THE STATE AND
COORDINATED CAPITALISM
Contributions of the Public Sector to Social
Solidarity in Postindustrial Societies
By CATHIE JO MARTIN and KATHLEEN THELEN*
In t r o d u c t I o n
D
OES egalitarian capitalism have a future? In the face of massive
changes sparked by globalization, technological change, and the
secular decline of manufacturing, students of the political economy of
the advanced industrial democracies are posing this question with in-
creased urgency.
1
In the past, cooperative arrangements in many so-
called coordinated market economies (
c m e s) seemed well suited to
reconciling high levels of economic efficiency with high levels of so-
cial solidarity.
2
A large and growing literature has emerged to explain
the origins and distinctive logic that separates these political econo-
mies from an alternative “liberal” model that, while equally viable in
the market, is characterized by greater social and economic inequality.
3
* The authors extend special thanks to Peter Hall, Torben Iversen, and John Stephens for extensive
and insightful commentary on the paper. In addition, they benefited tremendously from input from
Lucio Baccaro, John Campbell, Tom Cusack, Frank Dobbin, Martin Höpner, Richard Locke, Sara
Jane McCaffrey, Paul Osterman, Ove Kaj Pedersen, Britta Rehder, Wolfgang Streeck, Duane Swank,
Christine Trampusch, and the participants in seminars at the Copenhagen Business School, the In-
stitute for Policy Research at Northwestern University, the Sloan School of Management at m I t , and
the Center for European Studies at Harvard University. Martin thanks the Radcliffe Institute for
Advanced Study (Harvard University), the German Marshall Fund, and the Danish Social Science
Research Council; Thelen thanks the Institute for Policy Research (Northwestern University), the
working group on “Institutional Complementarities and Institutional Change” at the Max Planck
Institute for the Study of Society in Cologne, and the Max Planck Gesellschaft for support, financial
and otherwise. Sebastian Karcher provided valuable research assistance.
1
Jonas Pontusson, Inequality and Prosperity: Social Europe vs. Liberal America (Ithaca, N.Y.: Cor-
nell University Press, 2005); David Rueda, “Insider-Outsider Politics in Industrialized Democracies,”
American Political Science Review 99 (February 2005).
2
See, for example, Wolfgang Streeck, “On the Institutional Conditions of Diversified Quality
Production,” in Egon Matzner and Wolfgang Streeck, eds., Beyond Keynesianism (Aldershot, U.K.:
Edward Elgar, 1991).
3
Peter A. Hall and David Soskice, Varieties of Capitalism: The Institutional Foundations of Com-
parative Advantage (New York: Oxford University Press, 2001); see also Pontusson (fn. 1). For more
recent extensions and elaborations of the original varieties of capitalism framework, see Torben Iversen
and David Soskice, “Electoral Institutions and the Politics of Coalitions: Why Some Democracies
World Politics 60 (October 2007), 1–36
2 w o r l d p o l I t I c s
Redistribute More Than Others,” American Political Science Review 100 (May 2006); and Thomas R.
Cusack, Torben Iversen, and David Soskice, “Economic Interests and the Origins of Electoral Sys-
tems,” American Political Science Review 101 (August 2007). For a recent critique, see Walter Korpi,
“Power Resources and Employer-Centered Approaches in Explanations of Welfare States and Variet-
ies of Capitalism: Protagonists, Consenters, and Antagonists,” World Politics 58 (January 2006).
4
See, for example, Duane Swank, Global Capital, Political Institutions, and Policy Change in Devel-
oped Welfare States (New York: Cambridge University Press, 2002).
5
John Campbell, John Hall, and Ove Kaj Pedersen, eds., National Identity and a Variety of Capital-
ism: The Danish Case (Montreal: McGill University Press, 2006).
6
Martin Höpner, “Coordination and Organization: The Two Dimensions of Nonliberal Capitalism,”
Discussion Paper no. 07/12 (Cologne: Max Planck Institut für Gesellschaftsforschung, December 2007).
7
Anke Hassel, “The Erosion of the German System of Industrial Relations,” British Journal of
Industrial Relations 37 (September 1999); and Claus Schnabel, “Gewerkschaften und Arbeitgeberver-
bände: Organisationsgrade, Tarifbindung und Einflüsse auf Löhne und Beschäftigung,“ Discussion
Paper no. 34 (Erlangen-Nuremberg: Friedrich-Alexander Universität, May 2005).
Today, however, many of the institutional arrangements characteristic of
the coordinated market economies are under intense strain, due to new
market pressures and the attendant ascendance of neoliberal ideology.
But if the economic and ideological challenges are clear, the politics are
more contested. Some scholars fear that these experiments in cozy co-
ordination are doomed, while others bet on continuity over change.
4
The empirical record is mixed, with an impressive persistence of coor-
dination in some countries but not in others. Although there have been
significant changes in collective bargaining systems cross-nationally,
some countries have sustained higher levels of coordination in policy-
making channels and have managed to maintain a higher level of control
in framework agreements, even while aspects of wage setting have been
decentralized to lower-level units. Take Denmark and Germany—two
clear, noncontroversial cases of coordinated market economies that have
evolved along sharply divergent paths in the past two decades. Denmark,
the new poster child of Europe, has been able to sustain rather strong
institutions for coordinating politics at the national level in the face of
disintegrating forces. Key reforms in the 1990s moved Denmark sharp-
ly toward “activation” policies normally associated with liberal market
economies.
