The Forgotten Center: The State as Neglected Actor in Corporatist Political Economies

by

Anton C. HemerijckThe Netherlands Scientific Council for Government Policy

4, Plein 1813P.O. Box 2004

2500 EA The HagueThe Netherlands

Department of Public AdministrationLeiden University

Wassenaarseweg 52P.O. Box 9555

2300 RB LeidenThe Netherlands

E-mail: hemerijck@wrr.nl

and

Mark I. VailDepartment of Political Science

University of California at Berkeley210 Barrows Hall

Berkeley, CA 94720U.S.A.

E-mail: mvail@socrates.berkeley.edu

Draft prepared for forthcoming volume, The State after Statism: New State Activities in the Age of Globalization and Liberalization, Jonah D. Levy, editor.

Prepared for delivery at the 2003 Annual Meeting of the American Political Science Association, 28-31 August 2003. Copyright by the American Political Science Association.

Abstract: This paper explores varieties of state intervention in corporatist political economies. Focusing on recent reforms in social policy, labor-market policy, and wage policies in Germany and the Netherlands, it suggests that the neglect of the role of the state in corporatist systems has led to a failure to capture important dimensions of how they adjust to shifting political, economic, and social challenges. Furthermore, it argues that the states role in promoting needed institutional and policy reforms has been particularly important during the contemporary period of fiscal austerity, slow growth, and intense pressures on inherited policy arrangements. In some policy areas, the Dutch and German states have worked within existing corporatist frameworks, while, in others, they have suspended, by-passed, or even dismantled them in order to secure urgently needed reforms. The paper concludes that the character of state intervention not only varies with the challenges posed by particular policy areas, it has also been shaped in important ways by the national institutional frameworks within which corporatist institutions are embedded.

Since the 1970s, a well-developed literature has explored the dynamics of policy-making in

corporatist countries, emphasizing a high degree of involvement of societal interests, particularly of

employers and trade unions, in public-policy formation and implementation.1 Scholars have shown

how regularized channels of deliberation, consultation, and negotiation between labor and capital,

ideally organized into peak-level associations, have contributed to economic growth and social peace

in systems that often perform better, politically and economically, than liberal political economies,

where questions of economic distribution, the organization of production are addressed primarily

through (or remain unaddressed by) markets. While this rich body of work has provided a useful

analytical framework for exploring policy and institutional regularities in non-liberal political

economies, it has by and large neglected the role of the state, whose role, we argue, is crucial to

understanding how corporatist polities respond to shifting social and economic challenges. This flaw

has resulted in a misleading image of corporatist systems requiring little regulation and in which the

interests of social groups almost seamlessly produce policies concomitant with the public good.

The theoretical underdevelopment of the state in traditionally dominant society-centered

accounts of corporatist governance, we suggest, renders them poorly equipped to account for recent

political developments in many advanced industrial countries, corporatist and non-corporatist alike.

Like the literature on corporatism, recent work on Varieties-of-Capitalism similarly under-theorizes

the role of the state in corporatist, or coordinated market economies, differences among corporatist

political economies, and change over time within particular policy areas.2 Despite relatively fixed

institutionalized bargaining channels, patterns of interactions between the state and social partners

and the character of associated policy outcomes in corporatist systems vary considerably with

changing political and economic circumstances as well as across different policy areas. Not only do

1 For the classic formulation of corporatism, see Philippe C. Schmitter, Modes of Interest Intermediation and Models of Societal Change in Western Europe, Comparative Political Studies 10 (April 1977): 9. Other seminal works include Wolfgang Streeck and Philippe C. Schmitter, eds., Private Interest Government: Beyond Market and State (Sage: Beverly Hills, Calif., 1985); and Gerhard Lehmbruch and Philippe C. Schmitter, eds., Patterns of Corporatist Policy-Making (Sage: Beverly Hills, Calif., 1982).

2 See Peter A. Hall and David Soskice, An Introduction to Varieties of Capitalism, in idem, eds., Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford: Oxford Univ. Press, 2001).

2

the dynamics of corporatist adjustment evolve within given political economies, moreover, they vary

widely across corporatist countries, shaped by institutional particularities such as the nature of the

party system, the ideological postures of unions and employers associations, and the character of

policy legacies, as well as idiosyncratic political factors such as the partisan character and strategic

predilections of particular governments. That said, in all corporatist systems adjustment invariably

entails a significant and continued level of involvement by the state, whose purview for autonomous

action is critical to promoting needed reforms and economic adjustment.

By focusing primarily upon the interests of the social partners, prevailing approaches to the

study of corporatist adjustment also have difficulty accounting for the resurgence during the 1980s

and 1990s of social pacts and corporatist bargaining in many European countries,3 in the shadow of

the fiscal- and monetary-policy constraints of the Stability and Growth Pact and European Economic

and Monetary Union (EMU). Although the economic challenges of the day have shifted, the

importance of state intervention in facilitating adjustment in corporatist systems such as Germany and

the Netherlands remains undiminished. Indeed, we suggest that it is in periods of economic austerity,

when the relative scarcity of resources engenders competition among social groups and increases

discrepancies between private interests and public weal, that the states coordinating functions are

particularly important. Such adverse economic contexts also tend to intensify pressures on policy-

makers, not only to formulate just and viable policies that reduce economic uncertainty, but also to

promote negotiation between social partners whom strained circumstances have made more likely to

dig in their heels.

Germany and the Netherlands represent excellent prima facie cases for a comparative study

of the role of the state in corporatist adjustment for several reasons. First, the state in both countries

has a tradition of sharing political space with the social partners in what have been characterized as

3 For an overview of European social pacts, see Giuseppe Fajertag and Philippe Pochet, eds., Social Pacts in Europe (Brussels: ETUI, 2000).

3

intermediate bargaining systems.4 Employers are well organized, especially among large and

medium-sized firms, and collective bargaining occurs predominantly at the sectoral level.5

Furthermore, the Netherlands and Germany both possess Bismarckian, or Christian Democratic,

welfare states, characterized by occupationally distinct, employment-related social insurance

programs co-managed by worker and employer representatives and financed by earmarked payroll

contributions from employers and workers.6

At the same time, the two countries are distinct in terms of the institutional frameworks of the

political economy within which their welfare states and industrial-relations systems are embedded.

For example, state intervention has traditionally been very strong in Dutch industrial relations,7 while

in Germany the constitutionally enshrined principle of Tarifautonomie, or wage independence, has

limited intervention in this area. Constitutionally, the Netherlands represents a model of a

decentralized but unitary state in which governments retain final authority in a wide range of policy

domains, while German federalism and jurisdictional limits on state authority represent more

substantial constraints for policy-makers.8 As a result of these constitutional and regulatory

differences, the mechanisms through which the German state has facilitated adjustment have tended

to be more informal and subtle than those in the Netherlands, although German lites have been far

from passive observers of social and economic change. In Germany no less than in the Netherlands,

4 See, e.g., Franz Traxler, Sabine Blaschke, and Bernhard Kittel, National Labour Relations in Internationalized Markets: A Comparative Study of Institutions, Change and Performance (Oxford: Oxford Univ. Press, 2001).

5 German industrial relations take place under the de facto leadership of the metalworking sector, and separate wage bargaining from plant-level management. See Wolfgang Streeck, Works Councils: Consultation, Representation, and Cooperation in Industrial Relations (Chicago: Univ. of Chicago Press, 1995), and Kathleen Thelen, Union of Parts: Labor Politics in Postwar Germany (Ithaca, N.Y.: Cornell Univ. Press, 1991).

6 For the characteristics of Continental welfare states, see Kees van Kersbergen, Social Capitalism: A Study of Christian Democracy and the Welfare State (London: Routledge, 1995); Gsta Esping-Andersen, The Three Worlds of Welfare Capitalism (Princeton, N.J.: Princeton Univ. Press, 1990), 27 and passim; Fritz W. Scharpf and Vivien Schmidt, Introduction, in idem, eds., Welfare and Work in the Open Economy, vol. II, Diverse Responses to Common Challenges (Oxford: Oxford Univ. Press, 2000), 11-13; and Maurizio Ferrera, Anton Hemerijck, and Martin Rhodes, The Future of Social Europe: Recasting Work and Welfare in the New Economy(Oeiras: Celta Editoria, 2000), 40-45.

