoric by right-wing populist governments informs economic policy (Naczyk 2022), especially in sectors where the domestic business class can replace FDI without major problems, thus leading to a “selective economic nationalism” (Bohle and Regan

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2021). Right-wing populist governments have worked to decrease foreign MNCs’ significant presence in the national economy, for example by introducing taxes that make domestic subsidiaries of these companies less profitable. As a prime example, Hungary has imposed particular taxes on foreign banks, advertisement companies or supermarkets (Ban and Bohle 2021: 885; Bohle and Greskovits 2019: 1075–1076; Scheiring 2021: 273). The right-wing populist government in Poland has sought to limit foreign MNCs and their associated dependencies by boosting the role of the state in economic growth. Here, the primary emphasis lies on stimulating domestic savings and allocating them to investment within national companies (Morawiecki 2016). Foreign MNCs are enticed to leave the country via forced buy-outs (Sallai and Schnyder 2021). Again, this strategy is constrained by the volume of fiscal resources currently available—but also by the need to retain a heavy presence of FDI in sectors of technologically advanced manufacturing. For the time being, countries like Poland and Hungary thus combine “the noisy politics of combating FDI dependency … and the quiet politics of subsidising FDI” (Bohle and Greskovits 2019: 1075–1076). To wrap up, economies close to the DME ideal type of capitalism have been built around the open embrace of FDI. This model of capitalism has led to high growth rates, based on a rapid externally driven modernization of these economies. More recently, however, we have seen a reconsideration of this highly positive assessment by some of the governments in the ECE region. Notably, Hungary and Poland have started to treat many forms of FDI far more restrictively. 7.1.2

Selectively Using FDI: Foreign Multinationals and the Rise of State-permeated Capitalism2

A restrictive treatment of FDI has been the norm in SMEs such as China, India and (temporarily) Brazil, the other major type of emerging economy capitalism with high growth rates during the last decades. Even though much foreign capital has been invested in selected sectors, nationally generated capital still dominates corporate control overall. Integration into the global economy and into transnational production networks has taken place in a selective manner. While in China, for example, the textile 2 The argument in this subsection draws on May et al. (2014), Nölke (2012, 2018), and Nölke et al. (2015, 2020).

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production sector was liberalized, certain strategic industries, such as the telecommunications, energy and car manufacturing sectors, remained protected (Hsueh 2011). As per research conducted by the Organisation for Economic Cooperation and Development (OECD), both China and India maintain a higher degree of FDI restrictions than other countries surveyed by the organization (Fig. 7.1). This is an especially notable fact when compared to how leniently OECD nations regulate incoming foreign investments. Emerging economies close to the SME type primarily limit the ability of outside firms to purchase stakes in domestic companies. It also disallows (or at least does not promote) developing full markets for corporate control. Thus, despite the potential of foreign capital to freely enter the country, it would be difficult for outsiders to acquire controlling shares in large domestic companies, due to their complex corporate structures. In Brazil, for example, pyramid schemes and non-voting shares are important instruments for safeguarding the control of companies with domestic owners (Schneider 2013: 151–152). 0.25

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Fig. 7.1 Restrictions towards foreign direct investments for selected countries (Source Own representation, based on data from the OECD FDI restrictiveness index)

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The regulation of inward FDI in countries close to the SME ideal type should not be viewed as a generally hostile bloc to foreign capital— although the Bharatiya Janata Party (BJP) cultivated concepts such as “Swadeshi” (self-reliance) during its ascent to power in India (Nayar 2007). Rather, the timing within the economic development process is crucial regarding the question how overseas investment may interact with the domestic economy. Rob van Tulder (2010) has identified three typical stages for large emerging economies. In early phases of technology development, the knowledge transfer involved with FDI trumps concerns about national control. FDI is welcome, but under conditions such as forced joint ventures. Subsequently, however, FDI restrictions increase and many MNCs find it easier to sell their operations to local ones. In a third phase, the governments of these economies encourage their companies to expand abroad themselves, for market access and further technology acquisitions. Correspondingly, the diminished rate of foreign ownership in these economies between the first and second phase is not mainly caused by a business climate generally adverse to investors, but rather due to the selective obstructions that the state creates against international capital in sectors where this ownership is not necessary anymore for the purpose of technology transfer. To avoid colonization or dependency on foreign forces as in dependent market economies, these models of capitalism require national control at the firm level. As such, MNCs from abroad only have minimal sway when it comes to making crucial decisions on economic development. A common thread between many cases of late industrial development— from nineteenth-century Germany and the United States to France, Japan and the Soviet Union in the early twentieth century as well as East Asian developmental states during the mid-twentieth century—is a focus on national control. This is often due to experiences with foreign domination, international financial crises or long-term planning strategies. While these considerations often are linked to the writings of Friedrich List (1841), recent research has demonstrated that neo-mercantilist thinking has emerged independently in various world regions (Helleiner 2021). In contrast to these earlier cases of catch-up industrialization, however, contemporary protection does not only refer to trade but also to foreign MNCs, given their far more important role in an era of global production chains. Unlike other types of capitalism, SMEs are characterized by ownership structures that are either (indirectly) controlled by state authorities or

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owned by domestic families. Generally, these economies are dominated by national capital, i.e. capital resident in the country, and thus feature an important precondition for the coordination of long-term economic development strategies. Foreign capital is admitted as a majority shareholder only selectively as a modernization factor (Cho 2005: 164–166). The idea is to import foreign technology without losing national control over the economy (Brandt and Thun 2010). However, not all emerging economies have the ability to implement this strategy. Given their substantial size, large emerging markets such as China and India—with Brazil to a certain extent—possess an advantageous negotiation position when it comes to foreign investors (van Tulder 2010). This puts them in a more secure spot than other emerging economies concerning the realization of their policy priorities. MNCs today are continually striving to enter the immense domestic markets of major emerging economies and will gladly accept many conditions imposed by governing bodies in these areas. As a result, there is no need for governments in said countries to capitulate or “sell out” to foreign investors. Based on this powerful position, the governments of big emerging economies close to the SME type choose to exempt certain sectors they consider as having a high strategic value from liberalization towards FDI while also imposing requirements on foreign MNCs regarding technology transfer. As an illustration, foreign car manufacturers were only allowed to set up operations in China if they agreed to establish a 50/50 joint venture with domestic Chinese companies between 1994 and 2022 (Paba 2022). The expansive scale of burgeoning marketplaces such as China and India is advantageous not only for the negotiation position of their governments vis-à-vis foreign MNCs, but also for the creation of future home-grown ones. Huge home-grown markets are fertile ground for cultivating “national champions” (Lin and Milhaupt 2013). For businesses to successfully become international contenders, they must possess the necessary economies of scale to erect viable production sites. Even though this can be a struggle for emerging economies, large SME-type economies like those of China, India and Brazil take advantage of the opportunity to benefit from this economy of scale. Small and mid-size emerging markets, in contrast, lack the leverage in negotiations with foreign MNCs as well as the economies of scale needed for the expansion of domestic companies.

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The SME-type expansion process based on the selective treatment of foreign MNCs involves a broad array of policies. These policies include innovation-promoting measures via—at least temporarily—relatively lax patent protection, which is of central importance for technological catching-up processes (Amsden 2001). A selective inflow of FDI can be very helpful as a basis for this reverse engineering. In India, the pharmaceutical industry has profited tremendously from a “soft patent system to legalize reverse engineering” after 1970 (Goldstein 2007: 95). Even technologically quite advanced companies such as the Brazilian jet producer Embraer could not do without mobilizing innovations from abroad (da Silveira Luz and Monteiro Salles-Filho 2011; Goldstein 2002). At the same time, competition policy is purposefully designed to protect individual domestic companies against foreign competitors, at least temporarily, in order to enable them to expand into domestic and foreign markets through monopoly profits. In other sectors, FDI is specifically permitted as a modernization impulse for domestic companies. In Brazil and India, this has been particularly important in the past to get companies out of the disastrous rent-seeking orientation of import-substituting development, which is primarily concerned with state protection and corresponding profits (Abu-El-Haj 2007: 97). Finally, competition policy also opens some sectors to FDI in order to safeguard the provision of important services for domestic companies, for example in sectors such as telecommunications or power supply in Brazil (Dowbor 2009: 125). As a result, the share of FDI in GDP is moderate for SMEtype economies when compared with other established capitalism types (Fig. 7.2). This is particularly true for India, but also for China, if one takes as a basis that some FDI originates in Hong Kong and is used by domestic entrepreneurs to circumvent investment restrictions (see NBS 2010). Even in Brazil, foreign investments occupy a moderate position. They remain far from the foreign penetration of the economy found in the Czech Republic, but also in Germany for the past one to two decades. Finally, we need to highlight that the selective treatment of FDI in economies close to the SME model—as well as the extremely generous treatment of FDI in economies close to the DME model—took place in a very specific situation of modern capitalism. This does not only refer to the end of Soviet rule over East Central Europe and the rise of reformist fractions in the Chinese Communist Party. Since the 1980s, FDI development has gone hand in hand with the global reorientation of FDI from

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Fig. 7.2 Share of FDI stock in relation to gross domestic product for selected countries (Source Own representation, based on data from UNCTAD)

the center to the countries of the (semi)periphery, which, moreover, is now oriented less towards raw materials, and more towards inclusion in transnational value chains as well as access to local demand. The reorientation of global FDI allowed not only for the emergence of the very FDI-heavy DME model, but also for the excellent negotiation position on the side of governments and domestic capitalists in countries such as Brazil, China and India (Abu-El-Haj 2007: 96). The DME and SME-type economies have benefited greatly from shifts in global value creation since the 1970s. One prerequisite for this were technological and organizational developments that improved the possibilities of outsourcing relevant work processes to the “South” (Gereffi et al. 2005). An advanced level of technological development allowed large corporations to organize a restructuring into transnational production networks and, within the framework of the new international division of labor, to delegate parts of complex production processes to subcontractors in regions with lower labor costs (e.g. contract manufacturing). In addition, the SMEs benefited from economic stagnation trends in the North. In contrast to the “golden” or “Fordist” postwar phase, the old centers of capitalism had a lower investment ratio and weaker GDP

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growth, caused by the exhaustion of the previous wage-led growth model based on permanently increasing real wages (Lavoie and Stockhammer 2013). To conclude, high volumes of FDI have led to the emergence of two very different models of emerging economy capitalism during the last decades. Both types are rather extreme cases, difficult to mimic by other emerging economies. The extreme dominance of foreign capital in the first two decades of East Central European DME capitalism was due to the weakness of domestic capital after decades of communist rule. China and other SMEs such as India can draw on their very large domestic markets as a basis for the creation of national champions, an advantage that cannot be matched by other emerging economies. Thus, most of the latter will be positioned somewhere between the two extreme cases. Hierarchical market economies (HMEs) in Spanish-speaking Latin America (Schneider 2013), for example, have a less prominent role of foreign MNCs than in DMEs—with the possible exception of Northern Mexico—and are unable to impose stringent conditions for technology transfer, as in the case of China discussed above. Finally, we need to highlight that the emergence of these two types only was possible due to the availability of foreign capital looking for an investment position. This may not always be the case.

7.2

Second Image: Multinationals from Emerging Markets and Global Economic Institutions

During the last decades, we have seen a substantial shift of economic activity to some of the economies of the Global South, most notably China and India. Correspondingly, the rise of these economies has major implications for global economic cooperation. The subsequent pair of subsections demonstrates these implications via two separate mechanisms. On the one hand, MNCs are important linkages between domestic institutions of capitalism and the global economy. They implicitly transport these institutions via FDI, by lobbying for international norms or by private self-regulation. On the other hand, governments often are informed by their domestic type of capitalism about their positions towards global economic norms.

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7.2.1

The Rise of Multinational Corporations from Emerging Markets: State Capitalism 3.03

The last decade has seen the emergence of MNCs from large emerging markets, as reflected in key publications such as the UNCTAD Global Investment Report, the Fortune Global 500 and the FT Global 500. Of particular note is the increasing share of these MNCs among the world’s largest MNCs, exemplified by firms from the BRICs countries such as Petrobras, Gazprom, Tata and Sinopec, as well as by companies from other countries such as South Korea and Thailand (e.g. Samsung and PTT). The emergence of these companies has been of much interest to International Business scholars in recent years (Breinbauer et al. 2019; Demirbag and Yaprak 2015). It also has led to the development and modification of existing analytical instruments in International Business. For instance, the Eclectic Paradigm (Dunning 1988) and the Product Cycle Model (Wells 1983) have been adapted to account for this phenomenon. Additionally, Mathews (2017) has proposed the Linking, Leverage and Learning approach as a tool to explain this novel development. Still, these approaches based in International Business do not recognize the core feature of the new type of companies: emerging market MNCs are characterized by their particularly close ties with the domestic states of their origin, a phenomenon that is distinct—at least in degree— from the relationship between most Western MNCs and their home country government. Given the importance of their state ties, the proliferation of new MNCs based in emerging markets has been labeled “state capitalism” by an Economist special issue in 2012 (Wooldridge 2012). It could be argued that a more accurate designation might be “state capitalism 3.0” (ten Brink and Nölke 2013) because this current iteration represents a third manifestation of state capitalism and exhibits specific characteristics compared to both previous waves (with notable national variations resulting in variants such as 3.1 and 3.2). The earliest manifestation of state capitalism occurred in the mid-tolate nineteenth century, in the economies of the United States, Germany, Scandinavia and ultimately Japan, which were actively promoting trade protectionism. Influenced by authors like Carey, Hamilton and List, these nations sought to protect their domestic industries from being colonized 3 The argument in this subsection draws on ten Brink and Nölke (2013) and Nölke (2014a: 1–4).

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by the more powerful British economy (Helleiner 2021). This early form of state capitalism primarily involved the imposition of tariffs, coupled with the creation of infrastructural organizations such as central banks. However, during the liberal period at the start of the twentieth century, state capitalism began to decline in popularity. The second wave of state capitalism, occurring in the United States, Europe and the Soviet Union after the Great Depression as well as in East Asian countries following the Second World War, characterized a heightened role of government with different means. Compared to the beginning of state capitalism, a wider range of tools were used, such as central economic planning. The manifestation took on several forms such as US New Deal policies, the Swedish model, Fascism, Stalinism as well as the 1950s/1960s developmental states in Japan and South Korea. State intervention was much more extensive compared to its precursor: it not only aimed to protect domestic companies but also sought to regulate different business activities. International regulation allowed governments to follow their state-capitalist models while accepting incremental trade liberalization (“embedded liberalism”). Nevertheless, the state capitalism model was largely abandoned in the 1980s and 1990s due to growing support for neoliberalism, particularly from the Reagan and Thatcher administrations. Countries like China, India and temporarily Brazil are experiencing a third wave of state capitalism. This particular wave stands out because it involves both formal and informal partnerships between public authorities and private enterprises, rather than central command (Chapter 2). East Asia provides a useful example of the different waves of state capitalism, as it has experienced the second and third nearby and concurrently. Hsueh (2011: 267) summarizes the most important differences as follows: In short, China departs from the developmental state by embracing foreign competition and know-how, rather than protecting domestic private industry; pursuing sectoral reregulation based on a strategic value logic, rather than working closely with private industry to achieve national development goals; and privileging bureaucracies and state-owned companies over private actors when strategic assets are at stake.

MNCs are central to the third wave of state capitalism based on the rise of SMEs in large emerging economies. This refers both to the treatment of foreign MNCs by emerging market governments and to the treatment of

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their domestic MNCs. Given the magnitude of their domestic markets, emerging market governments possess considerable bargaining power concerning foreign investors and governments, thereby allowing them to make their own conditions instead of having to capitulate to the requests of foreign MNCs (van Tulder 2010). This is particularly important for the transfer of technology to the benefit of domestic companies. Furthermore, due to the massive consumer demand within their own countries, businesses in these large emerging economies can achieve stability in the face of global market volatility and can focus on growing domestically before expanding into overseas markets (Lu et al. 2010: 241). 7.2.2

Domestic Public Support Measures for Multinationals in State-permeated Capitalism4

One of the core features of state-permeated capitalism is the close cooperation between (parts of) government and (parts of) industry (Sect. 2.1.2), throughout the five crucial institutions identified by Comparative Capitalism (CC) scholarship (finance, corporate governance, industrial relations, education and training, innovation transfer). Subsequently, I will spell out this proximity in more detail, by looking at domestic public support measures for MNCs based in Brazil, China and India, the closest representatives of this type of capitalism. As we shall see, this close cooperation also informs the behavior of MNCs headquartered in these countries on the global level (Sect. 7.2.3). Proximity to the state, however, should not be misunderstood as top-down state direction; even in China, the reciprocal principle of guanxi and the related informal networks still play a major role (Lin and Milhaupt 2013: 707). Moreover, the state often is not the central state, but rather local governments that are linked to MNCs in a form of “institutional clientelism” (Xing and Shaw 2013: 105). In finance, the fundamental difference between MNCs from SMEs on the one side, and those based in LMEs on the other, lies in their far more limited dependency on mobilizing financial resources from global capital markets. Although some MNCs from SMEs are listed on the New York or London Stock Exchange, their reliance on such resources is significantly lesser than that on funds generated internally or loans from domestic banks. This financial structure allows the expansion of MNCs from SMEs 4 The argument in this subsection draws on Nölke (2014b, 2019), as well as Taylor and Nölke (2010).

