The intention of this volume is to contribute to the discussion on changing capitalist political economies and to enhance the empirical knowledge of institutional continuity and change in the small, highly corporatist political economies in the Alps, the Benelux countries and Scandinavia. Almost all of these political economies have often been in the spotlight. Many observers consider them as alternative models for socio-economic development since they combine competitiveness and a highly developed welfare system. Remarkably, these small political economies are largely absent from the literature on capitalist varieties that empirically still focuses on the US, Britain, France, Germany and Japan. This is an empirical omission, but also a missed chance for a critical review of the theory of varieties of capitalism. The character and development of the small countries’ political economies qualifies very well for this matter.

The volume's origins can be traced back to the editor's involvement in an international 5th Framework research project on The Consensual Political Cultures of the Small West European States (2003-2006), his co-editorship (with Herman Schwartz) of the book on Employment “Miracles” in a few small European countries (Amsterdam University Press 2005) and his recent participation in the discussion on capitalist varieties as exemplified in his book on Open Varieties of Capitalism (Palgrave-Macmillan 2009). The starting shot for the volume was the organization of a workshop in Amsterdam in June 2008 and subsequently of a panel at the SASE conference in San Jose, Costa Rica on “Institutional change and continuity in the small countries’ political economies”. The locations of these meetings once more illustrated what a privilege it is to have a job in academia. Discussants and complimentary paper presenters in Amsterdam were Jean Claude Barbier, Frans Becker, Brian Burgoon, Jeannette Mak, Daniel Mugge, Arne Niemann, Otto Penz, Els Sol, Jeroen Towen, Barbara Vis, Jaap Woldendorp and Adrian Zimmermann. Gregory Jackson chaired the SASE-panel in San Jose. The authors of the volume are indebted to all of them for their suggestions and criticisms. They have also to thank the two reviewers and the editorial staff of the Amsterdam University Press as well as Evelien van der Molen and Lea Klarenbeek for their assistance in the preparation of the bibliography and the index as well as in proofreading.

The political economies of the small, largely corporatist countries analysed in the contributions to this volume have not been immune to the pressures to liberalise that have sprung up notably since the early 1990s. And indeed, liberalisation has taken place to differing degrees. The contributions also show, however, that this process has remained limited. The countries still reveal a high degree of corporatism, and their welfare systems are still considerably more generous than those in countries such as the US in particular, which approximates the liberal type of capitalism. Their labour markets as well as product and company markets are still far removed from the liberal ideal. The exceptions are Switzerland – which generally combines a strong liberal stance with corporatism – and Denmark due to their relatively flexible labour markets, while in Belgium corporatism has suffered due to Flemish-Wallonian tensions. But these exceptions do not change the overall picture.

The small corporatist countries have performed as well as or even better than the strongly liberal ones. With the exception of Switzerland, they have all had high rates of GDP growth per capita as well as per hour; all of them except Belgium have medium to high employment rates; their inequality and poverty rates are relatively low; their concern for the environment is more serious than average (but still not serious enough); and half of them belong to the most innovative – and in that sense most competitive – countries in the world. Table 7.1 summarises these facts.1 Moreover, measured in GDP per capita, these countries are richer than all the Anglo-Saxon countries except the US, and some of them roughly equal the US in GDP per hour. When it comes to specific aspects, other countries rank up there with the corporatist ‘smalls’ – the Anglo-Saxon economies except New Zealand with respect to economic growth; Germany, Japan and the US with respect to innovation and competitiveness; and with respect to employment, the Anglo-Saxon countries and Japan. Nonetheless, the facts clearly demonstrate that top performances are possible without strong liberalisation. This is particularly true for the Nordic countries (except oil-rich Norway) which belong to the top performers in every respect.

Changing capitalism is a topic that has been discussed, with increasing intensity, in the context of the debate following the publication of Peter Hall's and David Soskice's Varieties of Capitalism (2001). Empirically, this discussion and related comparative research have concentrated on the bigger political economies of the United States, Japan and Germany, with some attention for Britain, France and Italy. Smaller countries have largely been ignored. This volume would like to shed some light on a group of smaller European countries, all of which reveal a high degree (Belgium, Denmark, Finland, Switzerland) or even a very high degree (Austria, the Netherlands, Norway and Sweden) of corporatism, as is shown in Table From here on, I will call them the sample countries.

These countries are of special interest because most of them have been praised as models in recent years – as an alternative to the strongly liberal route as exemplified by the US. It is intriguing, therefore, to learn what politico-economic change has meant to these countries. Have they moved in the liberal direction and if so, to what extent? Or have divergent developments occurred? What happened with their welfare systems, corporate governance, labour market legislation and industrial relations in the one and a half decades preceding the sharp downturn of the world economy in 2008? Subsequent chapters will investigate these questions and also pay separate attention to how they have reacted to the process of Europeanisation. The concluding chapter delves into the question whether corporatist capitalism is a viable candidate for a European socio-economic model, with the sample countries (or at least some of them) as examples.

This introductory chapter provides an overview of the institutional changes that have taken place since the early 1990s. It puts the sample countries into broader comparative perspective (with attention for the bigger EU countries, the Anglo-Saxon world outside Europe, and Japan) and identifies a number of forces that triggered the recent changes. It is also, however, a contribution to the discussion on the appropriate mapping of capitalist varieties. This is important because we need a kind of typology that is suitable for the analysis of institutional change and for specifying the identification of the direction of change. From where to where do empirical varieties move?