7 John P. Windmuller, Labor Relations in the Netherlands (Ithaca, N.Y.: Cornell Univ. Press, 1969). 8 Peter J. Katzenstein, Policy and Politics in West Germany: The Growth of a Semisovereign State

(Philadelphia: Temple Univ. Press, 1987).

4

however, the state has been instrumental to promoting reform, facilitating healthy political-economic

adjustment, and helping the economy adjust to shifting challenges. At times, both states have used

administrative and financial pressure to coerce the social partners into undertaking desired reforms.

At others, it has bypassed corporatism and imposed policies of its own devising, while in a few policy

areas it has suspended corporatist bargaining or even dismantled it altogether. While the character of

intervention has varied significantly between the two countries and within them over time, however,

the Dutch and German state have each assumed a large degree of responsibility for meeting the

challenges of political-economic adjustment.

A comparison of recent developments in Germany and the Netherlands illustrates these

distinct patterns of adaptation. In the 1980s, the Netherlands witnessed a resurgence of corporatist

bargaining in the wake of a severe recession, spiraling unemployment, and significant inflation.

Under the threat of government-imposed austerity and mandated liberalization, the social partners

chose to negotiate, with unions wishing to limit the pain resulting from reform and employers hoping

to forestall a government takeover of the policy-making process. The resulting Wassenaar Accord,

concluded in late 1982, provided for the de-indexation of wages, negotiations over work-time

reduction and job creation, and the partial decentralization of wage bargaining. This agreement

ushered in a period of vibrant, negotiated reform in the 1980s and early 1990s that underpinned the

celebrated Dutch miracle of rapid job growth.9 With respect to social security and labor market, the

Dutch picture has been more mixed, with alternating patterns of state intervention, suspending

corporatism in social insurance, and, much to the chagrin of the social partners, independent state

efforts to shape active labor-market policy after a failed tripartite experiment in the early 1990s.

In Germany, the 1980s witnessed a series of relatively timid reforms in social and labor-

market policy, followed by a period of increasing state intervention in response to the seismic social

and economic shocks of reunification in 1990. Thereafter, even as they intervened directly in areas

9 Jelle Visser and Anton Hemerijck, A Dutch Miracle: Job Growth, Welfare Reform and Corporatism in the Netherlands (Amsterdam: Amsterdam Univ. Press, 1997), esp. ch. 5.

5

such as labor-market policy, German governments of both Left and Right worked to promote

corporatist negotiation and to shape the incentives of the social partners to pursue needed reforms, for

example capping social-contribution rates in order to force cuts in welfare spending. Despite such

attempts, however, the vibrancy of German corporatism has gradually eroded since the mid-1990s, as

a state unable to secure needed reforms through established corporatist channels has increasingly, if

often reluctantly, undertaken reform by intervention and imposition in areas in which it enjoys, or can

fashion, the necessary prerogatives. These nationally distinct patterns of fragile and fluid national

corporatist bargaining structures provide clear support for the two central arguments of our

contribution to this volume. First, they demonstrate that careful attention to the states shifting role is

critical to a nuanced account of the dynamics of corporatist politics, particularly in periods of reform,

fiscal austerity, and slowed economic growth. Second, they illustrate that corporatism is a dynamic

and evolving process of dialogue and political exchange between the state and social partners, rather

than a fixed institutional structure producing stable and predictable policy trajectories.

In our contribution to this volume, we focus on wage policy, social policy, and labor-market

policy, policy domains which have been brought to the center of policy debates by the deleterious

effects of slowed growth, structural unemployment, strained welfare financing, aging populations,

and the vicious circle between high labor costs and unemployment. In each of these areas, the

German and Dutch states have been instrumental to reform, whether by promoting compromise

among unions and employers, working indirectly to reshape the policy incentives faced by the social

partners, or intervening directly to compensate for the failures of existing corporatist institutions. By

exploring these key policy areas, each with its own sector-specific policy legacies, we hope to shed

light on the circumstances surrounding particular patterns of corporatist policy-making, how national

constitutional and institutional particularities shape political dynamics across time, and, more

generally, the extent to which various corporatist structures facilitate or impede effective adjustment.

In the following section, we undertake a brief review of the literature on corporatism as a

theoretical construct and empirical heuristic, emphasizing the extent to which leading scholars have

6

addressed, or failed to speak to, the vibrant role of the state in corporatist governance. We then

present a detailed analysis of recent reforms in each country, once again focusing upon the dynamic

and multifarious role of the state. We end with a brief conclusion, where we assess each countrys

reform experiences and the lessons that they offer about the dynamics of corporatist adjustment and

the states evolving role in facilitating it.

The Forgotten Center: The State as Neglected Actor in Corporatist Political Economies

The corporatist literature of the 1970s and 1980s made important contributions to the revival of

the study of institutions mediating between state and market in capitalist democracies. In the midst of the

allegedly ungovernable 1970s, there was significant empirical support for the hypothesis that those

modern market economies capable of integrating business and labor interests into the formation and

implementation of policy were better able to manage the economic and social crises of the time.10 The

capacity of advanced industrial societies to manage social conflict and improve economic performance,

many authors claimed, is contingent on an institutional infrastructure which incorporates the societal

interests of organized capital and labor into national economic-policy formation and implementation.

During the 1970s in particular, society-centered corporatist research, focusing on the organizational

attributes of organized interests, contended that tripartite incomes policies were almost indispensable

tools of crisis management. In particular, so-called encompassing organizations, i.e., highly centralized

and concentrated functional interests, were believed likely to pursue responsible strategies of collective

action supportive of the public goals of full employment and price stability.11 To a large extent,

corporatist success in achieving economic and social stability was believed to be largely self-reinforcing

as positive demonstration effects would reinforce mutual trust among the social partners and the state.

10 See Lehmbruch and Schmitter, eds., op. cit.; Suzanne Berger, ed., Organizing Interests in Western Europe: Pluralism, Corporatism, and the Transformation of Politics (Cambridge: Cambridge Univ. Press, 1981); and John H. Goldthorpe, ed., Order and Conflict in Contemporary Capitalism (Oxford: Clarendon Press, 1984).

11 Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (New Haven, Conn.: Yale Univ. Press, 1982); Michael Bruno and Jeffrey D. Sachs, Economics of Worldwide Stagflation (Cambridge, Mass.: Harvard Univ. Press, 1985); Peter Lange and Geoffrey Garrett, The Politics of Growth: Strategic Interaction and Economic Performance in the Advanced Industrial Democracies, Journal of Politics 47 (1985): 792-828.

7

In the 1980s, however, corporatist theory lost much of its rationale, as many corporatist political

economies ran into serious employment, fiscal, and monetary difficulties, providing ammunition for

neoliberal and other criticisms of political interference with market mechanisms. During this period, a

number of arguments were advanced for the putative demise of corporatism. Some authors were ready to

predict the end of organized capitalism,12 while others discovered the challenge of flexibility13 and

found rising pressures towards decentralization of collective bargaining and the shift from Fordist,

standardized mass production toward craft-based, diversified methods of production difficult to reconcile

with the corporatist approach.14 In highlighting the historical corollaries of corporatist success and

Keynesian macro-economic intervention, other observers suggested that the liberalization of international

capital markets in the 1980s were sharply curtailing the political capacities of national governments to

offer full employment through the use of fiscal and monetary policy in exchange for wage restraint.15

Finally, with the introduction of the Stability and Growth Pact in the lead-up to EMU, part and parcel

of a more general shift toward hard currency policies across Europe, many observers feared that

intensified rgime competition would further jeopardize corporatist patterns of policy-making and

interest intermediation.