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to be less influenced by short-term pressures surrounding shareholder value and, therefore, grants them the ability to pursue long-term expansion strategies and accumulate financial reserves, which was particularly useful during the Global Financial Crisis. Additionally, many emerging market companies benefit from various measures of public assistance, such as tax incentives, financial guarantees and loans from state banks or state-controlled pension funds (Goldstein 2007: 98; Grätz 2014). Their access to state resources may give them an advantage in terms of financial resources compared to some of their Western counterparts. A notable example for a public support instrument is the Banco Nacional de Desenvolvimento Economico e Social (Brazilian National Development Bank/BNDS) opening a credit line in 2002 specifically for financing FDI by Brazilian MNCs. Although this is a controversial practice, it has resulted in numerous acquisitions during the rule of the labor party (Masiero et al. 2014). Moreover, many Chinese companies benefit from heavily subsidized credit, from state-directed banks on the national and local level (Haley and Haley 2013), making finance arguably the most important institution where these MNCs have to cultivate close linkages to the state (Breslin 2012: 41). The financing of large corporations in SMEs is closely linked to the dominating form of corporate governance. These companies are usually owned by their founding families or the state, unlike companies from LMEs, which are commonly owned by institutional investors and minority shareholders, partially from global capital markets (Allen et al. 2006: 12–14). The absence of an open market for corporate control permits SME corporations to ignore the expectations of financial analysts much more easily, as they are not threatened by an unfriendly takeover. SME capitalism often includes numerous companies that are not formally owned by the state, but are actually controlled by the state. Although the formal amount of public ownership may seem low, the level of state control is frequently overlooked. In Brazil, for example, the state—similar to the families dominating private ownership of Brazilian companies—can control companies through sophisticated legal structures, sometimes also based on shareholdings by public pension funds, even though nominally there is a very low number of state shareholders (Abu-El-Haj 2007: 106). In China, the still large share of state-owned enterprises is complemented by a very large number of formally private enterprises that are de facto under the control of the state via complex control chains (Liu and Sun 2005: 48). Identifying the dominant owner through legal constructions

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alone would not fully capture the significance of the informal networks between company leadership and state authorities, also to be found in other emerging economies such as Russia (Grätz 2014). This does not mean that these companies are completely controlled by the state, but rather that they have a reciprocal relationship with public authorities. An superficial study of labor laws in large emerging markets may mislead with regard to the state of industrial relations in state-permeated capitalism, as these laws contain several protection rights for workers that are often not implemented. This is due to the difference between the core labor force of large companies, who can make use of these protection rights, and the majority of workers with highly fragile work relations, or in the informal sector, who are neither organized nor protected in any way (Phillips 2004: 161–164). Particularly in India, we find a large contrast between official labor laws and informal labor practices. State support plays a key role here, as authorities tend to overlook the nonimplementation of labor standards to help businesses be competitive in the global market. In China, the state even actively supports the segregation of the labor force through the hukou system of local registration (ten Brink 2013: 281–309). The system of education and training in SMEs is largely financed by the state, as opposed to the commercial education facilities often available in LMEs and the collaboration between companies, labor unions and public authorities about vocational training in CMEs. Despite not being tailored to fit the individual needs of companies, this system nevertheless supports them by offering a large number of graduates from the tertiary sector, who are featured at a lower cost than those from more traditional global centers. This makes it possible for companies from emerging markets to compete on an equal footing with those from more developed economies in terms of a specific combination of labor costs and quality (Ramamurti 2008). India’s pharmaceutical and IT industries are a perfect example of this, as their growth and success would not have been possible without the strongly rising output of graduates from Indian universities over the last decades (Panagariya 2008: 441), particularly with regard to low-cost engineering labor. Especially during their initial development, businesses based in statepermeated capitalism depend on the selective state protection of intellectual property rights owned by companies in the conventional center of the world economy. During this period, due to limited indigenous innovation

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capabilities, the majority of innovations are passed on through cooperation between companies from emerging economies and more established economies—for example in a joint venture or other inter-company corporation (Goldstein 2007: 119). In this phase, SME MNCs depend on the leniency of public authorities in protecting foreign intellectual property rights. In later stages of economic development, however, countries like China—similar to the previous experience of Western economies—change tack and start to implement more stringent protection, given their higher share of original inventions (Zhao 2020). From a CC perspective, competition policy also plays an important role in the transfer of innovation (Wigger and Nölke 2007). To understand the rules and regulations of competition in leading emerging markets, however, one must comprehend how these economies strive to catch up with global integration (Goldstein 2007: 99–102). In an attempt to keep up with the competition of European, Japanese and American companies, many emerging market governments focus on producing and protecting large national entities (Grätz 2014), much like those established through traditional French industrial policy. Size is supposed to be a necessary (but not a sufficient) condition, allowing companies from emerging markets to achieve success in global markets. By comparison, other considerations that guide competition policy in the EU and US such as protecting consumers through low prices or ensuring market access for small and medium-sized businesses tend to play a much smaller role. To conclude, it is evident that state support plays a major role in understanding the support for MNCs from emerging markets, even though these corporations are not usually directly owned by the state. To fully grasp their behavior, we need to consider this institutional background and combine theories from International Business with those in Political Science and Sociology. In particular, the supply-side concepts of CC are valuable in this regard, highlighting the significance of the state as it relates to various institutions such as corporate governance, finance, industrial relations, education and training, as well as innovation transfer. Still, the demand-side Growth Model perspective also helps us to pinpoint state support for MNCs based on state-permeated capitalism. Although these companies are supposed to expand abroad in the long run, they first grow by producing for the domestic market (Nölke et al. 2020: 177– 180). Correspondingly, governments cater to stable domestic demand, for example in China (after the Global Financial Crisis) and India (Mertens et al. 2022: 8–11).

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7.2.3

Multinationals Based in State-Permeated Capitalism and Global Economic Governance5

By combining the CC framework with observations from Global Political Economy, we can gain insight into how differences in domestic institutions of state-permeated capitalism will shape the preferences and strategies of MNCs in global economic politics. This approach allows us to better understand why different countries might have different approaches towards global economic governance. However, it is not only the nature of business preferences which differs between Western and non-Western MNCs. The actual capacity to participate in economic global governance is also more diverse: both in terms of their access to resources and the scope of possible strategies. While Western MNEs are largely able to engage at all levels of economic global governance and to employ a wide range of strategies (from litigating to public relations), nonWestern MNCs’ engagement is predominantly limited to governmental settings, shaped both by their access to resources and state preferences. Thus, even if both Western and non-Western MNCs pursue similar interests, there are clear differences in the way they participate in global economic institutions. Smaller companies in Western countries may also rely on their governments to advance their interests in global negotiations. The same could also be true for multinational corporations from countries like France that have strong government-business relationships. Still, many Western multinational enterprises (especially those of AngloAmerican origins) have developed the practice of taking part in global economic governance frameworks via lobbying during negotiations for worldwide agreements or engaging in private self-regulation. All of these instances suggest that the substance of corporate preferences and their mode of engaging in global economic organizations are closely related— a desire for liberal regulations is associated with an autonomous role for business as transnational lobbyists and self-regulators, while a substantial background in support from the state appears to indicate a preference for international regulation through inter-governmental settings. The “statist” turn in global governance stemming from the increasing role of MNCs based in state-permeated capitalism can be illustrated in several

5 The argument in this subsection draws on Nölke (2011: 280-281; 2014b: 86-88; 2014c, 2019: 43-45) and Nölke and Taylor (2010).

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ways, for example regarding the access to natural resources in other countries, trade policy and transnational private governance. Rodrigues and Dieleman (2018) have uncovered an intimate relationship between MNCs operating in emerging markets and their home states regarding access to natural resources. One defining feature of these resources is the higher level of state control compared to other sectors. In developing countries, not only do economic considerations rule over exportation but political aspects do too. Consequently, MNCs from emerging markets are leveraging their long-standing relationship with government entities to gain access to natural resources in the Global South (Goldstein 2007: 105–116; ten Brink 2011: 7–9, 12–14). All too often, China takes advantage of its foreign policy to make sure Chinese companies are granted access to natural resources. This is especially true for the oil industry, where Chinese MNCs invest in countries that Western businesses refuse to enter due to human rights issues. Government-sponsored projects act as a gateway for private Chinese firms to build connections with African political and administrative representatives (Scholvin and Strüver 2013: 4). Russia is another example of a country that has seen great success due to the intense cooperation between the state and domestic corporations operating in the exploitation of natural resources (Grätz 2014), while Petrobras and the Brazilian government have not been far behind in this regard (Copara 2014). MNCs are crucial to the formation of bi- and multilateral trade and investment agreements, as well as double taxation treaties. These deals not only make it easier to access foreign markets but also encourage global integration into value chains. Emerging markets’ MNCs collaborate frequently with their respective governments to prevent competitive disadvantages, including concerning rigid labor regulations and the safeguarding of intellectual property. Simultaneously, South-South cooperation has grown vital to form bigger markets for MNCs. For example, Brazilian companies (Flynn 2007) have reaped notable benefits from this strategy with regard to the Mercosur. There is a certain amount of debate surrounding the activities of large Brazilian and Mexican companies, as they have acquired an overly dominant role in many Latin American economies—similar to how US MNCs operate. Such instances are seen as evidence of “sub-imperialism” (Misoczky and Imasato 2014). Based on the results from my short overview, it appears that some of the measures taken by domestic governments to support MNCs from emerging markets may go against the principles of the current

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liberal global economic order. Possible contradictions include intellectual property regulations in the Trade-Related Intellectual Property Rights (TRIPS) agreement through the World Trade Organisation (WTO). In some cases, certain Western nations attempt to use the World Trade Organization or the International Labour Organisation as a means of enforcing labor and environmental norms in the Global South. This is an effort to eliminate the competitive advantage stemming from excessive exploitation. However, based on the close collaboration between state and MNCs, large emerging markets have been able to block additional steps for liberalization (or for the realization of the preferences of Western industrialized countries) quite successfully during the last decades (van Tulder 2010: 68). Scrutinizing the on-the-ground activities of major emerging market companies concerning international agreements, one finds that these businesses rarely play a key role as advocates or self-regulators at global levels. While Western MNCs typically promote their interests in international meetings or set up transnational private self-regulation, corporations from emerging economies are more likely to depend on the governmental representation of their concerns—as exemplified by the Brazilian agribusiness (Hopewell 2014). Even when their businesses had the opportunity of being significantly impacted, Brazilian and South African companies did not make any independent efforts to directly lobby for TRIPS amendments allowing them to produce low-cost generic antiretroviral medicines. Instead, they relied solely on their governments’ representation (Wogart 2006). Moreover, despite being one of the largest generators of organic agricultural products, China refuses to cooperate with established private regulatory schemes and has instead chosen to create its state-managed certification program, named Green Food (Basu and Grote 2006). Chinese businesses only accepted the concept of Corporate Social Responsibility (CSR) for the textile industry once China National Textile and Apparel Council established a relevant standard. In contrast, OECDbased standards were out of favor (Weikert 2011: 193–194). Despite some Brazilian companies’ pressing involvement with CSR (a rare exception) and their contribution levels rivaling those of corporations from the traditional global economic core, these rules only pertain to a small portion of businesses in emerging markets. Furthermore, at least during President Lula’s first periods as president, these norms strongly correlated with governmental preferences—thereby further cementing the general rule (Peña 2014).

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To conclude, the growing role of MNCs based in state-permeated capitalism increases statist patterns in the global political economy (see also Stephen 2014). Based on the close cooperation with state authorities in their country of origin, they continue this cooperation when negotiating for access to natural resources and to domestic markets in other economies in the Global South. This collusion of public and private actors is not without problems, particularly for third parties. Moreover, this close collaboration also extends to the negotiation of global institutions. Here, the growing importance of companies that are used to further their interests via close government collaboration marks a tendency away from transnational private self-regulation and from direct business participation in the negotiation of international norms. The rise of state-permeated capitalism in advanced emerging economies, however, does not only move global governance to more statist patterns, it also affects the substance of global economic norms, as we shall see in the subsequent chapter.

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CHAPTER 8

Global Order

8.1 Second Image Reversed: Globalization, De-globalization and National Economic Models1 While discussions about the global economic order in the 1990s and 2000s focused on the phenomenon of globalization, we have moved to a discussion on de-globalization since the late 2010s. In this context, the main question again is how this transnational development affects national models of capitalism. An answer, however, must remain tentative, as there has been no systematic empirical research on this to date. In addition, national models of capitalism change only very slowly with respect to most of their core features, and the process of economic de-globalization has only recently begun. Nevertheless, in order to gain a first idea of how de-globalization affects national models of capitalism, I will proceed in three steps. The next subsection analyzes the relationship between globalization and national models of capitalism as evidenced in the literature to date. The second subsection collects data related to those aspects of de-globalization that are particularly important for the effect on national models of capitalism, before the third subsection gathers initial evidence of effects of de-globalization in relation to these models.

1 The argument in this section draws on Nölke (2022a).

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Nölke, Second Image IPE, International Political Economy Series, https://doi.org/10.1007/978-3-031-37693-1_8

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8.1.1

Comparative Capitalism and Globalization

The emergence of the Comparative Capitalism (CC) research program during the peak period of globalization has led to a proliferation of studies on the impact of the latter on national models of capitalism, especially in the first decade of the millennium. In this discussion, there was a clear empirical focus, namely on the analysis of the impact of financial globalization on the coordinated market economy (CME) of Germany (Sect. 4.2.1). This analysis was already a prominent theme in the popular early work of CC, Michel Albert’s (1992) analysis. Albert argued that the economic model of “Rhenish capitalism” would be superior in the long run in terms of growth and distribution, but that in the short run it could not defend itself against transnational erosion by Anglo-American financial markets. Subsequent studies refined this argument and identified the precise mechanisms of erosion. They focused on the increasing role of institutional investors in corporate finance (Sect. 4.2.1) and the role of transnational private governance supporting these processes through auditors, rating agencies and accounting standardization (Sect. 4.2.2). It is clear that part of German capitalism has moved away from the ideal type of the CME and towards that of the liberal market economy (LME). This observation applies to the large DAX companies and, in particular, the large German banks. The latter have largely withdrawn from lending as house banks for German industry and have become increasingly involved in proprietary trading of financial products and in investing German export surpluses abroad, with tragic consequences in the Global Financial Crisis (Braun and Nölke 2021). At the core of the German economy, small and medium-sized enterprises, however, the central features of the ideal type of a “coordinated market economy” outlined by Hall and Soskice (2001) are still valid. However, the German CME and the American LME are only two of the varieties of capitalism. Other types have been developed, especially for the study of emerging economies. I have covered dependent market economies (DME) in Central Eastern Europe (Sect. 7.1.1), and state-permeated capitalisms (SME) found primarily in China and India (Sect. 7.1.2) already. In addition, hierarchical market economies (HME) in Latin America (Schneider 2013) and patrimonial types should be mentioned. The latter are particularly necessary for understanding the Arab region as well as Russia and other successor states to the Soviet

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Union (Schedelik et al. 2021: 516–518, Hertog 2023). However, while in the early days of CC research the focus was only on finding positive equilibria in the form of particularly successful types of capitalism, negative equilibria are now also analyzed here, in the form of the hierarchical and patrimonial types. Economically, the variants of dependent and state- permeated market economies have been particularly successful so far (Sect. 7.1)—one could even say that countries that have followed these two types of capitalism (especially in Central Eastern Europe and China) have been among the main beneficiaries of globalization. However, we need to distinguish between the globalization of financial markets on the one hand and that of direct investment and trade on the other. The types of capitalisms in emerging markets have been affected to varying degrees by financial globalization. While state- permeated capitalisms in Asia have successfully protected themselves against the strongest effects of financial globalization through capital controls and other restrictive measures (Petry et al. 2023), economies closer to the dependent, hierarchical or patrimonial type have often been much more open here. They have suffered relatively from the fluctuations of financial markets during the decades of globalization. The volatility of capital flows associated with the globalization of financial markets can pose a major problem for the financing of long-term investments, especially during periods of an outflow of funds or even a “sudden stop” of these financial flows. This was particularly evident in the Southeast Asian financial crisis of 1997/ 98. But strong inflows of financial resources can also be a problem for these types of capitalism if they contribute to overvaluing the national currency and thus impairing the competitiveness of domestic industry, as became particularly clear in Brazil (Sect. 4.2.3). Finally, in addition to these macroeconomic aspects, financial globalization can also pose challenges at the micro-economic firm level. Here, it becomes apparent that a quarterly “shareholder value” perspective can only be reconciled to a limited extent with the requirements of a catch-up industrialization strategy geared towards long-term investment (Akyüz 2017; Alami 2020). However, financial markets are only one dimension of globalization. Other important dimensions are trade, FDI, information flows, migration, environmental aspects and political globalization through international institutions (Engartner and Nölke 2021; Schirm 2006). For the discussion of national models of capitalism, mainly the economic dimensions in a narrower sense are relevant, i.e. direct investment and trade. The sharp

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increase in FDI in the process of globalization has profoundly shaped many models of capitalism of emerging economies. This refers especially to the dependent market economies of Central Eastern Europe, where these investments are, after all, precisely at the core of the model of capitalism (Sect. 7.1.1), but also the state-penetrated economies of China and India (Sect. 7.1.2). The latter have also benefited greatly from direct investment, but have allowed it only under relatively selective conditions—particularly technology transfer—backed by the bargaining chip of their very large domestic markets. They have subsequently also used these domestic markets as a springboard for the global expansion of their own multinationals, especially in the case of China (Sect. 7.2). With regard to the globalization of trade, the “deep integration” dimension of trade agreements is particularly relevant in terms of influencing types of capitalism (Sect. 6.1). In contrast to classical trade agreements, which are limited to reducing tariffs and non-tariff barriers, these aspects, which are increasingly central in modern trade policy, deal with quite different issues, namely competition policy, investor rights (dispute settlement), product standards, government procurement, intellectual property rights, or working conditions (Maggi and Ossa 2020). These regulatory issues potentially interfere much more deeply with national models of capitalism and, if successful, lead to convergence steps towards the LME model, even if negotiated by the EU (Sect. 6.2). However, they are also more controversial than conventional agreements and therefore sometimes fail, as was evident, for example, in the case of the Transatlantic Trade and Investment Partnership (Sect. 6.1.1) and (almost) also in the case of the Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada. However, we should also not forget, given the public controversies surrounding these agreements, that regardless of possible effects of deep integration, the intensification of trade in the context of globalization (and Europeanization, see Sect. 5.1.1) in the 1990s and 2000s had a significant impact on many national growth models. Germany’s CME, for example, further intensified its macroeconomic growth model based on (goods) exports during these decades (Sect. 3.1.1), while the LMEs of the UK and the US increasingly compensated for the loss of their market shares in goods exports by stimulating domestic demand through debt (Sect. 4.1.1).