The very positive economic and particularly employment development that took place in the decade up to 2001 (or even longer) in Denmark, Ireland, the Netherlands, Australia and, since the second half of the 1990s, Finland and Sweden has been at the centre of much recent discussion in comparative political economy. Because this development contrasts markedly with near stagnation in France, Germany and Italy, it has been characterised in terms of ‘miracles’ and ‘models’. The Netherlands and Denmark attracted the most attention because their strong employment growth and employment stabilisation at very high levels, respectively, occurred in the framework of welfare systems that are still comparatively generous and that clearly differ from the USA and the uk. In the latter two countries, high employment and low unemployment went together with levels of inequality and poverty not (yet?) acceptable in the northwest of the European continent. It is no surprise, therefore, that politicians, journalists and scientists in other countries where employment has stagnated or even declined started discussing whether they could learn something from Denmark and the Netherlands.

To a large degree, the tenor of this discussion exalted the miracle economies, focussing on successful wage restraint agreements between capital and labour that was hidden under labels like new social pacts and competitive corporatism. Critical accounts were relatively rare. This situation is the context for our book, which critically scrutinises the dominant view by asking whether these small countries can figure as models for other countries. Thus, we ask how important conscious policies and agreements really have been in the miracles, and the degree to which positive developments in the small economies have been facilitated by favourable conditions and accidental, ‘lucky’ circumstances. We find that conscious policies played a much smaller role than most analyses suggest. All our countries benefited from the very smallness of their economies. They also benefited from lucky changes in their external environment, like sharply rising selective American investment (Ireland), the accelerating demand for commodities by Asian countries (Australia) and particularly the way that global disinflation triggered a wealth effect and rising private consumption through the house price increase in Australia, Denmark, Ireland and the Netherlands (much as happened in the late 1990s and the early 2000s in the USA, the uk and Sweden).

‘Germany isn’tworking’

‘ Europe has a problem – and its name is Germany,’ according to The Economist of January 19, 2002, in a leader titled ‘Germany isn't working’. Why? In the decade up to 2000, German economic growth was below OECD average, and in 2001, as the world economy slowed down, German growth slowed to just over half a percent per year, the lowest rate in the EU. By 2002, Germany hardly grew, and growth forecasts were gloomy. Unemployment had risen past the politically important level of 4 million, business as well as consumer confidence was at record lows, and the popular economic outlook was generally pessimistic. Germany had turned from the engine of the European economy into the laggard. What explains this dismal situation?

The usual answer, found in many newspapers and advisory commission reports, claims that the causes of the poor German performance lie in high wages and social security costs, complex taxes and tight labour market regulations. The excuse of reunification costs and shocks no longer has much credibility, according to The Economist.Given this diagnosis,most popular analyses suggest the obvious responses: the labour market has to be made more flexible, and the tax and welfare systems have to be reformed! The most prominent voice advising such reforms is perhaps the OECD in itsmost recent Economic Survey on Germany (2002j, pp.5, 13). And company bosses threaten tomove activities abroad if tax reform and labour market liberalisation will not take place very soon (Financial Times, December 16, 2002, pp.1, 3). The ‘proof’ that these reformswork is usually made by reference to better performing economies that have reformed their labour markets. Did not the US Federal Reserve Bank Board chairman Alan Greenspan advise the samewhen he said ‘that the greater easewithwhich employees can be laid off in the us has counter-intuitively created a greater incentive to hire and thus reduced unemployment in the US to levels unimaginable in all but a few countries in Europe’ (Wall Street Journal Europe, August 29, 2000)?

No question, Germany is not performing well in terms of economic growth and employment. In this sense it is indeed, and particularly was until 2000/01, a striking contrast to the ‘model economies’ discussed elsewhere in this volume.

Introduction

Switzerland does not occupy a prominent place in comparative political economy. One reason is probably that this proudly independent country is not part of the EU and therefore missing from many comparative statistical sets. This relative neglect leads to a generally rather superficial knowledge about the peculiarities of the Swiss form of capitalism and the development of its welfare system. It also obscures a specific interesting question: how did Switzerland in the 1990s maintain its very high employment rate in the context of the lowest productivity and GDP growth in the OECD? Switzerland's employment rate was essentially stable at 78.2 percent from 1990 through 2000, second only to tiny Iceland (OECD 2003a, p.298). In a very specific sense, this is also a ‘miracle’.

In the following pages we will describe the Swiss political economy, which has been inconsistently characterised as both corporatist as well as liberal. Then we will examine recent developments, including the unrecognised and peculiar Swiss employment miracle, as well as the main features of the Swiss welfare system which, contrary to international trends, has been expanded in recent years.

Corporatism in a fragmented polity

The Swiss political economy is often described as liberal because of, among other things, its relatively low level of employment protection (cf. Table 9.3 in the contribution on Germany). A second feature suggesting a liberal coding is the Swiss central government's low capacity for action. The country is a federation whose cantons are in turn divided into considerably autonomous counties and cities with a strong tradition of bottom-up politics. On the other hand, one cannot deny that the Swiss political economy contains a variety of corporatist characteristics as well. This made Peter Katzenstein (1985) present the country as a case of ‘liberal democratic corporatism’. In this model, the state sets only very general rules but does not intervene actively in the economic process (see also Armingeon 1987). In a bipartite structure, macroeconomic negotiations are dominated by employers’ associations and unions, although the former possess the stronger position. Employers’ associations are much more centralised than the unions, whose fragmented character reflects the Swiss federation and whose organisation rate is rather low (25 percent). Katzenstein argues that functional effects of Switzerland's position in the international economy explain these corporatist arrangements.