Departing from the intellectual fashion of the time, in 1989 Philippe Schmitter, one of the

founding fathers of corporatist research, suggested the continued relevance of societal interest

intermediation in an era of liberalization and slowed economic growth.16 Bearing out Schmitters

contention, the fiscal and monetary pressures associated with qualifying for EMU generally did not

lead to bold strategies of labor-market deregulation. On the contrary, EMU seems to have spurred a

resurgence of national social pacts aimed at ensuring welfare-state sustainability, as the shift to a hard

12 Scott Lash and John Urry, The End of Organized Capitalism (Oxford: Polity Press, 1987). 13 Guido Baglioni and Colin Crouch, eds., European Industrial Relations: The Challenge of Flexibility

(London: Sage, 1990).14 Michael J. Piore and Charles F. Sabel, The Second Industrial Divide: Possibilities for Prosperity (New

York: Basic Books, 1984); Richard Locke, Thomas Kochan, and Michael Piore, Employment Relations in a Changing World Economy (Cambridge, Mass.: MIT Press, 1995).

15 Fritz W. Scharpf, Crisis and Choice in European Social Democracy (Ithaca, N.Y.: Cornell Univ. Press, 1991).

16 Philippe C. Schmitter, Corporatism Is Dead! Long Live Corporatism!, Government and Opposition 24 (1989): 54-73.

8

currency rgime unexpectedly brought the social partners in many countries closer together.17 This

trend began in the Netherlands with the 1982 Wassenaar accord, followed by Denmark and Ireland

in 1987 and Finland, Italy, Spain, and Portugal in the early to mid-1990s.18

That said, the reinvigoration of corporatist bargaining since the mid-1980s has occurred in

novel ways not anticipated by earlier authors who tended to equate corporatism with Keynesianism.

The new social pacts of the 1990s, characterized by a competitive or supply-side orientation and

a narrower, more trust-based focus than that of antecedent, Keynesian corporatist bargaining,

centered on wage moderation, welfare reform, and labor-market flexibility. Meanwhile, unions

across Europe were forced to confront the bitter lesson taught by Margaret Thatcher that failure to

cooperate with supply-side measures may erode union power and even result in near-total political

marginalization. Likewise, European governments learned the equally bitter lesson that state

imposition of neo-liberal measures often yields social unrest, derailing reform strategies and

undermining economic competitiveness and performance, on which many of them staked their future.

The resurgence of social pacts illustrates the importance of two basic claims of first-generation

corporatist scholarship. First, it showed that institutional stability is critical during times of rapid

economic internationalization and technological change. Second, it reminded observers of the

advantages of institutions that permit an enlarged repertoire of potential policy responses through

coordination between the state and the social partners and issue linkage across policy areas.

From their earliest incarnations, most treatments of corporatist governance employed a rather

narrow, society-centered perspective centering on the organizational attributes of functional organized

interests, largely neglecting the role of the state in what purported to be generally self-regulating political-

economic models. The absence of a clear conception of the role of the state in associational life, we

believe, is the most telling omission in first-generation studies of corporatism. It also, however,

17 Fajertag and Pochet, op. cit.18 David Cameron, Unemployment, Job Creation, and Economic and Monetary Union, and Martin Rhodes,

Globalization, Welfare States, and Employment: Is there a European Third Way?, both in Nancy Bermeo, ed., Unemployment in the New Europe (Cambridge: Cambridge Univ. Press, 2001).

9

continues to characterize more recent work, a salient example of which is the nascent literature on

Varieties of Capitalism. Whereas Hall and Soskice are quick to point out that that their firm-based

perspective is actor-centered, Colin Crouch is right to counter that, in their analysis, firms are

substantively treated as passive institution-takers rather than entrepreneurial actors. Even more

important, its under-development of the state as part of the larger institutional configurations of both

liberal and coordinated market economies leaves the Varieties-of-Capitalism school with few

analytical tools for understanding dynamic interactions among societal actors, business organizations,

trade unions, and firms within the constraints of national institutional frameworks. Recognizing this

weakness in such approaches, a separate strain of research since the mid-1980s has attempted to develop

a more complex, state-centered perspective, emphasizing the state as an autonomous actor in political

and economic processes that critically affects the ways in which national political economies adjust to

shifting economic, social, and political challenges.19 Crouch, in particular, has shown in great detail

how organized interests define their strategies of collective action within the context of the institutional

context characterized by distinctive state traditions and complex historical linkages between the state

and civil society. 20

Insights such as Crouchs point to the fundamental role of the state in all corporatist systems.

Nearly all aspects of corporatist governance are profoundly affected by the state, which is the

principal source of law and thus capable of defining the national organization of societal interests and

their relationship to national politics. Almost by definition, therefore, corporatist governance cannot

be a state-free process. Policy adjustment in all corporatist systems involves at least two critical roles

for the state. First, the state is an institutional regulator. It provides Ordnungspolitik, the legal

framework and the ground rules that govern corporatist political processes, referred to alternately as

regulated self-regulation, private interest government, organized decentralization, negotiated

reform, and joint policy learning. Second, the states legislative capacity in economic, social, and

19 Gianfranco Poggi, The State: Its Development, Nature and Prospects (Stanford: Stanford Univ.Press, 1990).

20 Colin Crouch, Industrial Relations and European State Traditions (Oxford: Clarendon Press, 1993).

10

labor market policy-formation has a direct influence on relations among the government, trade

unions, and employer organizations. The role of the state in corporatist governance is thus not a

matter of getting the institutional channels of interest intermediation right and then greasing the

wheels of corporatist exchanges through side-payments and package deals.

Accordingly, corporatist governance is far from static, its constituent parts are in constant

motion, and participant actors react dynamically to changing pressures and evolving perceptions of their

environment. As in any joint-decision system, new policy pressures and dysfunctions are bound to

arise over time, and state intervention is needed to sustain, adjust, restructure, bypass, suspend,

relaunch corporatist institutions, and even dismantle them in the event of pathological conditions of

stalemate. In terms of Ordnungspolitik, the state can narrow or broaden the range of participants in

corporatist policy-making, limit or expand the scope and time for deliberation, consultation, and

problem-solving, as well as define the modalities of policy implementation. The state also has

independent resources at its disposal to change ineffective policies, launch new policy initiatives,

and/or subsume tasks previously administered by the social partners. Moreover, the state is

continuously involved in redrawing the boundaries between state and civil society, responding to the

social partners ongoing redefinition of their substantive priorities in the policy-making process, such

as their search for greater autonomy or advocacy of new forms of joint problem-solving.

The defining feature of the corporatist state lies in its institutional capacity and its normative

willingness to share political authority with organized interests. Colin Crouch has aptly termed this type

of power sharing between public authorities and private groups the sharing of political space. 21 The

role of the state in corporatist policy-making thus runs contrary to Hobbess solution of the dilemma of

social stability, according to which the denizens of the state of nature voluntarily surrender their rights

to an authoritarian power through the artifice of a social contract in order to counter a probable war

against all.22 In the corporatist approach to resolving the problem of social order, the state, rather than

21 Ibid.22 Thomas Hobbes, Leviathan, ed. C. B. Macpherson (London: Penguin, 1985 [1651]).

11

superimposing a Hobbesean hierarchical authority, shares its public functions with organized groups in

civil society. In exchange for their acquisition of the status of public authorities, voluntary associations

help to bear the burden of public administration, thereby becoming staatstrgende Krfte, or state-

supporting powers.

With all of these facets of the states role in corporatist governance in mind, it is clear that

corporatist governance invariably involves complex, reciprocal relationships between organized

interests and the state.23 Neither state capacity nor the power of interest organizations, in other words, is

the sole determinant of the dynamic of corporatist governance, whose logic is inherently one of political

exchange.24 By sharing public decision-making authority with civil society, the state devolves a portion

of its most distinctive resourcesnamely legitimate coercion and the capacity to enforce binding

agreementsto organized groups that it does not administratively control. The gain for private interests

is increased access to public-policy formation, while the state in return expects support for and

cooperation with its policies on the part of interest groups whose members are among their targets. At

the same time, by bestowing private interests with circumscribed public authority, the state is able to

expand its sources of information and professional expertise, resolve problems of public-policy

implementation, and overcome dilemmas of policy coordination.