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Economic De-globalization: Relevant Aspects for National Models of Capitalism

In contrast to the heyday of the globalization discourse in the 1990s, it has become very clear during the 2010s that there remain significant differences between the national constitutions of capitalism in different countries. The financial crisis emanating from the US, the rise of China and the very different fates of Eurozone member states in crisis are examples of the remaining diversity of national economic models and their respective specific challenges, beyond the earlier expectation of a general convergence on liberal capitalism. An opposition to the convergence thesis already characterized the emergence of the CC research program. The best-known theoretical perspective within this research program to date—the Varieties of Capitalism (VoC) approach of Hall and Soskice (2001)—was developed with the aim of demonstrating the continued existence of a powerful “social democratic” alternative (the CME), in the context of the triumph of economic liberalism that dominated the 1990s. In the age of the de-globalization discourse, the designation of the main alternatives has changed—the American digital dominance is now countered by the German export model and Chinese state capitalism—but the initial non-convergence hypothesis seems more plausible than ever. So how does de-globalization affect national models of capitalism? In contrast to the discussion on the effects of globalization on national models of capitalism, there have so far been no systematic studies on the corresponding effects of de-globalization. The social science discussion on de-globalization has so far mostly been concerned with other issues, in particular the role of globalization-skeptical political actors and the implications for the liberal world order (Benedikter 2021; James 2021; Kornprobst and Paul 2021; Menzel 2021; Walter 2021). In this respect, to approach an answer to this question, we first need to establish the extent and form of economic de-globalization relevant to national models of capitalism. Economic de-globalization could refer to three dimensions, those of financial markets (including currency issues), trade (goods and services) and FDI, which stands between these two aspects; the latter involves financial flows, but relatively long-term ones, often used to build productive capacity for trade. If we now look at the empirical data, we find that no de-globalization has yet been observed with respect to financial markets, although (or because?) it is precisely in this area that economic

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globalization has been most intense (Lütz 2002). This development has not been changed by the extensive efforts of international actors to re-regulate financial markets after 2008 and 2009 (Helleiner et al. 2010). Although after the Global Financial Crisis and the euro crisis, it temporarily looked like financial de-globalization is forthcoming (Van Rijckeghem and Weder di Mauro 2013), a longer-term, more detailed and less EU-focused analysis shows that this impression is deceptive. Only European banks reduced their international exposure after the crisis, while those of other industrialized countries increased theirs, so that more recent studies by BIS (McCauley et al. 2017), the International Monetary Fund (IMF) (Cerutti and Zhou 2017) and the US NBER (Razin 2020) clearly oppose the assumption of a de-globalization of financial markets. The corona crisis did not change this either; apart from an extreme rash in February and March 2020, it had comparatively little impact on financial markets due to the forceful intervention of central banks (Nölke 2022b: 88). The effects of the Ukraine War and the sanctions against Russia cannot yet be assessed with certainty. The situation is different with regard to trade in goods and FDI. Let us start with trade. Here, since the beginning of the 2010s, we have seen a clear reversal of the process that began in the mid-1980s, in which trade—measured here by import volume—expanded more strongly than economic output (Chapter 2, Fig. 2.6). Behind the slow development of global trade is not least an increasing tendency in favor of protectionist measures. This development becomes clear when we look at the totality of all measures that either liberalize or impede trade. Here, too, we see a clear increase in restrictive measures and a significant decrease in the share of liberalizing measures (Fig. 8.1). We have observed a similar development in the case of FDI. Here, too, we have been seeing a downward trend in relation to global economic output for some time (Chapter 2, Fig. 2.5). Again, behind the development of transboundary flows is a corresponding change in the institutional framework. We can see this in the development of international investment agreements (IIAs), which are intended to facilitate such direct investment. Here, it is clear that the number of newly concluded agreements has been declining for years, while the number of terminated agreements is now rising significantly (Fig. 8.2). We can thus conclude that economic de-globalization has indeed taken place in recent years, not in the area of financial markets, but in the area of trade in goods and FDI (see also Dullien 2021; Kolev and Matthes

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Fig. 8.1 Number of trade interventions globally (Source Own representation, based on data from Global Trade Alert) 250 200 150 signed

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Fig. 8.2 Number of signed and terminated investment agreements globally (Source Own representation, based on data from UNCTAD)

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2021; Straubhaar 2021). During the Covid-19 crisis, this divergence became entrenched: while financial globalization remained stable—and other forms of globalization, especially those in digitization, increased even further—restrictions on trade and FDI intensified (Nölke 2022b: 109–129). These trends are not expected to reverse in the coming years. In particular, the Ukraine War is likely to ensure a further continuation of this trend. 8.1.3

Economic De-globalization and National Models of Capitalism: First Traces

Given the relatively short time that has passed and the great stability of national models of capitalism—especially with regard to firm-based institutions on the supply side—we cannot expect de-globalization in the areas of trade and FDI to have already led to major changes in relation to these models. Nevertheless, it is useful to look for the first traces of corresponding processes that may intensify in the long run. Similar to the case of the effects of globalization, it is also necessary to differentiate by country models in the case of de-globalization (Witt 2019: 1069–1071). Adjustments should be particularly pronounced for those models of capitalism that are particularly intensively linked to the process of globalization, the DMEs of Central Eastern Europe and the Chinese SME. Progressive de-globalization is a particular challenge for these types of capitalism. But this also applies to the German export-driven growth model. After the Global Financial Crisis in 2008, the Chinese government began to reduce the strong export orientation of its own economy. From 2009 onward, domestic fixed investment replaced exports as the key driver of the Chinese economy, and from 2013 onward, investment in human capital, research and development and a stimulation of demand from Chinese private households increasingly took over. In the meantime, the balancing strategy has also been successful to some extent; in recent years, China’s current account balance has been trending increasingly towards balance after many years of substantial surpluses—as much as ten percent of economic output in 2007. In its analysis of this change, the German Bundesbank (2018) points to “limits to export orientation”, on the one hand in terms of the absorptive capacity of the global market, but also in terms of rising labor costs in the country, which are in clear

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tension with an export strategy based on price competition. China’s solution was to upgrade exports technologically on the one hand and to increase household demand on the other. Nor is China the only case of successful rebalancing in the case of a large current account surplus, which usually points to an export-driven growth model. In 2017, the IMF analyzed a whole range of cases of large and persistent surpluses that later have been balanced, from Belgium via Finland to Taiwan. The rebalancing measures are similar, with a prominent role for large wage increases (IMF 2017). In all of these cases, strengthening domestic demand reduced a pronounced dependence on exports—and thus problematic effects of progressive de-globalization. De-globalization has already left clear traces in the DMEs of Eastern Europe as well. This is particularly evident in the countries that have been governed by right-wing populist parties for some time, Poland and Hungary. Although these economies have been among the particularly pronounced winners of the globalization processes since 1990, governments are increasingly turning against a core aspect of these processes, namely the strong presence of FDI. The turn against foreign companies— in this case banks—was already one of the main mobilization themes in the Hungarian government’s election campaign in 2014: ...the fight between Hungary and foreign banks is compared to a boxing match, with the government choosing ‘the corner with the red white and green flag’ (Orbán). The alleged intention of multinationals and bankers is the ‘assault against Hungarian families’ (Orbán). Similar references compare the struggle to tax banks to outright war, with Hungarians representing a ‘soldier who sits trembling in fear in the trenches awaiting death [and is mocked by his fellows]’ (Orbán) (Oellerich 2021: 8).

The background to this turn of events was foreign currency loans that had bankrupted Hungarian borrowers—usually in the context of real estate financing—following a steep devaluation of the forint. The Orbán government used this circumstance for political mobilization against foreign banks and for—ultimately successful—measures to reduce their market shares, such as a bank levy and a financial transaction tax (Ban and Bohle 2021). Similar measures were also taken against the presence of multinational corporations (MNCs) in other sectors of the economy, with a focus on the parts of the economy not in international competition, for example, retail or the media)—but not on foreign companies in the

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export sectors, where Hungary continues to be technologically dependent (Bohle and Regan 2021). So far, the German CME has reacted relatively little to the trend towards economic de-globalization, although its hitherto decidedly export-oriented growth model—with a focus on goods production— would suffer considerably if this process were to continue. Before the outbreak of the Covid-19 crisis, Germany had the highest export ratio of all major economies at 46.9%, well ahead of our European neighbors France (31.3), the UK (31.5), Italy (31.6) or Spain (34.9); in relation to China (18.4), Japan (17.5) and the USA (11.7), it was even about three times as high (WKO 2020). Apart from a slight rebalancing in favor of domestic demand in the years between 2013 and 2019 (Di Carlo 2018; Niehues and Stockhausen 2020), the export orientation of the German economy has permanently intensified in recent decades; in 1970, for example, the export ratio was still 15%, less than one-third of today’s value (World Bank n.d.). The consequences of the Covid-19 crisis and the Ukraine War, however, threaten to put considerable strain on this extreme export model, not only through the decline in demand in export markets, but also through disruptions in the supply chains of German industry (Dullien 2021; Flach and Steininger 2020; Matthes 2021). The Ukraine War will mean that this trend will in all likelihood continue in the medium term, not only as a result of a breakaway of the Russian market, but also as a result of an intensification of China’s decoupling efforts. A rebalancing of the German growth model in favor of the domestic sectors—in particular through high government spending and an active industrial policy—appears increasingly inevitable (Nölke 2021). The liberal American and British models of capitalism, on the other hand, have so far been largely spared the effects of de-globalization. On the contrary, the digital corporations that now dominate the American economy together with the financial sector were even among the beneficiaries of the de-globalization surge during the Covid-19 crisis. However, an intensification of de-globalization is likely to lead to considerable problems in this economic model as well, especially if de-globalization should extend to the financial markets. Stimulating domestic demand through private and/or government debt in these economies is only possible as long as foreign investors tolerate the associated current account deficits in the long term. Given the strong demand for investment opportunities in British pounds and American dollars, this has not been a problem so far. However, a de-globalization of the financial system, in which these

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currencies lose their role as investment and trading currencies, is likely to change the situation. In this context, current practice to use Westerndominated financial market infrastructures (such as those related to the Society for Worldwide Interbank Financial Telecommunication [SWIFT] payment information system) as an instrument of “weaponized interdependence” (Farrell and Newman 2019) in the conflict with Russia in particular could pose a significant risk (Sect. 8.2.3). Greater use of Chinese and Russian alternatives in the area of cross-border payment infrastructure is likely to reduce the role of the dollar as a world trade currency in the long term in particular, and thus also the “exorbitant privilege” (Giscard d’Estaing) of US seigniorage (Nölke 2022c). To conclude, globalization has not only not leveled the differences between national economic models, but has in part given rise to some of these economic models in the first place, especially the dependent capitalism of Central Eastern Europe and the state-permeated capitalism of China. In the meantime, however, we have been noticing a clear tendency towards de-globalization in the areas of trade and FDI—and the institutions regulating these areas—for several years, although not (yet?) in the financial markets. The de-globalization of trade and direct investment is already beginning to have an impact on national models of capitalism. Types of capitalism particularly exposed to globalization, such as those of Central Eastern Europe and China, have meanwhile taken the first steps towards reducing corresponding dependencies, in contrast to the coordinated export capitalism of Germany and the liberal capitalisms of Great Britain and the United States. The Covid-19 pandemic and the Russian invasion of Ukraine will in all likelihood lead to an even further intensification of economic de-globalization, now possibly also with regard to the types of capitalism and the financial markets that have hitherto been comparatively untouched by the latter.

8.2

Second Image: Emerging Market Capitalism and Postnational Global Economic Norms

After having established how the domestic institutions of capitalism can influence the mode of negotiating international economic institutions— illustrated for production with the case of MNCs based in SMEs—I will now turn towards its influence on the content of international economic norms and the global economic order more generally. Again, the rise of state-permeated capitalism will be my point of departure, because its

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emergence is the most important change in the global economy of the last decades. My argument unfolds in three steps. First, I will gauge the conflict potential of the rise of state-permeated capitalism for existing global economic institutions (Sect. 8.2.1). Given the focus of the concept of state-permeated capitalism on the supply side, I will complement these considerations with a demand-side discussion on the interaction between different growth models regarding the global financial order (Sect. 8.2.2). Finally, I will discuss options for an alternative global economic order, which would be able to cater to peaceful cooperation between the established types of capitalism and its state-permeated contender (Sect. 8.2.3). 8.2.1

Institutional Incompatibilities Caused by the Rise of State-Permeated Capitalism2

In recent decades, the influence of economies that closely resemble a state-permeated form of capitalism such as China and India has been increasing. One of the most pressing questions in our modern world is whether these large emerging economies will challenge or embrace existing liberal international economic norms. In a recent discourse in International Relations, this query appears to remain in an irreconcilable state of opposing theories. Many Realist scholars fear a potential threat in international relations due to the rise of China (Mearsheimer 2001: 362; Schweller 2011: 287; Scott and Wilkinson 2013). However, Liberals and Constructivists are much more optimistic about future integration between major emerging countries such as China (Ikenberry 2008; Johnston 2007; Kahler 2013). The Second Image IPE approach emphasizes the importance of considering the internal economic institutions within emerging countries when attempting to answer this question. To demonstrate that large emerging economies are likely to generate a post-liberal global economic order, I will illustrate multiple discrepancies between their domestic economic institutions on the one side and the current international economic institutions on the other. Despite several years of contestation, the current international economic system is still largely based on the principles of the LME model—or what some refer to 2 The argument in this subsection draws on Nölke (2011, 2015a), Nölke and Taylor (2010: 170–173) and particularly on Nölke et al. (2015: 557–561).

