Institutional change in varieties of capitalism

Contemporary approaches to varieties to capitalism are often criticized for neglecting issues of institutional change. This paper develops a perspective on institutional change designed to be applicable to the equilibrium analyses of such approaches but distinctive relative to competing understandings of institutions. It begins by outlining an approach to institutional stability, which suggests that the persistence of institutions depends not only on their aggregate welfare effects but on the distributive benefits they provide to underlying social or political coalitions and not only on the Pareto-optimal quality of their equilibria but on continuous processes of mobilization through which the actors test the limits of existing institutions. It then develops an analysis of institutional change congruent with this starting point, which emphasizes the ways in which reform, defection and reinterpretation emerge out of contestation and compares this account of institutional dynamics to recent developments in Germany and France. The paper concludes by elaborating the implications of this perspective for analyses of liberalization in contemporary political economies. Comparative political economists have become deeply interested in processes of institutional change, and especially in those taking place in response to the opening of world markets associated with ‘globalization’ (Pierson 2001; Djelic and Quack 2003; Rieger and Leibfried 2003; Campbell 2004). They are asking a number of questions. When do the institutions of the political economy change? What factors drive change? Are changes in the international economy enforcing institutional convergence on the developed economies? We take up these issues with reference to one of the more influential frameworks devised to explain national differences in economic performance and policy, namely the ‘varieties of capitalism’ perspective now employed by a substantial number of scholars (see Hall and Soskice 2001). Building on the literatures of neo-corporatism and the ‘regulation school’, this approach applies the new economics of organization to the macroeconomy. It focuses on firms, as actors central to the process of economic adjustment with core competencies that depend on the quality of the relations they develop with other actors, including producer groups, employees and other firms. Those relationships depend, in turn, on the institutional support provided for them in the political economy as a whole. Although the perspective acknowledges that these relationships can take on a wide range of forms, it emphasizes the distinction between liberal market economies, where firms rely heavily on competitive markets to coordinate their endeavors, and coordinated market economies, where more endeavors are coordinated strategically. These different modes of coordination are said to confer comparative institutional advantages that mediate national responses to globalization. They rest on institutional complementarities that allow arrangements in one sphere of the political economy to enhance the results secured in others. The framework provides distinctive perspectives on many of the issues raised by globalization.