Effective corporatist adjustment is also crucially dependent upon a number of other

institutional preconditions which cannot be taken for granted. The role of bi- and tripartite

institutional structures, which bring together state officials and the social partners within institutions

for policy analysis, deliberation, and negotiation, for example, is of critical importance. Repeated

encounters within these fora encourage the development of solutions to distributive problems by

allowing outcomes undesirable to certain parties to be adjusted in succeeding rounds of negotiations,

thereby also reducing the transaction costs associated with negotiation and monitoring. Nonetheless,

23 Wolfgang Streeck, Social Institutions and Economic Performance: Studies of Industrial Relations in Advanced Capitalist Economies (London: Sage, 1992).

24 Colin Crouch and Alessandro Pizzorno, eds., The Resurgence of Class Conflict in Western Europe since 1968 (London: Macmillan, 1978); and Marino Regini, The Conditions for Political Exchange: How Concertation Emerged and Collapsed in Britain and Italy, in Goldthorpe, ed., op. cit.

12

the realization of the gains associated with positive coordination requires the transformation of short-

run, parochial interests into solidaristic interaction across the bargaining table and a shared view of

central political-economic problems. It is therefore misleading to view corporatist governance as

inherently associated with weak state power. On the contrary, social compromise may well enhance

the states capacity to secure its policy objectives by mobilizing intellectual and administrative

resources from the social partners and other stakeholders. Effective corporatist governance, therefore,

requires state actors not merely to create and maintain a framework for political exchange among

organized interests, but also to retain important steering capacities to guide substantive policy outcomes.

The states authority to approve and ratify also implies the power to nullify undesirable

agreements, thereby enabling it to promote bona fide processes of negotiation. In this respect, the

multifarious role of the state in corporatist governance corresponds to Scharpfs notion of the shadow

of hierarchy in strategic games,25 as the ultimate availability of hierarchical intervention and state

ratification of agreements among private interests helps to curb distributive conflict and rent-seeking

opportunism among bargainers. This postulated relative autonomy of the state, however, does not

suggest that state actors can change the institutional environment as if they were operating a lever;

rather, state responses to corporatist policy exchange both shape and are in turn shaped by both the

institutional framework within which they operate and the strategies of organized interests with which

they are confronted. The state will inevitably to be confronted with tensions between recognized

public interests and those of participant social partners, for whom the needs to represent rank-and-file

demands effectively and regulate these demands are in constant tension. When the strain between what

Schmitter and Streeck have called the logic of influence and the logic of membership is not

successfully managed by the social partners, a representation crisis can result, jeopardizing the entire

edifice of corporatist exchange.26 Capital and labor each pursues its own version of the national

economic interest, and their respective strategies are influenced not only by divergent ideologies and

25 Fritz W. Scharpf, Games Real Actors Play (Boulder, Colo.: Westview, 1997). 26 Streeck and Schmitter, eds., op. cit.

13

economic doctrines but also by perceptions of their respective roles in the political economy and their

self-interested concerns with organizational survival and growth.

The inter-organizational predicament of institutionalized collaboration between functional

opponents, together with the intra-organizational dilemma of organizing collective action, makes

corporatist governance inherently fragile. Even though corporatist institutions are likely to facilitate

political exchange, there is no straightforward implication of either social efficacy or economic

efficiency. Institutions merely define the opportunities and constraints faced by policy-makers, rather

than their chances of success. Moreover, compromises with the social partners often permit the

persistence of policy dysfunctions, which can flare up under changing economic and political

circumstances. It is thus important recognize the possibility of corporatist failure, to which Fritz Scharpf

aptly refers as a situation of a joint-decision trap.27 Forced to rely upon the often-self-interested

social partners for policy implementation, the governments capacity to respond creatively to

changing external demands is often constrained. The advantages accruing from Staatsentlastung, or

the states sharing of policy responsibilities with the social partners, thus comes at a price, and much

depends upon the institutional capacity of consensus engineering to generate, maintain, and adjust

agreements in the face of changing political-economic circumstances and divergent interests, goals

and perceptions. Furthermore, the willingness to accept unilateral sacrifices, on the understanding

that they will not be exploited but rather reciprocated by others when the occasion arises, presupposes

a high degree of mutual trust.

Without effective consensus engineering, not only among the representatives of the state and the

organized interests of capital and labor at the political center, but also among the rank-and-file of

organized interests themselves, corporatist institutions can become barriers to effective policy

coordination and undermine economic performance and social peace. Negative demonstration effects

may eventually erode the legitimacy of both corporatist practices and ruling governments unable to break

27 Fritz W. Scharpf, Die Politikverflechtungs-Falle: Europische Integration und Deutscher Fderalismus im Vergleich. Politische Vierteljahresschrift 26, no. 4 (1985): 323-356.

14

with the social partners. Under such conditions of a corporatist joint-decision trap, the state becomes

imprisoned in an institutional setting that no longer functions as intended. In these circumstances, state

actors may be forced to choose between two options. On the one hand, they can actively work to

reinvigorate societal consensus in an attempt to relaunch more responsive corporatist bargaining

processes. On the other, they can distance themselves from corporatist arrangements in an attempt to

extricate the state from its dependence on the support of the social partners. Such a strategy of

corporatist disengagement involves reacting to prolonged corporatist immobility with a state-led

strategy of more authoritative style of policy-making and directly devising reforms rather than

negotiating them with the social partners.

This possibility noted, the possibilities for state-led corporatist disengagement are limited by the

path-dependent character of established corporatist institutions. While enjoying a certain autonomy to

address problems in an authoritative fashion, state actors will most likely believe themselves to be in

need of societal consensus and will thus be reluctant to break out of the stagnant corporatist policy

framework or dismantle corporatist institutions in favor of untried alternatives. They will at first try to

persuade organized interests by offering them side payments and other incentives, or work to adjust and

recalibrate the corporatist model in order to secure a revitalization of joint policy-formation and

implementation. Though difficult, permanent defections from corporatist arrangements are far from

inconceivable, as the experience of Swedish corporatism in the 1990s demonstrates. In short, neither

the resurgence of social pacts nor state suspension of corporatist institutions is predetermined, and, in

the event of corporatist failure, scapegoating and mutual recrimination may or may not encourage the

participant actors to prepare for a return to negotiated reform.28

In the sections that follow, we see that such indeterminacy has characterized recent reform

experiences in both Germany and the Netherlands. Although both countries represent examples of

corporatist failure, state responses to shifting the challenges posed by these breakdowns, as well as

28 Anton C. Hemerijck, Corporatist Immobility in the Netherlands, in Colin Crouch and Franz Traxler, eds., Organized Industrial Relations in Europe: What Future? (Brookfield, Vt.: Avebury, 1995).

15

the character of policy outcomes themselves, have been shaped by nationally distinct institutional and

policy legacies. We begin with the German case, in which a period of relative policy immobility in

the 1980s and early 1990s has given way to an era of heightened state intervention designed to make

the corporatist bargaining framework more responsive and, when necessary, to step outside of this

framework and pursue policy by imposition.

State Strategies and the Dilemmas of Corporatist Social-Protection Reform in Germany

From its inception, the post-war German Social-Market Economy was designed to support a

self-regulating, virtuous circle between vibrant job growth and generous social policies, a model that

worked well in the 1950s and 1960s and resisted relatively well through the 1980s despite the

economic crises of the 1970s.29 The chief goal of policy-making before 1990 was to preserve, the

Social Market Economy and the social peace that it had successfully supported through a relatively

equitable division of wealth between wages and profits and cushioning workers from the effects of

(relatively rare) unemployment.30 Germanys excellent economic performance was supported by

extensive corporatist structures, in particular tripartite labor-market institutions, sectoral collective

bargaining, and firm-level works councils who shared responsibility for the organization of

production. Although in the late 1980s the German model began to show signs of strain, including

rising social-contribution rates and increasing rates of unemployment, it was German reunification in

1990 that forced the system into full-blown crisis, as millions of poorly adapted Eastern workers

entered the labor market, scores of uncompetitive Eastern firms went bankrupt, and rising economic

vulnerability put intense pressure on the welfare state. As time went on, structural unemployment,

sluggish economic growth and resulting pressures on social contributions, and increasing welfare

expenditures came to represent serious threats to the German models capacity for self-regulation.