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as the (Post-) Washington Consensus (Ban and Blyth 2013: 242; Wade 2013). How would a SME-led order manifest itself on the level of international institutions? Next, I will discuss the potential discrepancies between current global economic principles against the SME model as outlined in Chapter 2. By delving into distinct institutional facets, we can detect potential clashes that emerge from a confrontation of these economies with existing global institutions. These hypothetical claims are further strengthened by several examples of existing, albeit still minor, clashes. However, a seismic shift in the current economic system is not a suggestion of the subsequent juxtaposition. Emerging economies that have (selectively) joined the global trading and production networks also reap advantages from participating in the international capitalist system. Secondly, not only do challengers to the current global economic policies need significant administrative skills (Kahler 2013: 714), but they could also face a large amount of economic rivalry between themselves. This is highlighted, for example, by China’s mass-manufactured exports posing a threat to other emerging economies. Lastly, current world powers will likely attempt to oppose any effort that disrupts the global economic standing order. This has been made evident by Western forces’ reaction towards attempts from emerging economies to play a more important role in some international organizations (Wade 2013). For instance, transatlantic and transpacific talks can be interpreted as a way for powerful countries to employ counter-strategies to pursue their liberal deep integration agenda (Chapter 6). Even though the qualifications are clear, with a Second Image IPE perspective we can more accurately pinpoint areas of conflict between emerging economies and current liberal order ideals. Moreover, the subsequent two sections will demonstrate that these incompatibilities often indeed lead to the failure of international cooperation (Sect. 8.2.2) and to the emergence of rivaling international institutions (Sect. 8.2.3). It is essential to stress the significance of a concentrated national (state/ family) ownership in state-permeated capitalism when discussing corporate governance as a first institutional sphere highlighted by Comparative Capitalism, as discussed in more detail in Chapter 2. As opposed to LMEs and the principles of international economic institutions, smalland medium-sized enterprises offer fewer safeguards for minority shareholders. As such, it is becoming increasingly common to observe disagreements concerning international corporate governance specifications in deep integration regional trade agreements (Sect. 6.2). As mandated by

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the International Accounting Standards Board (IASB) based in London, liberal international institutions are committed to ensuring that there is an open market for corporate control and that global investors have access to transparency when it comes to the financial situation of companies. This transparency serves to encourage companies to invest their hidden reserves into more lucrative endeavors that will benefit shareholders (Sects. 4.1.3 and 4.2.2). However, given their turbulent economic and political environment, companies in emerging markets often consciously build up reserves as a financial cushion. Correspondingly, it is not surprising that we can notice a number of conflicts between the IASB and the governments of China and India (Ramanna 2013). Going one step further, the G7-developed Reports on Observance of Standards and Codes (ROSC) in cooperation with the IMF mandates close monitoring of national corporate governance standards alongside OECD corporate governance principles that are more liberal and “have become the principal international benchmarks for framing policy discourse in the area of corporate governance” (Baker 2012: 390). The IMF’s incursion into nations’ regulation policies was met with substantial opposition during the joint meetings of both the World Bank and IMF as well as by the International Monetary and Financial Committee (IMFC) during the second half of the 2000s. According to Mosley’s (2010) research, Brazil and China are two of the leading emerging economies that have persistently refused to make known information regarding corporate governance regulations as per ROSC principles. Corporate finance follows a similar pattern. In large emerging economies, finance is largely dominated by domestic banks and credit institutions. Patient capital plays a pivotal part in providing stability to these economies in the long term. As an external outcome, local financiers commonly construct obstacles against global capital mobility, particularly portfolio investments. Even though attempts to create a New International Financial Architecture were made in the wake of the Global Financial Crisis, they did not lead to any significant modifications regarding global finance’s essential liberal institutions (Sect. 8.2.3). This leads to tensions between practice in state-permeated capitalism and existing global norms. For example, capital controls have been declared outside of global economic norms until recently. However, Brazil took a deviating approach and implemented them in 2009 to gain greater influence over its financial system (Dierckx 2015: 149).

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Not only do institutional discrepancies manifest in the realm of capital account oversight, but also within banking legislation. After all, banks are fundamental lenders to businesses in state-permeated capitalism. Basel III’s reforms primarily target larger banks in LMEs and CMEs and involve complex regulations, though the compliance costs for emerging economies under Basel II were already considerable (Claessens et al. 2008). Brazil and India have unsurprisingly taken issue with the stringent regulations of Basel III (Lall 2012: 622–623). Another issue of contention with the global liberal order is the importance of national development banks in SMEs. These banks do not just lend money for financial gain, but also to advance national development. Liberal thinkers tend to view prioritized lending from national development banks as an illegitimate subsidy and incompatible with WTO regulations. On a larger scale, this institutional discord points to the custom of governments in state-permeated capitalism subsidizing companies working in critical sectors with financial assistance. The WTO rulings against Brazil and its Proex program for the support of aircraft producer Embraer 1999 and 2000 are a case in point (Sullivan 2003). Tensions will likely escalate on this subject, potentially resulting in the imposition of punitive tariffs for countries that offer “unjust” investment opportunities to their businesses. Institutional incompatibilities can also be found in the case of industrial relations. In emerging economies, governments are highly protective over the regulations of their workforce and refuse to be influenced by any external or transnational attempts at interference. In this area, the clash of interests between the Western stakeholder’s requirement for minimum labor standards and industrial relations practice in large emerging economies is already a widely discussed topic. Even though Western multinationals reap rewards from low wages in emerging economies, clashing interests can lead to major conflicts at an international level. Very low wages in SMEs can limit the ability of hubs of Western production to stay competitive. This motivates their attempts to protect themselves by introducing labor standards, in cooperation with non-governmental organizations and labor unions. Finally, tensions with the substance of Western-led institutions are not limited to the inter-governmental regulations of the International Labor Organization or of bilateral trade agreements, but also extend to private self-regulation. This applies, for example, to standards for corporate social responsibility (CSR), where SME business prefers less stringent regulations (Goldstein 2007: 133). Correspondingly, MNCs from emerging

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markets are underrepresented in the ranks of companies supporting the UN Global Compact. Exceptions usually refer to companies that own a brand name that can easily be identified—and boycotted—by CSR-conscious consumers in high-income economies (Araya 2006: 33). For latecomer countries to experience economic growth, reengineering existing technologies is vital. This is leading to weaker patent protections within many emerging economies. Correspondingly, the innovation strategy of state-permeated capitalism, based on a national latecomer development model, clashes with the global intellectual property rights (IPR) regime. When IPR protection became prevalent, its relaxed regulation within emerging economies was met with strong opposition from high-income economies, most notably regarding the WTO TRIPS (World Trade Organization’s Trade-Related Aspects of Intellectual Property Rights) agreement (Hein and Moon 2013). Emerging economies, such as Brazil, India and China, have kept their implementation of the TRIPS agreement rather minimalistic; however, there is a hint that this stance may shift in the future for China, given its growing domestic innovation system (Serrano and Burri 2019). For the time being, disputes between Western and emerging economies over IPR enforcement endure, now mostly in the context of the negotiation of the inclusion of IPR issues in bilateral or regional preferential trade agreements. Lastly, Brazil, India and China have the advantage of economies of scale thanks to their existing large domestic markets. Nonetheless, these countries’ stringent product market regulations are at odds with the concepts behind free trade liberalism. Correspondingly, it does not surprise that trade tensions between economies close to the SME ideal type, and the established CME and LME economies have been rising. Brazil, India and China were the subject of most complaints by the EU and the US in front of the newly established WTO Dispute Settlement Body (Horn et al. 2011). Moreover, the WTO regime is facing a plethora of tensions concerning free trade and is unable to reach an agreement due to unresolved issues in deep integration. These include investment regulation and public procurement, which are matters that emerging economies prefer not to surrender control over (Sect. 6.2). In contrast to liberal capitalism, state-permeated capitalism is fundamentally different in its institutional structure. Companies based in the West based in CMEs and LMEs rely heavily on a liberal investment and export regime, which is why we still have an international economic

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system broadly based upon the Washington Consensus. Important principles of the latter, such as the “abolition of barriers impeding the entry of FDI”, “privatization of state enterprises” and the “abolition of regulations that impede the entry of new firms or restrict competition”, are highly desirable from the perspective of Western MNCs (Williamson 2004: 196). Nevertheless, this framework does not take into consideration the institutional context of enterprises in state-permeated capitalism. Consequently, Brazil, China and India find little value in the enhancement of these structures. Liberal global institutions might not be ideal for emerging countries’ development ambitions, yet are often still utilized by them as there’s no working alternative yet. This is why, for example, China joined the WTO although it didn’t commit to a deep integration approach. In summary, this subsection highlights that the prevalence of a shared system of state-influenced capitalism in countries like China and India, and to some extent, Brazil, is incompatible with international economic institutions designed based on the current liberal model. By emphasizing how existing international economic policies in these countries already result in small squabbles, clashes and gridlocks about global economic regulation, this abstract discord was made clear. This list of institutional incompatibilities—driven by the categories of CC—is far from complete. Other incompatibilities stem, e.g., from the much closer collaboration between MNCs and government authorities in SMEs (see Sect. 7.2). For example, US anti-corruption norms based on a liberal model of capitalism such as the “Foreign Corrupt Practices Act” effectively work as economic sanctions against emerging market companies (Spalding 2010), and it is hardly surprising that many companies based in state-permeated capitalism do not implement norms such as the OECD Convention on “Combating Bribery of Foreign Public Officials in International Business Transactions” (Goldstein 2007: 106). The subsequent sections further support that institutional incompatibilities based on different types of capitalism are not a hypothetical construct, but lead to practical problems of international cooperation, exemplified by the case of finance. 8.2.2

The Heterogeneity of Growth Models and the Limits of Cooperation in Global Finance

So far, the discussion on how we can explain problems of global order by referring to the existence of institutionally distinct types of capitalism on the national level has focused on the supply-side institutions discussed

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by early generations of studies in CC. However, the demand-side factors favored by the third generation of CC scholarship and Growth Model analysis are equally important for explaining the limits of cooperation on the global level. This can be demonstrated by drawing on Thomas Kalinowski’s (2019) seminal study on the global regulation of finance. Kalinowski’s (2019: 5–8) point of departure is the limited reforms of global finance after the Global Financial Crisis. If compared with the severity of the economic crisis caused by the financial sector in 2008, the severity of post-crisis reforms is mixed at best. This is a widely shared assessment (Eichengreen, 2009; Germain 2010; Helleiner 2014; Wade, 2007). Moreover, limited reforms of global finance are attributed to conflicts within the G20, which was unable to agree on more far-reaching reforms after the crisis. To explain these conflicts, Kalinowski (2019) highlights three (groups of) countries with very different ideas regarding the regulation of global finance, based on different models of capitalism, i.e. “finance-led” capitalism in the US, “integration-led capitalism” in the EU and “state-led capitalism” in East Asia. At the core of his explanation of regulation problems of global finance is a modified trilemma triangle, which is based on the traditional Mundell-Fleming “impossible trinity” (Mundell 1963). Trilemma triangles are based on the idea that there are three different macroeconomic goals of which only two can be realized at the same time. Kalinowski (2019: 28) identifies “stable exchange rates”, “open capital accounts” and “sovereign monetary and fiscal policies” as these three goals. While trilemma triangles already pose a problem as such (even if only one state would have to decide), international cooperation in the case of finance is made even more difficult because each of the three major economic actors identified by Kalinowski (2019) pursues different combinations of macroeconomic targets. The US “finance-led” model seeks a combination of open capital accounts and sovereign monetary and fiscal policies, the EU “integration-led” model combines open capital accounts with stable exchange rates and the East Asian “export-led” model finally prefers a combination of stable exchange rates with sovereign monetary and fiscal policies. Kalinowski (2019: 67–83) details how these fundamental disagreements have prevented a more thorough post-crisis regulation by the G20. He then substantiates his argument by historically discussing the emergence of the three types of capitalism and their preferences—and clashes—regarding the regulation of global finance after the end of the

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system of Bretton Woods. The most important structural conflicts are on the size of macroeconomic stimuli (large ones preferred by the US and East Asia, small ones by the EU) and on restrictions on global financial markets (with the US tolerating far more volatile financial flows than East Asia and the US). He concludes by arguing that global cooperation only is possible if there are substantial changes on the domestic level, towards more balanced models. By combining very different types of capitalism—CMEs, DMEs, LMEs (at least until Brexit) and MMEs—within one “European” model of capitalism (and also putting the Chinese state-permeated capitalism in the same group as the Japanese CME), Kalinowski glosses over important institutional differences between national types of capitalism, in contrast to his previous work (Kalinowski 2013). Moreover, he does not engage with the conceptual apparatus of growth model research, notably the basic distinction between domestic debt-driven and exportdriven growth models. Particularly within the European Union, we find very different types of growth models and Kalinowski’s characterization of the EU mainly focuses on the German case—and even here it can be debated whether Germany indeed seeks currency stability—or undervaluation (Höpner 2019). Nevertheless, his findings are perfectly compatible with third-generation CC and Growth Model analysis, as outlined in Chapter 2. At the core of fundamental divergences about the regulation of global finance are indeed incompatible preferences of different demand-side growth models regarding the role of the financial sector. LMEs with debtdriven growth models such as the UK and the US require a high degree of financialization, as the basis for the ability of their large domestic financial sectors to produce employment and growth. A large number of financial transactions produces a high volume of fees (Kalinowski 2013: 482). Moreover, these growth models are using the financial sector— via increasing private and/or public indebtedness—to stimulate domestic demand in periods of low growth. A high level of debt in these two LMEs is tolerated by financial market participants—foreign investors in particular—due to their desire to make use of their global lead currencies and deep financial markets. Financialization requires liberal financial accounts—e.g. an absence of capital controls or financial transaction taxes—to work well. SMEs such as China and India, however, want to avoid the instability going hand in hand with liberal capital accounts and volatile financial flows, to

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pursue their long-term development agenda. However, they are open to macroeconomic expansion in case of crisis, to stabilize their long-term development project. Export-oriented CMEs such as Germany are highly skeptical of major debt-based fiscal or monetary policy stimuli because the latter contradict a price-conscious export strategy. They refuse any international coordination on the latter (Kalinowski 2013: 483). Due to these conflicting preferences, it is highly unlikely that we can expect a substantial consensus on the regulation of global finance as long as these different national economic models persist. Although these models temporarily live in a perfect symbiosis—with the debt-based models creating demand for CME exports and at the same time assisting in absorbing the financial surpluses created by these exports—they are leading to huge economic imbalances and a high likelihood of repeated financial crises. Only a rebalancing of the German export model towards a higher role of domestic consumption (Nölke 2021) and a symmetric rebalancing of the US debt-driven model towards a more limited role of financialization and a higher role of production would pave the way towards a fundamental stabilization of global finance. This stabilization would also find the consensus of countries following the model of statepermeated capitalism. For the time being, however, these economies have found a way to combine a relatively high level of global financialization with a decent degree of economic stability, as we shall see in the subsequent subsection. 8.2.3

The State-Capitalist Contestation of Postnational Liberal Institutions in Global Finance3

Given the absence of fundamental reforms of global finance, SMEs such as China and India have to find an alternative way on how to deal with highly volatile cross-border flows under conditions of financialization. Their solution is to organize domestic financial markets under the premises of state capitalism, in order to minimize the detrimental effects of this volatility for their projects of catch-up industrialization. In contrast to the postnational liberal financial markets in LMEs and CMEs, the focus in SMEs is not on profit maximization by private actors, but on the mobilization of financial markets for the facilitation of state objectives, with the 3 The argument in this subsection draws on Petry et al. (2023), Nölke and Petry (2022), and Nölke (2015b, 2022c).

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dominant role given to government bodies, not to private financial capital (Petry 2020a). In China, “market forces are utilized” but only “as long as state control over key economic aspects remains intact” (McNally 2013: 42). Stock exchanges, for example, utilize market infrastructures to manipulate the actions of participants so that they achieve a variety of economic and political objectives. In doing this, these exchanges are essentially reproducing state capitalism by using financial means (Petry 2020b). A comparison of stock exchanges of the BRICS grouping and South Korea demonstrates striking patterns for those economies close to the SME ideal type, namely China and India (Petry et al. 2023). Public ownership of exchanges here is more evident. Meanwhile, foreign and private ownership of these institutions is strictly regulated, as well as the competition between exchanges at a national level, in order not to undermine state influence. A state-capitalist instead of postnational liberal orientation also materializes regarding the market infrastructures provided. Speculative high-frequency trading, for example, is generally limited in its application in these economies. Furthermore, governments strive to gain leverage over critical commodity prices by constructing new future markets under national—instead of US—control, as well as limiting the international stock index futures trading that could potentially threaten their comprehensive control over domestic stock exchanges. To carefully control global integration, finally, state-capitalist capital markets vigilantly assess stock ownership and trading quantities of foreigners that also have to register beforehand. Large emerging economies close to the ideal type of state-permeated capitalism not only organize their domestic capital markets via stock exchanges in a way that allows them to deal with a global financial system still characterized by a high degree of financialization, but they also seek to modify existing or establish alternative international institutions to operate closer to the principles of state capitalism (Nölke and Petry 2022). As discussed in Sect. 4.1.2, we are lacking a comprehensive regulation of financial markets on the global level. Since the 1980s, most of the existing regulation follows the preferences of the US (and the UK) for a liberal model of financialization. More specifically, this is a “postnational liberal” model based on “intrusive liberalism” (Börzel and Zürn 2021), since it strives to eliminate the ability of national governments for controlling cross-border financial flows, in marked contrast to the “embedded liberalism” of the Bretton Woods system (Ruggie 1982).

