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George Giannakopoulos W8 Essay

Concertation modes of policy-making proved resilient to globalization because of the


power of organized interests. Discuss

Introduction
The advent of Concertation or Social Partnership as a mode of collective action in Western
Democracies signified a deviation from the traditional modus operandi of pluralism and neo-
corporatism. Globalization constituted the platform upon which social partnership was
materialized. The pressures originating from the internationalization of capital flows and the
growing economic interdependence between western democracies diminished the fiscal space
and forced governments to pursue policies that would consolidate their public finances, as
well as enhance the competitiveness of the exporting sector. In this essay I will demonstrate
that Social Partnership proved resilient to globalization because it rationalized domestic
macroeconomic policies. Furthermore, this rationalization took place in a political
environment where the traditional organized interests were weak and fragmented. Their
weakness was the catalyst behind the democratic deliberation that underpinned Social
Partnership and eventually rendered it a successful response to the challenges arising from
globalization. Hence, the weakness of the vested interests was the main reason behind the
success of Social Partnership.

Part 1. Setting the context; Monetarism and Globalization


During the early 1980s, the capitalist system started to evolve and this evolution had severe
repercussions for the organized labour and its status as a social partner. Following Scharpfs
analysis (Scharpf 1991), we can distinguish two major developments that took place from the
early 1980s and onwards. The first was the re-adjustment of macroeconomic policy-making
towards a monetarist consensus. Monetarist policies demanded that National Central Banks
were closely monitoring the price level and were ready to retaliate against inflationary
pressures by increasing the interest rates, at the expense of employment. The direct
implication for organized labour is that wage restraint did no longer require the participation
of unions in order to be attained (Simoni 2013). Thus, the political exchange that
characterized the Golden Age of postwar capitalism, that is wage restraint in exchange for
generous welfare state and accommodating fiscal policies, was rendered obsolete.
The second development was the internationalization of capital flows. In the absence of
capital controls, integration between financial markets deepens and capital is constantly
seeking the highest yields. Taking into account the fact that, the turn towards monetarism
took place in a world plagued with high inflation, high interest rates soon became the norm
rather than the exception. As a consequence, yields of financial products increased and
effectively crowded out productive investment. Nations, in order to sustain their rate of
capital formation, had to increase the rate of return deriving from productive investment. This
resulted in the need for a supply-side oriented redistribution (Scharpf 1991).

Part 2. Redefining neo-corporatism: Social Partnership


The need for supply-side redistribution urged Social Democratic and Conservative
governments alike to consolidate their public finances. In accordance, governments attempted
to increase the returns of productive investment by imposing restrain on wage costs and
taxation. Such policies, greatly affected blue and white collar workers, who saw their short-
term real incomes decline, in exchange for uncertain future benefits. Conventional wisdom
George Giannakopoulos W8 Essay

dictates that labour would resist such schemes, particularly in countries that had not develop
corporatic institutions. Nevertheless, Social Partnership offered a third way, distinct from
both unilateral government action and traditional corporatist approaches.
From a functional perspective, Social Partnership and Corporatism are equivalent. Both
facilitate decision making at the peak level, and thus internalize externalities originating from
wage-setting at the firm or sector level. However, there are substantive differences in the way
they achieve that. Corporatism requires that the system of interest representation is formulated
in a hierarchical non-competitive platform, where each special interest (principle) delegates
the decision-making competences to a single agent. Afterwards, tripartite negotiations take
place in which state, organized labour and employer associations agree on wages and working
conditions. In order to be effective, this process requires horizontal and vertical coordination
within the different trade unions (Baccaro 2003). Coordination insures that there will be no
drift from the agreements forged at the peak level. Hence, workers could no longer exercise
their freedoms of Voice and/or Exit from their designated associations (Ibid.). Overall, for
corporatism to work efficiently, hierarchical relations were required, which ought to be
encompassing for a significant part of labour.
Likewise, Social Partnership emphasizes negotiations at the peak level. The point of departure
from the corporatist tradition is the mode of decision-making within organized labour. Instead
of hierarchy and coercion, democratic deliberation and binding voting on the proposed
agreements enhance the legitimacy of outcomes. In addition, democratic processes can bypass
the issue of fragmented industrial relations. The relevant literature has indicated two reasons
for that; firstly, as voting is perceived to be a fair process, individual labour unions that
disagree with the decision of the majority, feel compelled to go along (Baccaro 2013).
Secondly, if unions violate democratic due process, they would encourage the same behavior
from their internal opposition (Ibid.).