29 Based on data taken from Fritz W. Scharpf, Economic and Institutional Constraints of Full-Employment Strategies: Sweden, Austria, and West Germany, 1973-1982, in Goldthorpe, ed., op. cit., 258.

30 In the words of Ludwig Erhard, Economics Minister in the 1950s and one of the conceptual fathers of the soziale Marktwirtschaft, The restructuring of our economic order must thus create conditions such that the purchasing power associated with rapid economic growth can overcome obstacles and finally end the resentment between poor and rich. Ludwig Erhard, Wohlstand fr Alle, ed. Wolfram Langer (Dsseldorf: Econ-Verlag, 1957), 7. Translation the authors.

16

In response, successive governments have undertaken initiatives designed to rebalance, and in

many cases to bypass the corporatist framework altogether, in the hopes of addressing the effects of

unemployment resulting from more than a decade of systemic crisis. In some areas, the state has

worked to encourage the social partners to undertake reforms of existing policies and institutions,

while in others, such as active labor-market policy and pension reform, it has by-passed corporatism

by directly devising reforms. Reinvigorating the labor market and its perverse effects on social policy

has become a central preoccupation, as the post-war German model of full employment, generous

social protection, and corporatist self-regulation has given way to a society of mass unemployment,

strained welfare finances, and unresponsive tripartism. In this section, we focus on German labor-

market policy and pensions, in which reforms have been shaped by an increasing degree of state

intervention and the erosion of traditional corporatist and consensual policy-making paradigms.

State intervention in the German social-protection system began under the center-Right

government of Chancellor Helmut Kohl. Spurred on by the economic dislocations resulting from

reunification, Kohl expanded social programs and labor-market schemes designed to absorb large

numbers of unemployed, preserve social stability, and begin the task of adapting the Eastern

workforce to a modern capitalist economy. By the mid-1990s, around 450,000 people were

participating in federal training programs, with another 400,000 temporarily employed in temporary

job schemes. As a result, as early as 1991 spending by the BA had become the largest single element

of financial transfers from West to East, and by the end of 1994, the total volume of support offered

by labor-market policies was actually above the level of registered unemployment.31

As the 1990s wore on, it became increasingly clear both that high non-wage labor costs and

exploding expenditure levels were unsustainable, while structural unemployment bore witness to the

systems failure to manage adjustment to the new economic climate of strained public finances and

31 Matthias Knuth, Active Labor Market Policy and German Unification: The Role of Employment and Training Companies, in Lowell Turner, ed., Negotiating the New Germany: Can Social Partnership Survive?(Ithaca, N.Y.: Cornell Univ. Press, 1997), 71-73.

17

slowed growth.32 In response, the current government has stepped up state intervention in labor-

market policy, building on efforts by its center-Right predecessor. Authorities realized that such an

approach would inevitably expose many problems, such as the unemployment hidden by existing

BA training and make-work schemes, before it could begin to solve them. Despite the political risks,

however, the government has considered the potential price, both to itself and to the political

economy, of doing nothing as much greater. As one highly-placed labor-market-policy official put it,

one cannot wash ones hands without getting wet.33

Intensified state intervention and the by-passing of traditional corporatist arrangements grew

out of a series of failed efforts to support corporatist bargaining with a view to promoting needed

reforms. In 1995, the government instituted the Bndnis fr Arbeit, or Alliance for Jobs, designed

as a standing forum for the government and social partners jointly to develop effective social-policy

and labor-market and reforms. Revived under Chancellor Schrder in 1998, the Bndnis appeared to

a period augur reinvigorated corporatist bargaining. Despite much fanfare and optimistic assessments

from the state and social partners, however, the forum produced very little in terms of tangible policy

results. In large part, this failure can be explained with reference to the wishes of the social partners

to defend their prerogatives against encroachment by reform-minded governments and their efforts to

defend their interests in the face of increasing pressures for reform. Neither employers (who wish

above all to increase labor flexibility and limit social contributions and tax burdens) nor unions (who

are more concerned with protecting the wages of their older industrial membership than promoting

jobs in emerging, non-unionized sectors) have demonstrated much of an interest in making sacrifices

for the noble but less proximate goals of reducing unemployment and ensuring the future viability of

social protection. As a result, the institution tended to degenerate into a talking-shop rather than an

32 Quickly dropping to 60% after reunification, Eastern industrial output had recovered to only 68% of Western levels by 1993, resulting in the elimination of 3.9 million jobs between 1990 and 1993. By February 1996, unemployment in the East had reached 17%, with an additional 800,000 people participating in make-work schemes. Christopher Flockton, Economic Management and the Challenge of Reunification, in Gordon Smith, William E. Patterson, and Stephen Padgett, eds., Developments in German Politics 2 (Durham, N.C.: Duke Univ. Press, 1996), 214-215.

33 Interview, Eden Andreas, Bundesanstalt fr Arbeit, 18 April 2001.

18

engine of policy-making, even as both the Kohl and Schrder governments continued to attempt to

promote bargaining under its aegis. In early 2003, the government finally allowed the organization to

dissolve, thereby publicly recognizing a failure that had been clear for some time.34

The failure of the Bndnis reflects the broader dilemmas faced by the German state in

shaping labor-market and social policies. Because the constitutionally enshrined principle of

Tarifautonomie, or wage independence, precludes direct state intervention in wage bargaining,

policy- makers have often used other labor-market policies as means of shaping patterns of economic

distribution. The states authority in the labor market is also limited by the prerogatives of the

tripartite Bundesanstalt fr Arbeit, or Federal Labor Office (hereinafter BA), a fact which has often

forced state actors to pursue reform by altering the incentives faced by the social partners rather than

by direct intervention. A characteristic example of this strategy has involved reforms of an extensive

network of early-retirement schemes managed by the BA and financed through social contributions,

which allow workers aged 55 or older who cannot find part-time work or who have (often

questionable) claims to disability to receive unemployment benefits until their pension plans take

over. Begun in the 1980s, these programs exploded in the 1990s, with 809,000 people receiving

benefits in 1999, not including disability pensions,35 and around 20% of the population aged 55-65 in

the West and 40% in the East participating in some sort of related program by 1996.36 Although such

policies have the politically desirable effect of reducing the unemployment rate, in which

participating workers do not count, they are extremely expensive and have at best questionable effects

34 Some observers have gone so far as to portray the Bndnis as a cartel in which unions and employers defend established interests rather than address unemployment and which the government uses to create a veneer of social dialogue. See Der Fehler ist System: Das Bndnis fr Arbeit schafft keine Jobs, Die Zeit 10 (1 March 2001), 1.

35 OECD, OECD Economic Surveys 2000-2001: Germany (Paris: OECD, 2001), 37. These policies have resulted in one of the lowest labor-market participation rates in the OECD for workers 55 and older (52.9% in 1995). See Philip Manow, Social Insurance and the German Political Economy, Max-Planck-Institut fr Gesellschaftsforschung Discussion Paper 97/2, November 1997, 39.

36 Philip Manow and Eric Seils, Adjusting Badly: The German Welfare State, Structural Change, and the Open Economy, in Scharpf and Schmidt, eds., vol. II, op. cit., 294-295. Another 800,000 in 1999 were participating in various training and subsidized job schemes managed by the BA. See OECD, OECD Economic Surveys 2000-2001: Germany, 37.

19

on real joblessness, since firms have little incentive to replace workers retired at the expense of the

social-security system,37 particularly in a context of slow growth and limited investment.