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The work of the International Accounting Standards Board (IASB) provides a good example on how the large emerging economies seek to modify existing postnational liberal institutions of global financial order to make them more compatible with the requirements of their own statepermeated models of capitalism. IASB standards (International Financial Reporting Standards/IFRS) are not only a problem for companies based in CMEs (Sect. 4.2.2). An immense gap exists between IFRS based on Anglo-American accounting models and those required for this era’s emerging markets. Current difficulties facing the IASB can be illustrated as follows: “For example, how can a standard on consolidated financial statements be designed to reflect the substantive relationships in Japan’s keiretsu and Korea’s chaebol, the networks of affiliated companies that may not have a parent company? In China, most business is done by stateowned entities, not by private-sector enterprise. To what degree should accounting standards make explicit provision for the different way that business is done in Islamic countries?” (Zeff 2012: 833). Incorporating IFRS into local regulations can prove to be a difficult process. The IASB places great emphasis on ensuring that company accounts are uniform throughout the world, making them easily recognizable and accessible to international investors. For this reason, they advocate for the application of identical accounting standards globally. Even though nations may seek to modify International Financial Reporting Standards to suit their economic environment, the IASB has notoriously been adamant against adapting its regulations for individual countries. In other words, global standards are expected to be abided by all regardless of external circumstances. As a rare exception, China managed to successfully negotiate one amendment of IFRS standards: Given state ownership of a substantial proportion of Chinese companies, the Chinese MOF noted that many state entities were likely to be subject to extensive related-party disclosure requirements under a strict interpretation of IFRS. Arguing against the onerous nature of such compliance, the MOF was able to successfully lobby the IASB to modify IFRS so that its state-owned enterprises were not subject to the same level of related-party disclosures as most other companies around the world. (Ramanna 2013: 4)

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Indian enterprises have faced difficulties in adhering to certain IFRS standards, yet they remained unable to make any modifications within them (Ramanna 2013: 20–25). One of the core reasons for the difficulties of the Chinese and Indian governments to negotiate for IFRS amendments is the specific institutional setup of the IASB. The sheer complexity of transnational private governance often overwhelms representatives from emerging countries with their limited resources, making it almost impossible for them to keep up with the IASB and successfully contribute to its decisions. The IASB’s proceedings being based online offers relatively easy global accessibility; however, the technical nature of their deliberations makes it a difficult obstacle for stakeholders who have not worked in places such as Big Four auditing companies: “whilst due process is admittedly a transparent procedure, it is one in which only those players with major financial and intellectual resources can participate” (Burlaud and Colasse 2011: 23). Given these problems, it does not surprise that the large emerging economies have made use of the occasion of the 2007/2008 Global Financial Crisis to increase their pressure for changes in the governance of the IASB. In 2009, a Monitoring Board was founded in order to ensure regulatory cooperation between the US SEC, European Commission, Japan’s Financial Services Agency and IOSCO’s Rising Powers and Technical Committees. This board is non-voting but plays an important role in selecting IFRS Foundation Trustees through nomination processes as well as monitoring their performance of the IASB’s regulations. This reform brings the private governance of the IASB more in line with the state-capitalist preference for inter-governmental cooperation. However, the large emerging markets not only seek to reform existing institutions of the global financial order, they also create new ones, if necessary. This can be illustrated by looking at the support of countries with balance-of-payment problems and the opposition of these countries to the traditional approach of the IMF, as exemplified in the East Asian financial crisis of 1998. The IMF plays a critical role in maintaining the postnational liberal monetary system, by providing liquidity to countries with balance-of-payments issues, while simultaneously imposing strict conditionalities that enforce liberal restructuring within those nations. From the point of view of a state-capitalist international financial system, these conditions are highly troublesome. Since the BRICS are powerless to influence IMF policies due to their limited voting privileges, they have generated alternative plans for delivering liquidity. In 2000, the Chiang

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Mai Regional Arrangement was created in East Asia (ASEAN+3) which included China. This arrangement has since advanced and evolved into an even more comprehensive Contingent Reserve Arrangement (CRA) fourteen years later in 2014. The purpose of these arrangements is to provide liquidity to governments in trouble without imposing IMF-style conditionalities, in line with a state-capitalist global financial order. So far, however, the condition-free amount of financial support is limited in volume (Würdemann 2018). Competing models of capitalism, however, are not always the main trigger for the establishment of alternative state-capitalist infrastructures for global finance. Most recently, the latter have received an additional boost in the context of Western sanctions against Russia, and rising tensions between the US and China. The focus here is on SWIFT, the most important provider of cross-border payment information. Since 2012, the exclusion from SWIFT has been utilized by the US—and increasingly by the European Union—as a geoeconomic weapon, first against Iran, later against Russia. This utilization of SWIFT has alerted large emerging economies regarding their vulnerability and they have stepped up their activities for the establishment of alternative systems. In March 2019, this was evidenced when the Bank of Russia’s SPFS (System for Transfer of Financial Messages) was permitted to be used internationally. Fueled by the implementation of sanctions from SWIFT during the Ukraine War, China has seen an increased interest in its CIPS (China International Payments System) transactions. Over time, the alternative systems are likely to substantially reduce the effectiveness of the SWIFT sanction weapon (Cipriani et al. 2023: 28). The existence of a well-working alternative global payment system would not by itself put limits on the liberal order in global finance. However, the strong degree of state influence in the state-capitalist financial systems of China and Russia would make it easier for the state to intervene in cross-border payments, to the detriment of the importance of postnational liberal financial market considerations. To conclude, the institutional incompatibilities between the prerogatives of state-permeated capitalism in large emerging economies on the one side, and the institutions of the postnational liberal economic order on the other, limit not only the depth of the necessary global regulation of finance, but also lead to the establishment of two rival global financial orders. The Russian war against Ukraine and Western sanctions

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are further intensifying process towards suboptimal regulation of global finance.

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CHAPTER 9

Conclusion

9.1

Findings: The Contours of Second Image IPE

The Second Image IPE research program still is in its early stages. This book offers a first systematic account of the domestic-internationaldomestic interactions that need to be addressed in order to develop a more comprehensive understanding. This section summarizes some of the initial findings. It does so in two steps. First, it summarizes the partial results of individual chapters in a big picture of the global political economy (Sect. 9.1.1). Second, it compiles the specific mechanisms how domestic capitalism influences international capitalism and vice versa, including their variance across issue areas and across countries (Sect. 9.1.2). 9.1.1

The Big Picture: A Deeply Unbalanced Global Political Economy

The combination of second image and second image reversed-perspectives across the most important issue areas leads us to a picture of the contemporary global political economy that differs considerably from those of mainstream Economics, but also from those of Marxist approaches such as Dependence and World System Theory (Sect. 2.2.1). In contrast to the former, it deviates from the assumption that all economies are alike, which is an important basis for its reductionist research strategy searching for © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Nölke, Second Image IPE, International Political Economy Series, https://doi.org/10.1007/978-3-031-37693-1_9

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economic laws that are valid independent of time and space. In contrast to the latter, it does not pose a steep and unsurmountable hierarchy between a Western or Northern center and a Southern periphery. At the center of the Second Image IPE picture are deep interdependencies between very different types of growth models (Sect. 2.1.2). On the one hand, we have economies driven by domestic demand, usually supported by high private or public debt. On the other hand, we have export-led economies. A third group of economies features rather balanced growth models, combining the stimulation of domestic demand via high investment and wages with a high volume of exports, both in advanced economies (e.g. Sweden) and emerging economies (e.g. China). Debt- and export-led economies depend upon each other. Export-led economies depend on the demand for their surplus goods and services upon debt-led economies. Debt-led economies, in turn, depend upon export-led economies for the provision of surplus financial flows. This mutual interdependence was particularly obvious in the Eurozone before the Global Financial Crisis/GFC (Sect.5.1.2), but also after the onset of the Corona pandemic, when Germany was forced to reverse its stance on the European fiscal policy in order to safeguard its most important export markets (Sect. 5.2.2). The two polar groups of growth models, in turn, have important subgroups (Sect. 2.1.2). Among the debt-led growth models, the United States and the United Kingdom play a crucial role as “managers of financialization”. Since their currencies and financial markets are much sought after for trade and value storage, they can afford much higher balanceof-payment deficits (and correspondingly higher domestic demand) than other economies in a comparable situation. Other debt-led economies— for example the Southern European economies, but also emerging economies such as South Africa—cannot afford long-lasting high balanceof-payment deficits. Among the export-led economies, the two major groups are those housing the headquarters of multinational corporations (MNCs) (e.g. Germany, Japan, South Korea) and those housing the assembly lines for these corporations (e.g. East Central Europe, Mexico, Southeast Asia). Countries of the first group very often originally have developed their strong export focus because of security considerations (Sect. 3.1). The constellation of these two polar types of economies has important repercussions on the design of the global economic order, understood as the combination of global economic institutions and practices

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(Sect. 8.2.3). Countries with a growth model that is based on the management of financialization seek a global financial order that is based upon the freedom of financial flows (Sect. 4.1). A similar impetus applies to the “top” export-led economies, which require this freedom for the foreign direct investments (FDI) by their MNCs, increasingly supported by regulatory harmonization via deep integration trade agreements (Chapter 6). These countries, however, also push particularly hard for trade liberalization, as an important target of their foreign policy (Sect. 3.2). International institutions driven by financialized debt-led, and by export-led economies support cross-border flows of finance, direct investment and trade (Sects. 2.2.2 and 4.1.1). A major difference between these sub-orders, however, is the degree of their centralization. The current global financial order depends on a high degree of centralization around Anglo-American-dominated institutions (Sects. 4.1.2, 4.1.3 and 8.2.3), whereas the global trade order increasingly is based on a regional integration schemes and a “spaghetti bowl” of bilateral and bi-regional trade agreements (Sect. 6.2.1). International institutions do not play an important role for the global investment order, but the latter in practice still is very hierarchical, particularly if we take the dependency of capitalism in East Central Europe on decisions taken in Western multinationals’ headquarters into account (Sect. 7.1.1). Within the European Union, the pressure of international (European) institutions has a particularly profound influence on the economies of the member states (Sect. 5.1). The global economic order thus can have important repercussions on domestic capitalism. Even powerful economies such as Germany have been profoundly influenced by Anglo-American financialization (Sects. 4.2.1 and 4.2.2). Even more important, however, are the repercussions on the Global South. Deep integration trade agreements interfere considerably with the domestic economic institutions of the participating economies (Sect. 6.2). Moreover, the postnational liberal financial global order causes a high degree of volatility for many of these economies (Sect. 4.2.3). Only very large emerging economies such as China and India are able to extract themselves from most of the pressure of the global economic order. They are able to impose their own conditions on inward financial flows and FDI (Sect. 7.1.2), and to support the creation of their own MNCs by comprehensive state support (Sect. 7.2). However, the big picture is not static. The differences between export- and debt-based economies were more pronounced before the

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GFC than afterwards (Sect. 2.1). The process of globalization, which has considerably influenced the evolution of economic models in emerging economies, is now stagnating and partially moving towards de-globalization (Sect. 8.1). Moreover, the current global order is not necessarily stable, as we have seen in case of the postnational liberal order, which increasingly is under pressure by a rival state-capitalist order supported by large emerging economies (Sect. 8.2). These observations point us towards the need to put the current picture that has been derived upon the basis of Second Image IPE in historical perspective (Sect. 9.3.1). A major limitation of the analysis contained in this book, however, is its focus on the rich economies of the Global North and on the more advanced emerging economies. The main reason for this omission lies in the limited suitability of most analytical arguments of contemporary Comparative Political Economy (CPE) for the analysis of low-income economies. Concepts of Comparative Capitalism (CC) predispose the existence of capitalism and are hardly suitable to the analysis of subsistence economies, for example in parts of Africa or rural India. Similarly, the analysis of macroeconomic growth models in low-income economies often is made very difficult by the absence of comprehensive and reliable economic data, but also by the wide fluctuations of the global commodity prices that are so essential for many of the low-income economies (Schedelik et al. 2023). 9.1.2

Linkages Between National and International Capitalism

Next to the identification of the big picture of the global economy combining the most important country cases and issue areas in a coherent picture (with a substantial reduction of complexity), the Second Image IPE research program also is able to pinpoint a number of specific mechanisms linking national and international capitalism. I will first look at international level influences on the national level (second image reversed), and then on national level influences on the international level (second image). On the international level, we have to distinguish between the topdown effects of economic processes on the one side, and of international economic institutions on the other; security considerations play a specific role (Table 9.1). This distinction is for analytical purposes only—in practice, these different factors usually work hand in hand.

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Table 9.1 International-level influences on national models of capitalism

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International economic processes Financialization Foreign direct investment Trade flows International economic institutions Supranational institutions Supranational institutions Inter-governmental Institutions Transnational private governance Security considerations Source Own representation

The international economic processes with the most intense effects on the national-level capitalism are financialization and the globalization/deglobalization of production via FDIs. Trade flows, in contrast, can be managed—and cushioned—by national governments comparatively easily. Initiatives to profoundly shape national models of capitalism via deep trade integration often have failed (Sect. 6.2). Among the most impressive cases where national economic models have been influenced quite profoundly by international economic processes are the dependent market economies in East Central Europe. Due to extraordinary historical circumstances, these economies have oriented themselves completely towards the globalization of production via FDIs (Sect. 7.1.1). Financialization, in contrast, has influenced domestic capitalisms across the board (both in the Global North and the Global South), for example based on the cross-border activities of institutional investors. The latter both influence the corporate governance of companies in a micro perspective (Sect. 4.2.1) and currency relationships of emerging economies in a macro perspective (Sect. 4.2.3). International institutions influence domestic capitalism in different ways depending upon their content and mode. As far as the content of international institutions is concerned, liberal models of the economy are particularly prominent. This is not surprising, given that we (still?) live in the era of a liberal global economic order (Sect. 8.2.1). However, at least in the field of finance, an alternative state-capitalist order is gradually emerging (Sect. 8.2.3). With regard to the mode of international institutions, the main distinction is between private and public institutions, and between

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inter-governmental and supranational among the latter. Supranational institutions such as the European Union (Sect. 5.1) and the International Monetary Fund (Sect. 4.1.1)—in case of structural adjustment programs—exercise the potentially most powerful influence on domestic economic models, in contrast to inter-governmental institutions (such as economic norms propagated by the OECD), which usually are based on consensus decision-making. Although the World Trade Organization (WTO) integrates a supranational component in its dispute settlement system—even if the national government winning a case enforces the decisions of the latter—most of its decisions are inter-governmental and based on consensus. This generally is the case in trade (outside of the EU) and explains the very limited extent of deep integration agreements (Sect. 6.2). Whereas the effects of public institutions on the international level on national-level capitalism are very familiar—think, e.g. of the conditionality the IMF imposes on debtor countries—the book has unearthed a number of private institutions with considerable impact on national-level capitalism. These institutions included cases of transnational private selfgovernance in accounting (Sect. 4.2.2) and of coordination service firms such as institutional investors (Sect. 4.2.1). Generally, supranational and transnational private institutions appear to be the instrument of choice for liberal capitalism, whereas the more statist models of capitalism ones rather focus on inter-governmental institutions. Content and mode of international institutions thus are related. The extent to which the international-level influences capitalism on the national level is not only mediated by the power of international economic processes as well as of international economic institutions, but also by national-level factors. Clearly, the size of an economy matters. In particular, China with its focus on a high degree of state control over the economy and its excellent negotiation position towards foreign companies seeking access to its large domestic market is able to block unwelcome pressure by FDI and to use these investments for the purpose of its national economic development strategy (Sect. 7.1.2). Still, even medium-sized emerging economies such as Brazil have considerable difficulties to stem themselves against the pressure emanating from global currency speculation (Sect. 4.2.3). Within the supranational European Union, the small and medium-sized Southern European economies have been profoundly shaped—if not even destabilized—by the Economic and

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Monetary Union (Sect. 5.1.2), but also the national economic institutions of the large German economy did not remain completely unaffected by decades of liberalizing pressure (Sect. 5.1.1). Other national-level factors mediating international-level influences include the existence of blockholders and state control in corporate governance, which limit the pervasive influence of financialization exercised by institutional investors and multinational corporations (Sects. 4.2.1 and 7.1.2). Finally, not all international influences can be reduced to the economic realm. Security considerations also can play an important role, as we have seen as their support for the emergence of export-led models (Sect. 3.1). Similarly, security considerations can also limit the influence of international institutions, as we are currently witnessing in the case of SWIFT, the Society for Worldwide Interbank Financial Telecommunication. Repeated rounds of economic sanctions enforced by the European Union and the United States have provided incentives to countries such as China and Russia to develop their own cross-border payment (signaling) system, thereby limiting the reach of SWIFT and its sponsors (Nölke 2022a, 2022b, 2023a). Turning to bottom-up (national to international) mechanisms, it again makes sense to distinguish between influence on international economic processes and on international economic institutions. The book has identified ample ways on how different national types of capitalism and growth models influence these institutions and processes. Table 9.2 selects some of the most important preferences with regard to content and regulation mode emanating from the three most important national models of capitalism (dependent and mixed market economies are less powerful). Table 9.2 International-level preferences from national models of capitalism