5
Yet these initiatives emerged from consensual, tripartite
bargaining, and their effects, if anything, have strengthened the orga-
nizational power of the peak associations. By contrast, Germany has
drifted toward a more “disorganized” version of capitalism.
6
Legislative
reforms in Germany have left most of the key institutions traditionally
associated with “Model Germany” formally intact; however, stability at
the formal-institutional level masks a very significant erosion of coor-
dinating capacities both within the state and on both sides of the class
divide. Membership in unions and employers’ associations has fallen
significantly, and coverage of collective bargaining and other collective
arrangements has shrunk though widespread defections.
7
s t a t e a n d c o o r d I n a t e d c a p I t a l I s m 3
8
This difference corresponds roughly to the distinction drawn by Katzenstein, between social and
liberal corporatism, and by Soskice, between centrally and sectorally coordinated systems. See Peter J.
Katzenstein, Small States in World Markets (Ithaca, N.Y.: Cornell University Press, 1985); and David
Soskice, “Wage Determination: The Changing Role of Institutions in Advanced Industrial Coun-
tries,” Oxford Review of Economic Policy 6, no. 4 (1990).
9
Kathleen Thelen, Union of Parts: Labor Politics in Postwar Germany (Ithaca, N.Y.: Cornell Uni-
versity Press, 1991).
10
Torben Iversen and Jonas Pontusson, “Comparative Political Economy: A Northern European
Perspective,” in Torben Iversen, Jonas Pontusson, and David Soskice, eds., Unions, Employers, and
Central Banks (New York: Cambridge University Press, 2000).
This article investigates why some countries have been able to sustain
national-level institutions for coordination, while others are becoming
more disorganized in response to the changing economic context. The
key objective is thus to explain the direction and character of institu-
tional change as it bears on coordination. We begin by acknowledging
that the broad category of coordinated market economies subsumes quite
different types of cooperative engagement. Macrocorporatist forms of en-
gagement are national-level institutions for fostering cooperation among
the peak employers’ associations and unions: these include both political
forums for negotiating national public policy outcomes and collective bar-
gaining channels that deliver either peak-level bargains or sectoral agree-
ments negotiated within a national framework. Forms of coordination
associated with enterprise cooperation, in comparison, occur at the level
of sector or regional institutions and are often privately controlled.
8
While the Scandinavian countries historically had a rather higher
level of bargaining than the Christian democratic ones (at the peak
rather than at the sectoral level), both groups had high levels of mac-
rocoordination, as even the Christian democratic countries featured
considerable concertation across bargaining units and high levels of
cooperation in policy-making channels. In addition, to the extent that
Christian democratic countries relied on enterprise cooperation, this
form of engagement seemed to reinforce macrocoordination and func-
tioned as a sort of structural equivalent, because manufacturing inter-
ests were able to play a leading role in both wage negotiations and
relations with the state.
9
Indeed, in the 1970s and 1980s enterprise coordination was widely
viewed as superior for achieving macroeconomic performance, since coun-
tries in which the state loomed especially large (for example, Denmark
and Sweden) seemed to be listing under the weight of high public con-
sumption.
10
Yet with the advent of a service sector economy, private ar-
rangements for coordination in manufacturing can no longer substitute
for public coordinating mechanisms, as exposed sectors are shrinking in
employment and the needs of core industrial workers are becoming in-
4 w o r l d p o l I t I c s
creasingly distinct from the rest of society. As a consequence, the subcat-
egories of coordination—macrocorporatism and enterprise cooperation
—seem to be associated with different patterns of politics offering dif-
ferent capacities for self-adjustment. We thus wish to understand what
allows some countries but not others to cope with the essential prob-
lematic of sustaining national-level coordination while adjusting for
economic change.
We argue that differences in the role and the size of the state are at
the heart of the divergence among European coordinated countries,
because state policy is key to forging and sustaining broad national
coalitions that link—rather than separate—diverse interests (such as
manufacturing versus services and labor-market insiders versus outsid-
ers). A large public sector (1) has an impact on the strategic interests
of government bureaucrats, by expanding their interests in improving
the skills of the long-term unemployed, (2) expands the capacities of
bureaucrats to construct political coalitions of private sector groups to
support state policies, and (3) alters the strategic interests of private ac-
tors. In short, we argue that the relative power and distinctive interests
of the state are crucial factors in sustaining particular varieties of coor-
dination across time within countries.
Our argument directly challenges the received wisdom in three im-
portant ways. First, we reject a central tenet of neoliberal theorizing
that the state is a constraint on adjustment and suggest instead that the
state is more important than ever in facilitating continued coordina-
tion. A large public sector (typically written off as an inevitable drag on
the economy) can actually provide state actors with a critical political
tool for shoring up coordination in a postindustrial economy.
Second, while we agree with a large varieties-of-capitalism litera-
ture that sees employer coordination as crucial for defining coordinated
market economies, we question the widespread tendency in that lit-
erature to view such coordination as a self-sustaining equilibrium. Just
as state policy was crucial historically in forging coordination in virtu-
ally all arenas of the political economy,
11
state support is essential for
maintaining coordination today in the face of new pressures. Thus, in
renegotiating cooperative arrangements, countries that have tradition-
ally relied on state policy to shore up coordination between the social
partners have a distinct edge over countries that have relegated coordi-
nation to private-interest associations.
11
See, for example, Kathleen Thelen, How Institutions Evolve: The Political Economy of Skills in
Germany, Britain, the United States and Japan (New York: Cambridge University Press, 2004).