In the wake of the influx of unemployed Eastern workers after reunification, the federal

government has attempted to limit recourse to such supply-reducing schemes, working to rebalance

corporatist labor-market arrangements and subtly assuming a degree of authority from the social

partners. In particular, the government has worked within the BA to end some early-retirement

programs and boost subsidies for part-time jobs for older workers with the aim of increasing their rate

of exit from traditional employment while providing them with an income in the labor market.

Unfortunately, this approach had the perverse effect of actually increasing the number of early

retirees, since the greater availability of part-time work has enabled many older workers partially to

compensate for the loss of income that early retirement entails.38 Although the dire state of the

Eastern economy has made curtailing these programs politically quite tricky,39 the government has

recently tightened restrictions on eligibility and limited social-contribution rates in the hopes of

encouraging the BA to reduce the annual number of entrants.40

Recent governments have also worked to reform corporatist labor-market arrangements by

promoting low-wage jobs through reimbursements of employers social contributions and granting

income-tax exemptions to low-wage workers. Although the Kohl government made tentative moves

in this direction, such efforts have gathered greater momentum under the Schrder administration. For

example, in April 1999, the government extended the obligation to pay social-security contributions

to casual workers (employees, disproportionately women, working fewer than fifteen hours per

week), while shifting public revenues to the social-security system by reimbursing the taxes and

37 Ibid., 31.38 There are two categories of German early retirement programs, those for workers with reduced capacity

to work (claims that are often specious) and benefits for those unable to find part-time work but who wish to retire from their full-time positions. Early retirees often base their claims on reduced capacity even as they continue to work part-time.

39 Bernard Ebbinghaus, Any Way Out of Exit from Work? Reversing the Entrenched Pathways of Early Retirement, in Scharpf and Schmidt, eds., op. cit., vol. II, 534-535.

40 Christine Trampusch, Die Bundesanstalt fr Arbeit und das Zusammenwirken zwischen Staat und Verbnden in der Arbeitsmarktpolitik von 1952 bis 2001, Max-Planck-Institut fr Gesellschaftsforschung Working Paper 02/5, May 2002.

20

contributions of all workers making slightly more than DM630 (about 320) per month.41 The hope

was to collect social-security contributions from (and therefore to extend social-security coverage to)

lower-wage workers, improve the collection of contributions from the so-called Scheinselbstndige,

or supposedly self-employed, a category often abused as a shelter from taxes and social

contributions, and encourage job creation by preserving exemptions for workers earning the lowest

incomes.42 During 2000 and 2001, the debate over low-wage subsidies was renewed, with many

(particularly Schrders Green coalition partners) claiming that the threshold was too low to have a

major effect on unemployment. Despite rising budget deficits, which exceeded the Maastricht limits

of 3% of GDP and in January 2003 led to a reprimand by the European Union, the government has

debated raising this threshold once again, at an additional annual cost of DM2.8 billion (1.43

billion). The Greens, the more liberal voice in the coalition, had pushed for the exemption ceiling to

be raised to DM1740 per month, more than double the then-current threshold. Although the SPD

rejected this level as too costly, both parties agreed that it should be increased, as unemployment

passed the psychologically significant level of 4 million in January 2002.43

In other areas of labor-market policy, the state has been able to adopt a more direct approach

to creating jobs, effectively by-passing corporatism by expanding policies of labor-market activation.

While the Kohl government focused its active labor-market policy efforts largely in the East, the

current administration has developed similar programs on a larger scale across the German economy

in an effort to combat structural unemployment. For example, the recent Sofortprogramm zum Abbau

der Jugendarbeitlosigkeit, or Immediate Program for the Reduction of Youth Unemployment

41 OECD, OECD Economic Surveys, 1998-1999: Germany (Paris: OECD, 1999), 85, 177. 42 For a discussion, see Wade Jacoby, Institutional Transfer and Institutional Experimentation: Four Cases

from Eastern Germany, Paper presented at the workshop Semisovereignty Revisited, Univ. of Birmingham, April 2002, MS, 17; and Wolfgang Streeck, High Equality, Low Activity: The Contribution of the Social Welfare System to the Stability of the German Collective Bargaining Regime, MS, 10-11.

43 The political tension surrounding this news was reflected in newspaper headlines such as He Is Germanys Scourge! and Chancellor, What Are You Doing for Us?. See Pierre-Alain Furbury, Nouveau revers pour Gerhard Schrder: Le chmage repasse la barre des 4 millions, Les Echos, 7 February 2002, 7.

21

(suggestively referred to as JUMP),44 has created a wide range of training and apprenticeship

measures, additional wage subsidies for firms that hire young workers from the unemployment rolls,

and job counseling services, devoting DM2 billion (1.02 billion) annually (of which DM600 million

derives from the European Social Fund) to the goal of creating 100,000 new jobs for workers under

25.45 Whereas the BA has traditionally administered such programs with almost total autonomy,

JUMP is run jointly by BA and the Labor Ministry, reflecting the same centralization of authority

seen elsewhere in labor-market policy-making. The measures results so far are difficult to ascertain;

although the BA claims that 43,000 successful placements were made in 1999,46 problems of

counterfactuals make it difficult to determine how many of these placements would otherwise have

been made.47 Nonetheless, the measure clearly demonstrates the governments increasingly

aggressive approach and its willingness to compensate for the failures of the BA.

Reflecting a similar pattern of increased activism on the part of the federal government, the

Law for Job-Activation, Qualification, Training, Investment, and Placement (Vermitteln in

German), or Job-AQTIV Gesetz, has focused on reintegrating the long-term unemployed into the labor

market. This law has mandated the restructuring of the BAs job-placement services and adopted a

much more aggressive, contractual stance towards the unemployed in the hopes of shrinking the

number of workers on the unemployment rolls and reducing benefit expenditures. Henceforth,

regional or local branches of the BA are obligated to create personalized profiles for each job seeker,

44 Joblessness among workers under 25 rose significantly in the 1990s, reaching 10.4% in 1998 with 476,000 without either jobs or apprenticeship places. More alarmingly, between 1991 and 1998 the number of young applicants registered for apprenticeship slots increased from 541,790 to 796,400, while the number of available positions decreased from 830,940 to 603,900. Bundesanstalt fr Arbeit, Ausbildung, Qualifizierung und Beschftigung Jugendlicher, Informationen fr die Beratungs- und Vermittlungsdieste der Bundesanstalt fr Arbeit, 2/99, 13 January 1999, 69, 72.

45 The law was intended to last twelve months but has been extended each year by agreement between the BA and the government. See Bundesanstalt fr Arbeit, Sofortprogramm zum Abbau der Jugendarbeitlosigkeit: Zwischenergebnisse aus der Begleitforschung, Informationen fr die Beratungs - und Vermittlungsdieste der Bundesanstalt fr Arbeit, 20/00, 17 May 2000.

46 Bundesanstalt fr Arbeit, JUMP: Das Sofortprogramm zum Abbau der Jugendarbeitlosigkeit, special issue of Direkt: Frdern und Qualifizieren 10 (April 2000), 2.

47 According to the Labor Ministry, since 1998 406,000 people have benefited from the program, either through employment or apprenticeship or training slots. Bundesministerium fr Arbeit und Sozialordnung, Jump ist ein voller Erfolg, press release, 15 February 2002.

22

offering appropriate job openings and providing tailored advice and counseling services. In return,

the unemployed person is obligated to accept reasonable job offers and make a concerted effort to

find work or else risk seeing his benefits suspended.48 The government has thus been willing to incur

significant short-term costs in order to promote the goal of reducing unemployment, and thus public

expenditures, over the medium-to-long run.49 The efficacy of this measure remains to be seen, but its

contractual posture toward the unemployedconnecting the right to benefits to job-seekers

obligationsreflects a major departure from the traditional view that unemployment (and other

social) benefits are rights and paid for by years of contributions.