Liberal market economies

Coordinated market economies Export-led growth models State-permeated market economies

Source Own representation

Financialization Transnational private self-regulation (mode) Regulatory harmonization Supranational stabilization of market access (mode) Selective exposure to international markets Inter-governmental cooperation (mode)

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Among the most basic influences emanating from national types of capitalism towards international economic processes is the development of financialization that has its origin in the US and UK economies. The governments of these countries exercised a lot of pressure in favor of the process of capital account liberalization, for example via the powerful role of the US in World Bank and International Monetary Fund (IMF) (Sect. 4.1.1). Also with regard to international institutions that could have put a limit on the process of financialization, they have consistently acted in favor of its deepening, for example with regard to the international regulation of hedge funds (Sect. 4.1.2). However, not only governments transport features of domestic capitalism into international economic processes. Institutional investors and other coordination service firms have also played a very important role in spreading the process of financialization to the international economic plane (Sects. 4.2.1 and 4.2.3). Similar to institutional investors, MNCs also are an important transmission mechanism for transporting features of national-level capitalism to international economic processes, but also to international institutions. At the focus of the empirical studies were MNCs from emerging economies (Sect. 7.2). They implicitly transport these features on the one side via FDIs (often with state support, Sect. 7.2.2) and on the other side via lobbying for international norms (Sect. 7.2.3). This has important repercussions particularly for the mode of regulation. MNCs based in liberal market economies traditionally have a preference for private self-regulation (Sect. 4.1.3). The strongly growing number of multinationals based in state-permeated market economies, in contrast, prefer inter-governmental forms of institutions, due to their close linkages with their home country state, both on the domestic and the international level (Sects. 7.2.2 and 7.2.3). Turning to international institutions and national governments, the latter usually are informed by their domestic type of capitalism with regard to their positions towards global economic norms. Different types of domestic capitalism make for different preferences with regard to the international level, both with regard to content and mode of regulation. In terms of content, the liberalizing role of the US and UK liberal market economies (LMEs) with regard to finance has already been mentioned (Sects. 4.1.1 and 4.1.2). Governments of countries with a strong export model and/or hosting the headquarters of many important MNCs seek to

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support international trade also via open markets and regulatory harmonization. International regulatory harmonization, however, is hampered considerably by the stubborn heterogeneity of national models of capitalism, as we have seen in case of transatlantic cooperation (Sect. 6.1). Given the dependency of export-led economies on the access towards and the stability of their most important export markets, they can take a particularly intense interest into the economic governance of the latter (Sect. 3.2.1). They do not only support the establishment of supranational regional integration schemes supporting their exports (Sects. 3.2.2 and 3.2.3), but also take a particularly active role in the situation of crisis, as demonstrated for the case of Germany during the Eurozone crisis (Sect. 5.2.1) and the Corona pandemic (Sect. 5.2.2). Particularly interesting are these mechanisms when they are leading to institutional incompatibilities, i.e. when national and international models of capitalism point into different directions, thereby creating frictions. The rise of large emerging economies with their state-permeated economic models, for example, brings manifold institutional incompatibilities regarding the liberal economic order (Sect. 8.2.1). Frictions on the international level can take the form of a blockade of the negotiation of international institutions as in case of TTIP (Sect. 6.1.1), of a very limited international cooperation as in global finance (Sects. 4.1.2 and 8.2.2), or of the formation of alternative international institutions, as in case of global payment information systems (Sect. 8.2.3). On the national level, frictions mean that international influences interfere with important institutional complementarities (Comparative Capitalism) or prerogatives for macroeconomic policy (Growth Models). For example, whereas the process of globalization of production was very much in line with the requirements of export-led growth models of coordinated market economies (CMEs) and dependent market economies (DMEs), and with the export sectors of balanced growth models, the current process of de-globalization is much less so (Sects. 8.1.2 and 8.1.3). Other examples are the problems with the imposition of budgetary austerity on debt-led growth models via Eurozone rescue institutions (Sect. 5.2.1), and the clash of financialization with patient forms of corporate finance in the German CME (Sects. 4.2.1 and 4.2.2). To conclude, both the different preferences in the content and on the mode of regulation between countries with CMEs, LMEs and SMEs diverge substantially. Correspondingly, they lead to global tensions (Sect. 8.2.1); the failure of (deep integration) international agreements

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(Chapter 6); superficial and weak regulation (particularly in finance, Sect. 4.1.2); limited international cooperation (Sect. 8.2.2); and even the emergence of two rival international economic orders (Sect. 8.2.3). The subsequent chapters will discuss these findings normatively (Sect. 9.2) and will put them into historical context (Sect. 9.3).

9.2 Normative Concerns and Policy Implications: Perils of Intrusive Liberalism1 Each theory of IPE has implicit—and sometimes explicit—normative connotations. Think of the value of international cooperation and of the maintenance of the liberal international order in Liberalism, the importance of national security in Realism or the need to overcome capitalist exploitation in Marxism. Although Second Image IPE does not pursue a project of grand theory on a comparable level of abstraction, it nevertheless carries some normative connotations as well. With regard to the international side, this boils down to a focus in favor of national economic self-determination (Sect. 9.2.1), on the domestic side it highlights the importance of balanced growth models and of the maintenance of institutional complementarities (Sect. 9.2.2). 9.2.1

A Normative Focus on National Economic Self-Determination

Compared to the theories of International Political Economy (IPE) named above, Second Image IPE as developed in this book primarily is a theory of economic development. This orientation is a fruit of the close cooperation with CPE and its focus on economic growth, both within Comparative Capitalism and within the Growth Model approach. For the same reasons, it implicitly puts a focus on national economic development, not necessarily on global economic development. Thus, the perspective is more communitarian than cosmopolitan. Given that many of the core concepts of CC have been developed against the backdrop of the dominance of an ideal–typical model of liberal capitalism, CC is implicitly a theory of latecomer industrialization within an international environment dominated by economic liberalism. This

1 The argument in this section draws in part on Nölke (2012, 2019a, 2019b, 2020, 2021a, 2021b, 2021c).

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can already be observed for the historical predecessors of CC during the late nineteenth and the early twentieth centuries, the German Historical School, List and similar approaches in other world regions that sought to promote industrialization against the backdrop of the British dominance in global capitalism (Helleiner 2021). This motive returned during the rise of the Variety of Capitalism (VoC) in the heat of the US-dominated globalization debate around the millennium. Arguably, one of the core reasons for the overwhelming popularity of the VoC approach in CPE (Hall and Soskice 2001) was its appeal as a defense of a non-liberal approach towards economic development (in the form of coordinated market economies with a prominent role for labor unions), in a situation where considerable pressure was exercised for economic liberalization. It is also no coincidence that industrial latecomers have to defend themselves against the pressure for economic liberalization exercised by the leading economy of their times. The leading economy of its time— the United Kingdom during most of the nineteenth century, the United States during parts of the twentieth century, later joined by Western Europe and Japan—has an overwhelming advantage in competitiveness, for example because of economies of scale. Correspondingly, latecomer economies can only chose for a certain degree of temporary national protection, if they want to avoid economic colonization and a permanent status of economic inferiority. The lead economy, however, exercises a liberalizing pressure, in order to maximize the market access of its industries. Although latecomer economies usually become more liberal if they succeeded with economic liberalization, they mostly retain some of their non-liberal features. Think of French etatism, Japanese and Korean corporate governance or German co-determination, but also the role of the Communist Party in China or family control of business in Brazil and India. The design of the non-liberal features depends on the size, level of economic development and timing of integration into global capitalism of the country being studied (Hsueh 2011: 10–11). Contemporary state capitalism in large emerging economies utilizes inward and outward foreign direct investment (FDI). These economies are considered “thirdgeneration late developers” (McNally 2012: 755), integrated into a particularly intensively globalized economic system. Various forms of non-market coordination assist the process of latecomer industrialization—or the adjustment of latecomers in later crises. Given this point of departure, the implicit normative bias of Second

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Image IPE is to defend national economic self-determination, particularly those of economies not at the apex of the global economy. Arguably, this protection is a precondition for latecomer industrialization—or for a defense of the non-liberal achievements of an earlier phase of latecomer industrialization. Taking into account that many of the current lead economies—now often pursuing economic liberalization of other economies—had successfully industrialized with non-liberal features, Second Image IPE posits itself against attempts for “kicking away the ladder” (Chang 2002), i.e. preventing emerging economies from using the same instruments for (temporary) protectionism the now dominating economies have used during their historical rise. The main negative force from the perspective of Second Image IPE is international coercion regarding national economic models, particularly liberalizing pressure exercised by leading economies and by the international institutions dominated by these economies (but also economic coercion by imperialist expansion and war). Thus, international economic coercion is not only a problem in terms of democratic legitimacy and— in a postcolonial perspective—of Northern dominance over the South, but also from the perspective of Second Image IPE. Normatively, Second Image IPE positions itself against liberal approaches in International Relations and IPE which argue in favor of more international coercion, in order to ensure the provision of global public goods such as peace, security and prosperity (HSFK 2018: 3; Mansbridge 2015). Among the most widely discussed cases of international coercion are those of supranational economic institutions. These include the imposition of economic conditionality by the World Bank and the IMF on Southern economies since the debt crisis of the 1980s (Barya 1993; Beckman 1991; Walton and Ragin 1990), as well as the imposition of economic conditionalities by the European Union on EU member states during the Eurozone crisis (Heinrich and Kutter 2011; Ryner 2015). Calls for more coercion have increased even further in the context of the demise of the Western-led liberal international order (HSFK 2018). Correspondingly, Second Image IPE as a counter-weight to these claims is more urgent than before. 9.2.2

Policies in Favor of Balanced Growth Models and Institutional Complementarities

What kind of specific policy conclusions can we derive from Second Image IPE, next to avoiding international economic coercion? This is a more complicated question than with other theoretical approaches in IPE, given

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the close connection of Second Image IPE to CPE. One of the core assumptions of the CC approach in CPE is that there is not “one best way” to organize a capitalist economy. For example, both coordinated and liberal market economies are successful, but with different products and types of innovations. Similarly, the Growth Model approach acknowledges alternative models to create demand and, therefore, economic growth (debt-led, export-led, wage-led), even if there is an implicit preference for wage-led growth (Lavoie and Stockhammer 2013), or at least a balanced model combining export- and debt-led growth (Baccaro and Pontusson 2016). Given this point of departure, there cannot be uniform policy prescriptions in Second Image IPE, unless in conventional Economics, where the “market generally works best” (Wade 2017: 865). Policy prescriptions in Second Image IPE will depend on the growth model and the institutional complementarities of the country at hand. For example, an economy where growth is based on debt-led domestic demand should avoid fiscal austerity and restrictions to credit creation. Likewise, a growth model that is based on cost-sensitive exports may get into trouble with strong domestic wage increases. Moreover, policy prescriptions have to take into account the important interdependencies between different growth models. For example, from the perspective of a highly export-dependent economy like Germany, it may be suitable to stimulate domestic demand in its crucial export markets, as has taken place in the form of the NextGenerationEU support program during the Corona pandemic (see Sect. 5.2.2). For specific considerations, we have to distinguish between the two different schools in Comparative Political Economy. Although most authors pursuing a Growth Model perspective usually do not articulate very clear policy prescriptions, some basic conclusions can be derived from their writings. The focus is on the demand side of the economy, not on the supply side. Thus, high wages tend to be seen positively, as a source of demand, and not negatively, as a cost factor. The overarching preference in the relevant Post-Keynesian literature is for a wage-led growth model, based on full employment (Lavoie and Stockhammer 2013). However, since it was not possible to realize this growth model during the last decades, the CPE tradition within the Growth Model approach implicitly favors a balanced model, combining both high domestic demand via debt and high wages, and high export demand. This combination is possible if exports are in advanced services and highly sophisticated goods, which do

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not conflict with high domestic wages and prices—in contrast to low-level service and good exports. Sweden is cited as a country that came close to this ideal type, at least temporarily (Baccaro and Pontusson 2016). However, only few countries successfully compete with regard to exports of these goods and services. Here is where CC comes in, in order to explain these different abilities. The VoC-approach already highlights the competitive advantages of CMEs with regard to exports based on incremental innovations and of LMEs in radical innovations. These innovations are based on specific institutional complementarities, combining systems of corporate governance, company finance, industrial relations, education and training and the spreading of innovations in an economy (Hall and Soskice 2001; Nölke 2016). Still, CC research has not been widely utilized to devise economic policy reform strategies. This firstly can be attributed to the intricate nature of CC logic, which differs from traditional economic methods. Unlike traditional approaches, CC does not presume that there is a single optimal way to arrange economic activities that governments or companies must strive for. CC rather suggests that an economy can have several optimal institutional setups (CME, LME, etc.). Therefore, there are multiple yardsticks to measure its success, rather than just one. Secondly, the CC’s institutional complementarity concept makes it challenging to come up with economic policy reform proposals, as compared to traditional economic approaches. This is because the classical CC perspective suggests that economic institutions, including corporate governance and industrial relations systems, can only function effectively if they can complement each other, i.e. it is based on the assumption that “the functionality of an institutional form is conditioned by other institutions” (Höpner 2005, 331). It means that you cannot simply take a successful institution from one economy and apply it to another. The well-known German occupational training system serves as an example of this consideration. Germany’s economic success is often attributed to its occupational training system, as a crucial basis for incremental innovations. However, institutional export programs for this educational training system promoted by the German Agency for International Cooperation (Gesellschaft für Internationale Zusammenarbeit/ GIZ) have shown low levels of success over several decades (Euler 2013). The institutional transplant has not been very successful in many countries where it has been introduced, due to the lack of important preconditions. For the CME model of vocational training to be effective, it

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needs a stable corporate governance and finance structure. Additionally, it requires strong trade unions with a willingness to collaborate constructively with employers. These conditions usually are absent in economies where the German vocational training system is exported to. Thirdly, economic policy reform proposals usually are directed towards governments, but the VoC theory was developed with a focus on companies instead. This perspective suggests that public policies have limited direct impact. Although the opposition to state-centric corporatism debate of the 1970s and 1980s was the reason behind this focus of VoC theory, it creates challenges in formulating government action proposals. Despite its limitations, research on CC can offer valuable insights for economic policy. One significant implication is that various approaches to reform via economic policy may be overly simplistic. This pertains to strategies which assume that there is only one optimal method for structuring an economy and which do not take into account how different economic institutions may complement each other. These strategies may overlook productive resources in institutions that seem counterproductive from a typical liberal perspective assuming “one best way”. From an economically liberal perspective, a comprehensive wage bargaining system may seem like an obstacle to flexible labor markets. However, for the past decades, the success of German capitalism was greatly attributed to the institution of wage bargaining coordination, although to the detriment of uncoordinated Southern European economies (Sect. 5.1.2). Moreover, CC scholarship highlights the persistence of institutions on the national level as an essential aspect to consider while discussing economic policy reform. In terms of CC, institutions play a crucial role in understanding variations in the success of different national economic systems and their capacity to withstand changes. Many economists, in contrast, believe that the economy can be modified regardless of the institutional setup by economic policies. This clearly differs from the CC perspective, which claims that institutions are sticky. Differences in economic outlook lead to different recommendations. Both conventional and Post-Keynesian economists agree that the Eurozone crisis was caused by poor economic policies, but they have different opinions on what good economic policies would look like. The perspective of CC, in contrast, emphasizes the distinct and persistent institutional structures of the economies in the Eurozone. From this analytical perspective, it seems unlikely that a common currency can work smoothly if

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both CMEs and mixed market economies (MMEs) are involved. This is because CMEs can outperform MMEs in terms of cost competitiveness if necessary, thanks to a coordinated system of wage moderation. Given these assumptions, a Second Image IPE perspective takes a critical stance towards international influences, which work against established institutional complementarities or which threaten to impose uniform macroeconomic policies, given that the latter may not work well with the existing growth model or model of capitalism of a specific country. This book has documented several cases where this has been the case (see for example Sects. 4.2.2, 5.2.1, or Sect. 6.2). 9.2.3