Part 3. Social Partnership and Organized Interests


The previous section elaborated on how democratic processes allow labour unions to
overcome their fragmented industrial relations in the absence of state coercion. Yet,
democratic process is by definition an open-ended procedure, thus creating a much wider
array of alternative outcomes. Scharpf (1991) demonstrated the need for supply-side oriented
redistribution, as a way to reinvigorate capital formation in Western Democracies. Under
majority rule, the representatives of organized labour would be compelled to express the
preferences of their principles, even if they went against the long-term national goals for
higher rate of investment. Hence, we can assert that governments would seek to engage in a
Social Partnership with organized interests if their goals aligned.
In the new mode of tripartite negotiation, that of concertation, we can identify three major
actors; governments, employers and labour unions. If we assume that employers preferences
will always be in favor of supply side redistribution we can, for the time-being, consider them
as exogenous. The success or failure of the negotiations for supply-side reforms depends on
the interaction between governments and labour unions. Every government will seek to
maximize the legitimacy of the imposed reforms, as long as this does not incur significant
transaction costs or a significant drift from the objective. That is to say, the relative strength
of the government vis--vis the labour unions will determine whether the preferred mode of
policy- making will be either social partnership or unilateral action. The following table
summarizes the results:
George Giannakopoulos W8 Essay

Strong Unions Weak Unions


Strong Government Gvt Unilateral Action Gvt Unilateral Action
(United Kingdom*) (Austria*)
Weak Government Gvt policy captured by Concertation (Ireland,
unions (Sweden***) Italy**)
* Baccaro and Simoni 2008, ** Baccaro 2003, *** Garrett and Way 1999

The relevant literature has shown that weak governments, i.e. governments that are holding a
small majority, are the ones that will seek to underpin their reforms with a Social Partnership.
In this way, they will muster legitimacy via the democratic processes that takes place within
labour unions. On the other hand, weak governments will be willing to cooperate only with
relatively weak unions (Baccaro and Simoni 2008). This way, there will little chance that
unions will be able to capture governments policies and turn them in favor of their narrow
sectoral interests. On the contrary, strong governments will probably wish to avoid incurring
the transaction costs associated with the tripartite negotiations, as they would perceive their
strong parliamentary majority as sufficient for the task.
Irish PNR and the Italian pension reform prove the validity of the previous conjecture. Both
countries, were experiencing at the time an unsustainable status quo that required reforms.
The governing parties did not hold the necessary majority to impose these reforms
unilaterally. Hence, Social Partnership provided the necessary legitimacy that forged these
quite successful pacts. On the contrary, the UK under Thatchers rule, in the absence of
serious opposition, pursued structural reforms unilaterally, the scope of which was aiming at
the imminent unravelling of the corporatist system in the country. Finally, Sweden provides
an example of strong labour unions (especially those of the public sector) capturing economic
policy. This resulted in the breakdown of peak-level negotiations and to a complete re-
organization of the corporatist relations within the country.

Conclusions
This essay attempted to prove that the mode of Social Partnership is efficient only when the
organized interests are weak. Under fragmented industrial relations, democratic processes can
provide a legitimate and efficient solution to coordination problems. Nevertheless, the
democratic equilibrium is precarious, in the sense that all parties will have incentives to
capture the process in their favor. Concertation proved to be resilient to globalization because
it facilitated the implementation of much needed structural reforms. The case of Ireland is
indicative of the way in which, a weak economy was rapidly transformed into a vibrant
exporting economy in a matter of years. In this new era of Capitalism, the role of organized
labor changed, and trade union from co-setters of wage levels, became a source of legitimacy
for unpopular policy choices.

Word count: 1464


George Giannakopoulos W8 Essay

Bibliography

Marco Simoni (2013). The Left and Organized Labor in Low-Inflation Times
World Politics 65(2) pp: 314-349

Baccaro, L. (2003). "What is Dead and What is Alive in the Theory of Corporatism."
British Journal of Industrial Relations 41(4): 683-706

Baccaro, L. and M. Simoni (2008). "Policy Concertation in Europe: Explaining


Governments Choice." Comparative Political Studies 41(10)

Scharpf, F. W. (1991). Crisis and choice in European social democracy. Ithaca,


N.Y, Cornell University Press. Chapter 11, pp: 238-255

Garreth G. and Way C. (1999). Public sector unions, corporatism, and


macroeconomic performance, Comparative political studies, vol. 32 no. 4, June
1999 411-434