While the BA still officially manages many such schemes, the federal government has

recently assumed an increased degree of authority for their financing and administration in the hopes

of making the BA more responsive to changing labor-market conditions and addressing the vicious

circle between non-wage labor costs and structural unemployment. In 1993, for example, the

government passed a law providing that the Labor Ministry would henceforth set the BAs annual

budget.50 This provision, in combination with the federal governments obligation to cover any

deficit that the BA may (and often does) run, has provided the state with significantly greater

influence over the scope and character of labor-market policies. By 1999, the federal government

was financing nearly a third of all such programs and has steadily increased the share of resources

devoted to high-priority, active labor-market policies.51 At the same time, the government has

partially shifted welfare funding from social contributions to general taxation. In 1999, for example,

the government imposed a tax (the controversial kosteuer) on environmentally dangerous

activities and materials, the revenues from which were used in part to replace 0.8% of annual pension

48 The law also introduced new instruments to train and retrain workers, increased subsidies to employers to reduce non-wage labor costs and encourage hiring, and instituted additional job-creation schemes. See SPD und Bndnis 90/Die Grnen Budestagsfraktionen, Zur Reform der Arbeitsfrderung: Eckpunkte der Fraktionen SPD und Bndnis 90/Die Grnen vom 3. Juli 2001 fr ein Job-Aktivierien, Qualifizieren, Trainieren, Investieren, Vermitteln-Gesetz, July 2001.

49 We are indebted to Wade Jacoby for this insight. 50 Trampusch, op. cit., 28.51 Uwe Blien, Ulrich Walwei, and Heinz Werner, Labour Market Policy in Germany (Nrnberg:

Bundesanstalt fr Arbeit, 2002), 6.

23

contributions with federal tax monies. The tax was also designed to compensate for the loss of

revenue resulting from caps on social-contribution rates implemented as part of the 2001 pension

reform in order to promote job-creation and provide a much-needed shot in the arm for social-security

funds by expanding their contribution base.52

In 2002, the state began to assert greater control over the BA and to remove some of its

policy- making authority after it was discovered that the agency had grossly inflated job-placement

statistics.53 Since March of that year, the BA has been governed by a three-person executive board

appointed directly by the federal government, and in the summer the government established the

Hartz Commission, an independent panel composed of experts from government ministries,

employers associations, and unions, to make recommendations for labor-market reforms. Although

structurally tripartite, the Commission issued recommendations that reinforced the trend toward state

control of labor-market policy, including increased federal funding for active labor-market policies,

the development of state-run temporary job agencies to promote flexible employment, and further

reforms of the BAs administration and employment services.54 To be sure, such policies in part

reflect the governments response to public pressure, but they also indicate real concern about the

self-regarding nature of social partners priorities, the apparent incapacity of Germanys tripartite

labor-market institutions effectively to govern themselves, and the BAs weak record of reducing

joblessness. Although the narrowness of the 2002 victory by the Red-Green coalition, union

52 The 2000 tax reform, which reduced tax rates and liberalized restrictions on firms and banks sale of stock held in other companies, was another element of efforts to encourage investment and job growth.

53 The highest German administrative regulatory agency concluded that as many as 70% of cases had been incorrectly reported and that it was doubtful whether the statistics issued by the BA can at all be used as the basis for the law-making and budgetary decisions of the Bundestag and the government. The report found confirmation in Riesters admission that it cannot be excluded that workers in the labor office had an interest in falsely reporting statistics on successful job placement. The scandal led to the resignation of BA President Bernhard Jagoda and proposals for major reforms of the BA. See Bundesanstalt gert immer strker ins Kreuzfeuer der Kritik, Frankfurter Allgemeine Zeitung, 6 February 2002, 13; and Jagoda weist Rcktrittsforderungen zurck, Frankfurter Allgemeine Zeitung, 7 February 2002, 13.

54 See Hartz Commission, Moderne Dienstleistungen am Arbeitsmarkt: Vorschlge der Kommission zum Abbau der Arbeitslosigkeit und zur Umstrukturierung der Bundesanstalt fr Arbeit, August 2002. The qualified character of the Commissions tripartism could also be seen in the selection as its leader of Peter Hartz, the personnel director at Volkswagen, with which Schrder has long had business ties, rather than establishing a board of co-equal union and employers association leaders to direct its work.

24

opposition, and a dire fiscal outlook may limit the follow-through on many of these reforms, they

seem already to have had a positive effect, with a reduction of 33,000 in the number of unemployed

in June 2003 with no concomitant upturn in the struggling German economy.55

Since 2002, Schrders government has stepped up efforts to revitalize the labor market,

including a series of reforms that continue along the lines of those of the Hartz Commission but go

well beyond them. Under the banner Agenda 2010, the administration has introduced a

comprehensive series of reforms which, in the arena of labor-market policy, aim to promote

employment, reduce non-wage labor costs, and liberalize regulations on economically-motivated

layoffs and shop hours.56 In the realm of unemployment insurance, the reforms reduce the length of

eligibility for primary unemployment insurance (Arbeitslosengeld) to twelve months for all workers,

with the exception of those older than 55, who will enjoy eighteen months of eligibility.

Unemployment-assistance benefits (Arbeitslosenhilfe), paid to workers whose eligibility for

unemployment insurance has expired, are to be reduced to the level of Sozialhilfe, the basic income-

support program. The measures also provide for the liberalization of protections against layoffs in

Germanys smallest firms, the loosening of the countrys notoriously strict shop-opening laws, with

the social partners in a given sector limited to a passive veto authority, and reductions in health-

insurance contributions from 14.3% to 13% of gross wages. In short, Agenda 2010 aims to impose

change in nearly every aspect of the German labor market, with limited input from the social partners.

Predictably, the proposals elicited sharp criticism from unions and the Left wing of the SPD,

who declared themselves bitterly disappointed and promised to fight meter by meter to secure

modifications of the reforms major provisions. So strident were the conflicts within the SPD over

the proposals that the party called an exceptional conference for 1 June, weeks before which Schrder

had threatened to resign if the measures were not approved. Although the Left succeeded in having

55 Officials attribute this positive outcome to the governments active labor-market policies. Bundesanstalt fr Arbeit, Die Entwicklung des Arbeitsmarktes im Juni 2003, press release, 8 July 2003. See also Something Stirs: German Unemployment Is Responding to Chancellor Schrders Measures, The Economist, July 26th-August 1st 2003, 48.

56 The program also involves proposed reforms of health insurance, pensions, and income support.

25

its proposals placed on the agenda for the regular, annual SPD conference to be held in November,

the partys approval of the Chancellors proposals, on which he had staked his political future, means

that few substantive changes are likely.57 Two of the programs proposals were voted into law in

June, with the remainder slated for adoption in the autumn. Just as with the governments earlier

labor-market measures, with Agenda 2010 Schrders approach has been one of imposition rather

than consensus, increasing influence of the state relative to the social partners, and a real willingness

to risk significant political capital in order to see through significant reforms. Furthermore, the

measures demonstrate the governments developing conception of labor-market policy as a

redistributive project and the centrality of employment in its vision of social protection.

Despite their aggressive character, recent German measures have not resolved Germanys

employment crisis. The country continues to struggle with record levels of unemployment, at 10.4%

in May 2003 with 4.34 million on the official unemployment rolls,58 high non-wage labor costs, and

economic growth that ranges from sluggish to non-existent. Nonetheless, the cumulative effects of

early reforms under Kohl and, more significantly, the measures undertaken by the Schrder

administration, are beginning to make themselves felt. In addition to the early payoffs of the Hartz

reforms, the prioritization of active labor-market policy has begun to address some of the German

labor markets most trenchant problems. Although still at alarming levels, long-term unemployment

has decreased modestly since 1998, with those without jobs for twelve months or longer constituting

52.6% of total unemployment in that year but only 51.5% in 2000.59 Efforts to promote part-time

work have also begun to pay dividends, with the percentage of total employment represented by part-

time jobs rising from 15.8% in 1997 to 17.6% in 2000.60 Despite an upturn in overall German

57 Although around a third of the delegates voted against the governments version of the proposals, the partys approval basically moves the reforms from the party to the parliamentary arena. The creation of working groups to discuss differences within the party over the reforms during the summer thus seems to be a case of pacification rather than substantive consideration of the dissenting minority. See Gnter Bannas, Neunzig Prozent ausgemacht; Ja-Stimmen statt Beifall, Frankfurter Allgemeine Zeitung, 2 June 2003, 3.