Second Image IPE and the Problem of International Cooperation

The normative connotations and policy conclusions discussed so far implicitly take the perspective of what is best from a national perspective, in line with the underlying late-industrialization perspective of Second Image IPE. However, it is equally important to pose this question from an international perspective, given the global challenges that are being discussed in IPE. From this perspective, the national perspective may even be secondary and the core problem is how to achieve global cooperation for the common good, the typical question raised by liberal-institutionalist approaches to IPE for example. From a liberal-institutionalist perspective, the solution to the need for more international cooperation is the establishment of robust international institutions, preferably with supranational character. More economic coercion, however, is not a desirable solution from the perspective of Second Image IPE (see Sect. 9.2.1). How can we then improve global cooperation without more powerful international institutions? Actually, this question has been at the core of Thomas Kalinowski’s (2013, 2015, 2019) treatment of Second Image IPE for the issue area of finance (Sect. 8.2.2). In contrast to other approaches tackling the problem of limited global cooperation, Kalinowski points towards structural cooperation problems that are difficult to overcome, unless we are able to simultaneously change domestic institutions of capitalism in several major economies. This is more difficult to attain than simply designing “better” international institutions, as suggested by Liberal Institutionalism. Still, Kalinowski is more optimistic with regard to international cooperation than many schools of Realism (Kalinowski 2019: 244–5). However,

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the basis of Kalinowksi’s optimism regarding improved global cooperation—in his case of finance—remains somewhat unclear. After a detailed empirical account of how stubborn national differences prevent a more meaningful international cooperation in finance, based on arguments of CC and path dependency (see Sect. 8.2.2), he concludes that … domestic changes are not a precondition for changes at the international level. Rather, as the domestic and international levels are interdependent, they can and have to go hand in hand. In fact, global changes can play a role in facilitating domestic changes as much as the other way round. (2019: 245)

However, if we take a closer look at the required changes—an end to financialization in the US, comprehensive social reforms in East Asia and establishment of EU fiscal union as well as a different mandate for the ECB—he himself qualifies these measures as unlikely (Kalinowski 2019: 253). In addition, these comprehensive changes would only solve the cooperation problem in finance, not in the whole range of issue areas, where different national models of capitalism cause problems for international cooperation. While Kalinowski’s solution of balancing out all major growth models certainly is very desirable, it is not very likely to be implemented, at least in the near future. An alternative way towards global cooperation may be more realistic, inspired by Second Image IPE. In the absence of major domestic adjustments, international cooperation still is possible, if based on respect for national capitalist diversity. Thus, international cooperation has to be grounded in the traditional inter-governmental rather than the more recent transnational private or supranational institutions (Grewal 2018: 24). Instead of more coercion via international institutions, the focus would be on voluntary international cooperation by governments, based on respect for national economic self-determination. In principle, this would be some kind of return to the post-Second World War order of “embedded liberalism” (Ruggie 1982). The latter combined an incremental process towards enhanced international cooperation—the focus was on the liberalization of trade in goods and services based on a semifixed currency exchange rate system—with national sovereignty regarding the management of the domestic economy. In order to defend this sovereignty—most notably including interventionist and redistributive measures—cross-border capital mobility was reduced by allowing for the

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imposition of capital controls; without the latter, interventionist and redistributive policies could easily lead to capital flight and economic destabilization. This liberal economic order was replaced by a second liberal order since the 1980s. Given that the new order includes far more severe interventions by international institutions into national sovereignty, it has been baptized as “postnational liberal order” or as “intrusive liberalism” (Börzel and Zürn 2021). This second—and still contemporary—liberal order has taken away many of the measures for the defense of national economic self-determination, including capital controls and semi-stable exchange rates. It often has replaced inter-governmental with transnational private and supranational institutions. The second global liberal economic order also has led to the intensification of cross-border flows— particularly finance and FDI—under the notion of “globalization”, to a degree where these flows hardly can still be controlled by national governments anymore. During the last years, the postnational liberal order has increasingly become the subject of contestations, both internally (e.g. by the Trump presidency in the US) and externally (by large emerging economies). A core principle in these contestations is the issue of state sovereignty in international relations, i.e. to manage international politics through a neo-Westphalian synthesis comprised of hard-shell states that bargain with each other about the terms of their external relationships, but staunchly respect the rights of each other to order its own society, politics and culture without external interference. (Barma et al. 2007: 25)

Partially, this contestation already has led to the evolution of an alternative state-capitalist global order (see Sect. 8.2.3). In this situation, a return from postnational liberalism to some version of the old order of embedded liberalism may be the best option for international cooperation, if compared with the alternatives of international coercion (HSFK 2018), or a vague hope for mutual adjustments of economic systems (Kalinowski 2019)—or no cooperation at all. Further pursuing intrusive liberalism may even have the opposite effect, an increasing alienation of North and South, and the further establishment of an alternative, China-led international economic order.

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How could this look like in practice? Today, a return from intrusive liberalism to a version of embedded liberalism would require the abolition of those aspects of international capitalism, which exercise undue pressure of national economic self-determination. For example, this would include a reduction of volatile cross-border capital mobility (Sect. 4.2) or a withdrawal from the imposition of a deep integration trade agenda (Sect. 6.2). National self-determination would be protected by taking away the most powerful coercive powers from international institutions and by firmly grounding the latter on the principle of inter-governmental cooperation. Of course, a return to some kind of embedded liberalism would not be neutral with regard to the existing types of capitalism. It would be to the disadvantage of those models of capitalism that are based on the management of financialization, and of those models based on a particularly extensive export agenda, particularly via MNCs and the management of global production chains. Late industrializing countries benefiting from a reduction of intrusive liberalism, in contrast, would be favored. Given this constellation, embedded liberalism would be an option for a compromise with those countries currently pursuing the establishment of an alternative global economic order. To conclude, Second Image IPE carries an implicit normative bias in favor of latecomer industrialization economies. In order to allow sufficient policy space for these countries, it turns against the call for more international economic coercion, particularly if the latter threatens to destroy crucial institutional complementarities, or to impose macroeconomic policies that do not work well with the underlying growth model of specific countries. International cooperation from this perspective should not be pursued by an ever more intrusive postnational liberal economic order. For the near future, an international economic order close to the principles of the post-World War II order of embedded liberalism seems more auspicious.

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9.3

Future Research Agenda: Toward Historical Political Economy2

The discussion on the current contestation of the liberal international order already has indicated that the findings (and recommendations) of Second Image IPE have to be put in historical context. For example, the perils of intrusive liberalism are a contemporary problem, but have not been a problem before 1980—and may also be less relevant in the future. Section 9.3.1 specifies the historical context for the above findings, whereas Sect. 9.3.2 develops these insights towards a new research agenda of Historical Political Economy. 9.3.1

The Findings in Historical Context: A Move Towards Liberalism and Back

If we take a historical look at the findings of the empirical chapters, we are recognizing a double movement towards liberal economic principles and back. First, we see a major drive towards intrusive economic liberalism during the 1980s, 1990s and 2000s, both on the national and on the international level (e.g. Chapter 4, Sect. 7.1.1), more recently followed by developments towards more statist forms of economic organization (e.g. Sects. 7.2 and 8.2). Arguably, we have seen three different phases of economic organization after the Second World War. During the era of the 1950s and 1960s, economic liberalism played a very limited role, except for a general commitment of gradually reducing trade restrictions (“embedded liberalism”). Cross-border financial markets, for example, were largely absent. International institutions were non-intrusive and respected national economic sovereignty. Generally, these economic institutions were based on inter-governmental cooperation, and thus on the existence of consensus, not on coercion. This situation started to change during the 1970s, but increasingly so from the early 1980s onward. Among the most important liberalizing forces during the 1980s were the conditionalities imposed in the context of structural adjustment programs by the IMF and the World Bank (Sect. 4.1.1). The European Union also has proved to be a labor 2 The argument in this section draws on Nölke (2012, 2017, 2018, 2022c, 2023b), Nölke and May (2013, 2019) and May et al. 2023.

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for economic liberalization, particularly since the 1990s (Sect. 5.1.1). In contrast to the earlier period of embedded liberalism, we can qualify this phase as “postnational” or “intrusive” liberalism (Börzel and Zürn 2021). The drive towards economic liberalism has come to a halt since the end of the 2000s, most notably in the context of the GFC. During the last years, in contrast, we are witnessing a move towards non-liberal capitalism, primarily in emerging markets (Sects. 7.2 and 8.2), but increasingly also in the traditional core of the global economy, including the US (Trump presidency) and the UK (Brexit). While the Biden presidency has reversed some of these tendencies, it did not change—and rather intensified—the process of economic de-globalization (Sects. 8.1.2 and 8.1.3). The main impetus for the current turn away from intrusive liberalism and towards a more statist form of economic organization, however, is the rise of large emerging economies. Over the last decades, the weight of China—but also of countries such as Brazil, India and Indonesia—in global capitalism has increased strongly. In these economies, economic liberalism plays a minor role if compared with the US economy, which dominated global capitalism during the 1990s. Correspondingly, an increasing share of global economic activity is characterized by non-liberal capitalism. The development towards non-liberal capitalism is also reflected on the level of international institutions (such as the WTO) which have stopped being a major force for the spread of liberal capitalism. The blockade of the WTO has ended the liberalizing tendency exercised by global trade institutions (Sect. 6.2.1). The weakening of the worldwide liberal economic order is not just affecting trade, it is also impacting financial markets and development policies. The IMF’s changed stance on capital controls is a significant sign of the erosion of the liberal order. One of the main challenges to achieving global financial liberalization is the presence of capital controls. In the past, the IMF opposed these controls but now recommends that these controls are perfectly reasonable under certain conditions (Ghosh and Qureshi 2016). Brazil and China’s refusal to provide information for the so-called “Reports on Observance of Standards and Codes” compiled by the IMF (Sect. 8.2.1) is another sign of global liberal institutions deteriorating in the financial market area. Global liberal institutions are also losing their leadership role in development finance. Initiatives by China and the BRICS group of countries (Brazil, Russia, India, China and South Africa) to establish alternative

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global development banks are pertinent here, particularly the Asian Infrastructure Investment Bank and the New Development Bank, which began operations in 2016. The Covid-19 pandemic has intensified the tendencies towards a more pronounced role of the state. For example, it has led to the rediscovery of industrial policy (Eder and Schneider 2020). This development is particularly noteworthy because this form of intervention had been completely frowned upon for several decades—the IMF even spoke in this context (in reference to Harry Potter) of the “…return of the policy that shall not be named” (Cherif and Hasanov 2019). Moreover, one of the most obvious consequences of the Covid-19 crisis are public policies to reduce the vulnerability of one’s own economy to global production networks wherever possible. Particularly with regard to medical products—for example, respirators or mouth masks—this fragility became clear to the public. American companies, for example, had shifted 90 percent of their production of mouth masks abroad in less than a decade, with now tragic consequences (Gereffi 2020: 292–296). Very soon after the outbreak of the crisis, production processes had to be discontinued in many economic sectors due to a lack of appropriate primary products. In response to these experiences, many producers have now begun to substantially reduce their dependence on these networks by shifting production back (referred to as “on-shoring” or “re-shoring”), or at least avoiding that of inputs and intermediates from just one country. In the case of vital products, however, governments do not rely solely on business decisions. A number of governments—such as those of Japan, South Korea and the United States—have now established financial programs that financially reward re-shoring (UNCTAD 2020: 6, Vaughn and Weldzius 2021). The weakening of economic liberalism during the pandemic can also be seen in the fact that shortly after the outbreak of the crisis, more trade measures were introduced that are incompatible with WTO rules than ever before after an economic crisis (Curran et al. 2021: 12). This has taken place in a context that was already tending towards protectionism before the crisis, as can be seen from the blockade of the WTO dispute settlement mechanism by the USA, which has now lasted five years. In this context, it should not be surprising that public discourse in the industrialized countries since the Covid-19 crisis increasingly tends towards protectionism, as broadly based studies on Australia and the United States demonstrate (Branicki et al. 2021; Mansfield and Solodoch 2022).

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Recently, the move away from economic liberalism has been further intensified by three more or less unrelated developments, namely the Russian war against Ukraine, China-US-decoupling and policies to prevent climate change. During the war, states have deeply interfered into the economy by economic sanctions. Moreover, European energy markets have seen comprehensive state involvement, via subsidies and nationalizations. State intervention in the economy will be further intensified by the process of decoupling the Chinese and US economies, which had already begun before the pandemic (Witt et al. 2023). In the background is the fear of a comprehensive—also military—conflict between the two great powers. Both sides are preparing for a potential conflict by trying to reduce the dependence of their own companies on the other economy. To this end, China adopted the “Made in China 2025” strategy back in 2015, which is not only geopolitically motivated, however, but also driven by the interest in positioning Chinese companies in the higher-value positions of global production networks (Levine 2020). The US has followed suit in recent years, on the one hand with restrictions on Chinese companies—initially with a focus on Huawei, but now also with regard to other companies in sectors such as IT and telecommunications—and on the other hand with very extensive subsidies to build up microchip production in the US, especially against the background of Taiwan’s leading role in the production of particularly advanced microchips. In this situation, third economies have to follow suit with state intervention, for example with the organization of the national “Rapidus” consortium for the production of microchips in Japan and the EU with its concept of “Open Strategic Autonomy” and a possible “EU Chips Act” (Bardt et al. 2022). Climate policy, finally, has mutated into a third source of increased state intervention in the economy. In 2022, for example, the passing of the U.S. Inflation Reduction Act (de facto a large-scale subsidy program for climate-friendly technologies) caused transatlantic irritation, as this program also imposes extensive requirements with regard to the purchase of pre-products of American origin. European governments fear a relocation of production processes to the USA, supported also by the significantly lower energy costs there. In the medium term, even greater government intervention in international economic relations is to be expected in the form of a carbon border adjustment mechanism (CBAM), on which the EU reached fundamental agreement in March 2022. The CBAM is intended to prevent CO2 -intensive production

256

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processes from being relocated to non-European regions that do not have such taxes. Exports from these regions are to be subject to a CBAM import duty, which, however, is interpreted by the EU’s trading partners as a protectionist measure and could lead to countermeasures (Zachmann and McWiliams 2022). The current global trend away from liberal capitalism is not a completely new development. After the 2008 Global Financial Crisis (GFC), comparisons have been made between the current situation and that of the 1930s (Eichengreen 2015). The debate has focused on comparing the Depression of the late 1920s with the 2008 recession. Lately, the conversation has shifted towards comparing political reactions to the crisis and specifically examining the rise of right-wing populist extremism (Lim 2023). While history doesn’t exactly repeat itself, there are notable similarities between the current situation and past events. The strong parallels between countries and between international institutions within specific historical phases of capitalism likely are no coincidence. However, in order to understand the dynamics behind these parallels, we have to develop a more comprehensive approach towards a Historical Political Economy. The idea of a cyclical alternation of coordinated and liberal forms of capitalism might form the point of departure for the development of this approach. 9.3.2

Elements of Historical Political Economy

In contrast to CPE and IPE, Historical Political Economy is much less institutionalized, although there have been some initiatives to tackle this perspective over the years (Cox 1981; Maier 1987; Amoore et al. 2000, Charnysh et al. 2022). Correspondingly, we cannot draw on an elaborated set of tried and tested concepts as in CPE and IPE (chapter 2). Instead, for early theory development an eclectic combination of different concepts seems appropriate. Three theoretical developments are particularly important: the idea of a double movement developed by Karl Polanyi (1944); the cyclical development of capitalism as laid down in the theory of Social Structures of Accumulation (SSA); and finally, theories of organized capitalism. Karl Polanyi (1944) developed the idea of a double movement as an evident component of a theoretical interpretation of recent events. The initial attempt to apply Polanyi’s framework to the economy after the Global Financial Crisis assumed a likely social re-embedding of the

9

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257

economy. More recently, the discussion has changed in the sense that many observers now perceive right-wing populism as a central element of such a double movement (see, among others, Pettifor 2017; Worth 2017). Polanyi himself observed that Roosevelt’s New Deal was in line with a dual movement that followed the early twentieth century’s very liberal capitalism, but at the same time also saw the rise of fascism as part of this dual movement. Accordingly, Brexit, the Trump election and the rise of statist modes of capitalism in large emerging economies can be included as elements of a double movement against an overly liberal mode of capitalism during the last decades. Further, the similarities between contemporary developments and those of the 1930s point to cycles. Polanyi’s perspective is of circumscribed relevance in this context, as it only contains an elaborated theory on the opposition to a deepening of liberal markets, but no similarly elaborated theory on the emergence of these liberal markets, which must precede it (Deutschmann 2017: 3–5). Cyclical approaches, such as the SSA approach, focusing on the development of capitalism, are more appropriate for this topic. SSA, which is a mixture of Regulation Theory and post-Keynesian economics, supposes that capitalism alternates between phases of being liberal and regulated (Kotz et al. 1994). Each type of phase lasts for a few decades. Liberal phases of capitalism often result in a turbulent crisis due to their inherent instability, whereas regulated phases can lead to a stagnation period due to assumed less favorable characteristics in the production and distribution of goods and services. Looking at it from this angle, the financial crisis that occurred recently can be seen as a result of the ending of the liberal phase of capitalism. This can be likened to the Great Recession, which marked the conclusion of the liberal capitalism crisis earlier in the twentieth century. The juxtaposition of phases in SSA should not be understood in a mechanistic manner. The return to a liberal (regulated) phase of capitalism is not a return to the status quo ante. Each phase of capitalism has its unique features. Moreover, historical coincidence plays a role as well. While the crisis of contemporary economic liberalism should lead to a new phase of regulated capitalism anyway, the Covid-19 pandemic and the Russian war against Ukraine have further sped up the process. A central aspect of the SSA approach, however, raises difficulties: During and after World War II, the economy was highly regulated by national and international rules. This led to the assumption that capitalism was in a “regulated” phase, which was appropriate at the time.

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This was largely due to the strong leadership of the United States. The information presented here indicates that there will not be a return to that type of regulation. While many people are becoming unhappy with liberal capitalism, there doesn’t seem to be a shift towards socially regulating the economy. Therefore, since the ongoing developments can be seen as a response to liberal capitalism and since there have been cyclical patterns throughout the history of capitalism, we require a new term that can encompass both the current developments and the ones that occurred after World War II. The term “organized capitalism” is promising to encompass both current developments and those of the 1930s. Several German and Austrian theorists from the early twentieth century, such as Rudolf Hilferding (1910), Fritz Naphtali (1928), Werner Sombart (1932) and Friedrich Pollock (1933), created this term. They particularly emphasized the importance of finance capital and cartels in European and US economics. The concept of organized capitalism revolves around whether corporations are solely owned by their proprietors or have some public infrastructure characteristics. This determines if they are bound by collective interests authorized by institutions while making economic decisions (Höpner 2007: 6–7). Organized capitalism is the term given to a system where collective interests can come from various sources including sectoral economic concerns, class interests and even political interests, such as promoting a war economy. Organized capitalism is usually institutionalized on a national basis although it can take very different forms. From this perspective, German monopoly capitalism of the 1930s had a lot in common with US Fordism of the 1930s, as both involved a high degree of organization of economic activities and were opposed to highly competitive liberal capitalism. Both models, including cartels, trusts and monopolies on the one hand, and business networks and corporatism on the other, involve a high degree of organization. In both cases, the leadership of a private firm must defer to the wishes of the cartel as a whole or incorporate the effects of individual decisions on the national economy (Table 9.3). Compared to highly competitive liberal capitalism, this capitalism’s high level of organization makes it more vulnerable to being influenced by goal-driven social influence (Hilferding 1910). Observers, like Sombart (1932), regarded the call for a return to the competitive form of capitalism as reactionary, while the Commission of German Trade Unions, under the leadership of Naphtali (1928), saw the shift towards organized

9

Table 9.3 Juxtaposition of coordinated and liberal phases of capitalism

CONCLUSION

1920s

Liberal

1950s/1960s

Organized

1980s/1990s/2000s

Liberal

2020s

Organized

259

Roaring twenties Embedded liberalism Postnational liberalism State capitalism

Source Own representation

capitalism as a significant move towards economic democracy. Although the idea of organized capitalism was once seen as positive, fascism has ruined that perspective. Organized capitalism continued to exist in Western economies until the 1970s. Following that, it was substituted with a new phase of “disorganized” capitalism under the postnational liberal framework (Lash and Urry 1987). To conclude, the eclectic approach towards Historical Political Economy sketched out above is able to put many of the findings of Second Image IPE into perspective. However, the alternation between liberal and organized phases of capitalism based on the Polanyian double movement and SSA theory is only one option on how to conceive Historical Political Economy. Other options include, for example, Regulation Theory (Aglietta 1979), theories of hegemonic cycles (Arrighi 1994) or Neo-Gramscian historical taxonomies (Van der Pijl 1998). The core point is that Second Image IPE should be careful with claiming general laws valid irrespective of time and space. Capitalism is a moving target. The recombination of Comparative and International Political Economy should be joined by a recombination with Historical Political Economy.

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Index

A Accounting standards, 6, 89–91, 97, 99, 101–103, 146, 148, 150–154, 224 Anglo-America, 12, 35, 86–89, 91, 95, 96, 102, 155, 192, 204, 224, 235 ASEAN+3, 226 Asian crisis, 83 Asian Infrastructure Investment Bank, 254 Austerity, 56, 128, 130, 131, 133, 241, 245 B Balanced growth model, 26, 49, 234, 241, 242 Balance of payment, 55, 130, 131, 133 Black Economic Empowerment (BEE), 164–167 Brazil, 91, 105–107, 154, 157, 179, 180, 182–184, 187–189, 205, 216–219, 238, 243, 253

Brazil, Russia, India, China, South Africa (BRICS), 162, 186, 223, 225, 253 Bretton Woods system, 56, 57, 68, 79, 81, 82, 223 Brexit, 52, 121, 136, 137, 221, 253, 257 C Capital controls, 39, 81–84, 91, 106, 205, 216, 221, 250, 253 Capital mobility, 8, 38–40, 103, 104, 216, 249, 251 Central America, 160 Central bank, 67, 69, 84, 91, 104, 106, 107, 123, 187, 208 China, 6, 7, 11, 15, 28, 29, 31, 32, 35, 37, 39, 59, 60, 63, 64, 72, 103, 105, 107, 122, 125, 137, 147, 154, 155, 157, 175, 177–180, 182–185, 187–191, 193, 194, 204–207, 210–216, 218, 219, 221–224, 226, 234, 235, 238, 239, 253, 255

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Nölke, Second Image IPE, International Political Economy Series, https://doi.org/10.1007/978-3-031-37693-1

265

266

INDEX

Climate change, 255 Coordinated market economy (CME), 25, 26, 28, 30, 32, 85–87, 91, 92, 94, 97–99, 101–103, 118–123, 146, 147, 152, 158, 176, 178, 190, 204, 206, 207, 212, 217, 218, 221, 222, 224, 241, 246, 248 Coordination mechanism, 25, 122, 125 Core, 5, 9, 11, 13, 15, 27, 31–33, 36–38, 41, 53, 61, 66, 69, 79, 82, 90, 97–99, 101, 105, 107, 128, 129, 132, 145, 148, 149, 151, 152, 178, 186, 188, 190, 194, 203, 204, 206, 211, 220, 221, 225, 242, 243, 245, 248, 250, 253, 259 Corporate governance, 25, 30, 91–93, 96–99, 101, 105, 119, 159, 164, 165, 188, 189, 191, 215, 216, 237, 239, 243, 246, 247 Corporate Social Responsibility (CSR), 194, 217, 218 Corporatism, 9, 56, 87, 247, 258 Costa Rica, 160–162 Covid-19, 52, 128–130, 134–139, 210, 212, 213, 254, 257 Credit, 13, 38, 51, 56, 61, 82, 85, 95, 96, 99, 104, 106, 126, 127, 130, 134, 189, 216, 245 Currency, 5, 6, 29, 38, 40, 51, 56, 57, 61, 67–69, 104, 106, 107, 117, 120, 121, 123–125, 127, 128, 130, 132, 133, 205, 207, 211, 213, 221, 237, 238, 247, 249 Czech Republic, 28, 29, 31, 32, 183

D Debt, 26, 55, 73, 104, 106, 121, 122, 125–128, 132, 206, 212, 221, 234, 245 Debt brake, 129 Debt crisis, 82, 122, 130, 244 Deep integration, 145, 155–167, 206, 215, 218, 219, 235, 238, 241, 251 De-globalization, 212 Dependency theory, 4 Dependent market economy (DMEs), 14, 25, 27, 31, 32, 118, 121, 175, 178, 179, 181, 183–185, 204, 206, 210, 211, 221, 237, 241 Deregulation, 82 Deutschland AG, 95 Domestic demand, 26, 50, 52, 105, 123, 133, 191, 206, 211, 212, 221, 234, 245

E East Central Europe, 8, 14, 15, 27, 28, 175–178, 183, 234, 235, 237 Economic and Monetary Union (EMU), 58, 117, 123, 239 Economic cycles, 153 Economic partnership agreement (EPA), 156, 163, 164, 166 Education system, 83 Embedded liberalism, 40, 79, 187, 223, 249–253, 259 Emerging economy, 28, 163, 164, 175, 179, 185 Euro Dollar markets, 38 European Central Bank (ECB), 120, 129, 133, 249 European Monetary System (EMS), 68, 69, 72 European Single Market, 158

INDEX

European Union (EU), 7, 8, 52–54, 58, 67, 71, 85, 89, 90, 101, 103, 117, 118, 120, 123, 127–130, 133–135, 137, 138, 145–147, 149–159, 162–167, 177, 191, 206, 218, 220, 221, 226, 235, 238, 239, 244, 249, 252, 255, 256 Eurozone crisis, 14, 30, 53, 117, 118, 120, 123, 126, 131, 134, 135, 137, 138, 241, 244, 247 Export dependence, 124, 211 Export-led growth model, 49, 53, 59, 60, 138, 239, 241 Export surplus, 32, 49, 51, 56, 58, 59, 63, 67, 68, 70, 204 F Fair value, 90, 100–102, 151, 154 Financial crises, 103, 181, 222 Financialization, 6, 8, 30, 37–41, 59, 79, 80, 82, 85, 87–91, 94, 97, 99, 100, 102–104, 106, 107, 127, 154, 221–223, 235, 237, 239–241, 249, 251 Financial market regulation, 87, 88 Financial markets, 8, 14, 30, 31, 73, 80, 82, 84, 88, 89, 95, 103, 104, 128, 152, 204, 205, 207, 208, 212, 213, 221–223, 226, 234, 252, 253 Financial Stability Board (FSB), 84 Financial system, 8, 84, 122, 212, 216, 223, 225, 226 Fiscal policy, 130, 234 Fordism, 7, 258 Foreign direct investment (FDI), 5, 11, 27, 28, 37, 39, 40, 60, 104, 160, 162, 165, 166, 175, 176, 178–185, 189, 205–208, 210, 211, 213, 235, 237, 238, 240, 243, 250

267

Foreign policy, 58–64, 67, 68, 70, 72, 80, 193, 235 Free trade agreement (FTAs), 148, 163 G General Agreement on Tariffs and Trade (GATT), 40, 64, 66 Germany, 9, 10, 12, 13, 25, 26, 28–32, 49–59, 61–65, 67, 68, 70–72, 85, 86, 91, 98, 101, 107, 120–124, 126, 127, 129–136, 138, 147, 154, 158, 176, 181, 183, 186, 204, 206, 212, 213, 221, 222, 234, 235, 241, 245, 246 Globalization, 1, 8, 12, 13, 38–41, 73, 89, 95, 203–208, 210, 211, 213, 236, 237, 241, 243, 250 Global order, 16, 89, 219, 235, 236, 250 Global value chains, 7, 38, 39, 60, 155, 178 Governance, 37, 80, 87–89, 97, 102, 119, 192, 193, 195, 204, 225, 237, 241 Group of Twenty (G20), 84, 220 H Hedge fund, 80, 84–87, 92–94, 98, 119, 240 Hegemony, 63, 72, 155 Hierarchical market economy (HMEs), 25, 29, 185, 204 Historical political economy, 252, 256, 259 Hungary, 29, 178, 179, 211, 212 I India, 7, 29, 59, 105, 154, 156, 157, 177, 179–185, 187, 188, 190,

268

INDEX

191, 204, 206, 214, 216–219, 221–223, 235, 236, 243, 253 Industrial policy, 65, 155, 191, 212, 254 Industrial relations, 25, 30, 97, 98, 120, 122, 188, 190, 191, 217, 246 Inflation, 56, 57, 104, 106, 122, 123, 126, 129, 131–133, 139 Innovation, 25, 30, 80, 97, 122, 124, 125, 175, 183, 188, 190, 191, 218, 245, 246 Institution, 7, 10, 13, 15, 16, 26, 27, 29, 35, 37, 41, 54, 60–62, 64, 66, 82, 83, 91, 92, 94, 98, 101, 105, 107, 117–120, 122, 123, 128, 131, 132, 145, 147, 148, 154, 156–159, 161, 164, 165, 167, 185, 188, 189, 191, 192, 195, 210, 213–217, 219, 223–226, 234–241, 244, 246–250, 252, 253, 258 Institutional complementarities, 5, 8, 30, 97, 99, 149, 164, 176, 241, 242, 245, 246, 248, 251 Intellectual property rights (IPR), 155, 156, 158–161, 164, 167, 190, 191, 206, 218 Interdependence, 8, 13, 234 International Accounting Standards Board (IASB), 6, 87, 89, 90, 101, 102, 150–155, 216, 224, 225 International institution, 5, 7, 34–38, 40, 41, 62, 148, 154, 205, 215, 216, 223, 235, 237–241, 244, 248–253, 256 International investment agreement (IIAs), 208 International Monetary Fund (IMF), 40, 54, 79–83, 153, 208, 211,

216, 225, 238, 240, 244, 252–254 International Organization for Standardization (ISO), 147, 148 Intrusive liberalism, 223, 250–253

J Japan, 7, 11, 50, 181, 186, 187, 212, 234, 243, 254, 255

L Latecomer industrialization, 242–244, 251 Latin America, 25, 29, 185, 204 Liberal institutionalism, 34, 248 Liberal international economic order, 38 Liberalism, 10, 16, 24, 37, 177, 207, 218, 242, 252–255, 257 Liberal market economy (LME), 25, 26, 28, 30, 85–88, 90–94, 96, 98, 102, 107, 121, 122, 146, 147, 152, 158, 159, 166, 178, 188–190, 204, 206, 214, 215, 217, 218, 221, 222, 240, 241, 246

M Market for corporate control, 119, 189, 216 Methodological nationalism, 8 Middle-range theory, 4 Mixed market economy (MMEs), 86, 118, 121, 122, 125, 221, 239, 248 Mobile capital, 104 Monetary policy, 67, 106, 107, 121, 129–131, 133, 222 Multinational corporation (MNCs), 39, 155, 175, 192, 211, 234

INDEX

N National champions, 159, 182, 185 Neo-Gramscianism, 259 Neoliberalism, 8, 58, 187 Neomercantilism, 3 New Deal, 187, 257 New Development Bank, 254 NextGenerationEU (NGEU), 134–136, 138, 245 Non-tariff trade barriers, 156, 206

O Open economy politics (OEP), 6, 9–11, 15, 16, 34, 35, 145, 148

P Path dependency, 55, 58, 249 Patient capital, 25, 87, 98, 216 Periphery, 30, 53, 234 Poland, 29, 178, 179, 211 Post-Keynesian Economics (PKE), 6, 7, 14, 26, 27, 257 Postnational liberalism, 250, 259 Private equity, 85, 92, 98 Private self-regulation, 84, 88, 89, 91, 185, 192, 194, 195, 217, 239, 240

R Rating agency, 87, 88, 204 Realism, 242, 248 Reciprocity, 163, 188, 190 Regulation theory, 27, 36, 257, 259 Regulatory harmonization, 11, 145, 146, 155, 156, 235, 239, 241 Rhenish capitalism, 204 Right-wing populism, 257

269

S Security, 10, 16, 35, 49, 51, 53, 54, 58–60, 69–73, 123, 147, 155, 234, 236, 239, 242, 244 Shadow banking, 84 Shareholder value, 93, 94, 96–98, 106, 166, 189, 205 Slovakia, 29 Social Structures of Accumulation (SSA), 256, 257, 259 Society for Worldwide Interbank Financial Telecommunication (SWIFT), 87, 213, 226, 239 South Africa, 154, 162–165, 234 Southern African Development Community (SADC), 163, 164 Southern Europe, 58, 69, 121–123, 125, 127, 130–133, 136 State capitalism, 117, 186, 187, 207, 222, 223, 243, 259 State-owned enterprise, 189 State-permeated market economy (SME), 31, 32, 91, 103, 105–107, 159, 164, 175, 178–185, 187–191, 204, 205, 210, 213, 215, 217–219, 221–223, 239–241 Stock market, 31, 88, 96, 104 Subprime crisis, 99

T Technical standards, 146, 148 Trade balance, 31, 32 Trade policy, 61, 66, 71, 145, 155, 156, 158, 162, 167, 193, 206 Trade union, 58, 63, 65, 90, 119, 120, 123, 125, 132, 161, 247 Transatlantic Trade and Investment Partnership (TTIP), 146, 148, 149, 206, 241

270

INDEX

U UN Conference for Trade and Development (UNCTAD), 106, 176, 184, 186, 209, 254 US Dollar, 106 V Varieties of capitalism (VoC), 7, 10, 24, 80, 85–87, 92, 97, 122, 146, 204, 207 W Wage-led growth model, 185, 245

War, 1, 12, 55, 58, 62, 70, 136, 155, 208, 210, 212, 226, 244, 257, 258 Washington Consensus, 24, 81, 215, 219 Wealth disparity, 54 World Bank, 31–33, 40, 41, 79–83, 106, 124, 212, 216, 240, 244, 252 World system theory, 16, 233 World Trade Organization (WTO), 40, 64, 156–158, 160, 163, 165, 194, 217–219, 238, 253, 254