58 Keine Wende auf dem Arbeitsmarkt: Aktive Arbeitsmarktpolitik hellt Statistik etwas auf, Frankfurter Allgemeine Zeitung, 6 June 2003, 13.

59 OECD, OECD Employment Outlook (Paris: OECD, June 2001), Statistical Appendix, 227.60 Ibid., 224.

26

unemployment, unemployment among those over 50 decreased by 6% in 2002, and the number of

workers aged 16-25 removed from the unemployment rolls increased by 10% between 2001 and

2002.61 Although the employment situation remains critical, reforms are beginning to make modest

but significant headway in a number of areas, despite near-total economic stagnation since 2001.

No longer able to rely upon a system of tripartite labor-market policy-making and

increasingly vulnerable to criticism of its record on employment, Schrders government has thus

gradually assumed a variety of responsibilities that formerly lay within the domain of the social

partners, increased public resources devoted to the labor market, and developed a range of new

policies that parallel pre-existing programs managed by the BA. Rising joblessness and increasing

pressures on social-policy financing seem to confirm the suggestion by some observers that the high-

wage, high-skill, high-employment economy upon which Erhards soziale Marktwirtschaft was

founded may no longer be sustainable.62 At least in the context of labor-market policy, German

corporatism has adapted rather poorly, creating a partial policy vacuum that the state has begun to fill.

By adjusting incentives faced by workers in the labor market and, in many cases, by-passing inherited

corporatist institutions and independently developing a series of novel labor-market policies, German

authorities have shown that the state enjoys a broad capacity for intervention in corporatist systems,

which require constant and shifting state strategies in order to function.

While recent labor-market policy-making thus reflects a combination of political strategies,

pension reform has entailed more direct state intervention, reflecting the erosion of the traditionally

consensual rapport between the major political parties and increasing strains in the relationship

between the state and social partners. In part, the differences between patterns in labor-market policy

and pensions are functions of the nature of pension system itself, which has long been directed by

government experts in close consultation with the opposition, unions, and employers, in marked

61 Bundesanstalt fr Arbeit, 2002 Annual Report (Nrnberg: BA, 2003), 8, 11.62 For a particularly pessimistic perspective on the German economys capacity for adjustment, see Wolfgang

Streeck, The German Economic Model: Does It Exist? Can It Survive? in Colin Crouch and idem, eds., Political Economy of Modern Capitalism: Mapping Convergence and Diversity (London: Sage, 1997), 33-54.

27

contrast to the tripartite administration of labor-market policy. Whereas the states strategy in labor-

market policy has been to rebalance and by-pass corporatism, in pension reform the challenge of

reform has been quite different. In this area, its approach has been to reinforce the states historical

autonomy over the pension system, while excluding unions and the political opposition from the more

informal influence that they have long enjoyed. This go-it-alone tactic reflects the reinforcement of

the states authority over the German pension system and illustrates its ability to set the terms of

debate and exclude other social and political actors from the policy-making process.

The generous German pay-as-you-go system, created in 1957, remained relatively untouched

until 1989, when the Kohl government raised the retirement age to 65, established a 0.5% per-year

penalty for retirement before 65 and an equivalent bonus for each year thereafter, and slightly

modified the benefit-calculation system. Passed before reunification, this relatively modest measure,

which preserved an average replacement rate of 70% and involved significant concessions to the

opposition SPD and the trade unions, did not take into account, and was unable to cope with, the huge

additional burden represented by Eastern workers for whom the system had suddenly assumed

responsibility. The new government understood that the tinkering of the previous decade, designed to

avoid alienating the electorate and marked by consensual negotiations with the social partners and the

political opposition, would no longer suffice to ensure the future viability of German pensions.

Amid considerable controversy, in August 2000 Schrders government released its initial

pension proposals, which went far beyond Kohls 1989 measures and contravened the preferences of

the trade unions, the SPDs traditional allies. The governments reforms mirrored a measure passed

by the Christian Democrats in 1997 but quashed by the incoming administration in 1998, suggesting

that increased intervention in the pension system has become an approach that crosses partisan lines.63

63 Recent state intervention has also involved efforts to control spiraling health-care costs by rebalancing corporatist arrangements. In 1989, for example, the Kohl government passed a measure that limiting physicians autonomy and introducing elements of competition and patient choice, while working within the existing corporatist framework. For details, see Susan Giamo and Philip Manow, Welfare State Adaptation or Erosion? The Case of Health Care Reform in Britain, Germany, and the United States, Paper presented at the American Political Science Association Annual Meeting, 28-31, Washington, D.C., August 1997.

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The initial draft envisioned a reduction in total average benefits from 70% to 64%,64 and, from this

adjusted rate, an additional annual reduction of 0.3% for those retiring in or after 2011 (the disputed

Ausgleichsfaktor, or Equivalence Factor), which meant that each cohorts benefits would be 0.3%

lower than those of the previous years retirees, with each retirees benefits remaining constant. The

measure also proposed the creation of a legal right to firm-level pensions in companies and

introduced federal subsidies for low-income workers pensions and caps on contribution rates. The

reforms centerpiece and most controversial provision, however, was the unprecedented introduction

of supplemental private accounts, into which each worker would deposit up to 4% of his annual

income (beginning with 0.5% in 2001 and increasing by 0.5% annually until 2008), supplemented by

generous government subsidies and tax exemptions.65 In addition, the government was to pay annual

supplements to the system, increasing from DM8.1 billion in 2001 to DM43.7 billion by 2030.66

The reform elicited sharp protests, as womens groups, the opposition CDU/CSU, pensioners

associations, and the Left of his own party demanded major changes in the proposals. 67 Decrying a

privatization of social risk,68 unions demanded keeping total average benefits at 67% (to be

financed by an additional increase in social contributions), the quashing of the Ausgleichsfaktor, said

to disadvantage younger workers, increased state and employer support for firm-level pensions, and

the abandonment of the proposal for private accounts. This last demand was the highest priority, for

unions suspected that employers exemption from contributing represented the beginning of the end

for Germanys cherished system of parity financing. In the words of one union leader, the welfare

64 This actuarial figure is deceptive, since it represents the benefits of a notional worker having contributed for 45 years. Most workers benefits would thus actually be lower.

65 Bundesministerium fr Arbeit und Sozialordnung, Die Rentenreform 2000: Ein mutiger Schritt zu mehr Sicherheit (Bonn: Bundesministerium fr Arbeit und Sozialordnung, August 2000).

66 SPD und Bndnis 90/Die Grnen Bundestagsfraktionen, Entwurf eines Gesetzes zur Reform der gesetzlichen Rentenversicherung und zur Frderung eines kapitalgedeckten Altersvorsorgevermgens, 14 November 2000, 4.

67 In one famous incident during a congress of the moderate public-service union, the Chancellor declared in response to heckling from the audience, It is necessary, and we are going to do it. Basta. See Schrder bleibt bei der Rentenreform hart: Wir werden es machen. Basta, Frankfurter Allgemeine Zeitung, 6 November 2000, 1.

68 Interview, Ludger Loop, Gesellschaft fr Innovation, Beratung und Service, IG Metall, 13 March 2001.

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state has the task of holding society together;69 accordingly, unions feared that the partial exit of

employers from pension financing would jeopardize the integrity of German society.

Declaring itself willing to discuss the details, but not the principle of the reform, the

government adopted a multi-pronged strategy to secure the laws passage with the fewest possible

concessions to either the social partners or the CDU/CSU opposition. The first aspect of this

approach involved separating the reform into two laws, reflecting a clever divide-and-conquer

approach that would permit the government to pass both measures without any major modifications.

The first measure, involving changes in the basic pension rgime, was opposed by the CDU/CSU,

and, to a lesser extent, by the unions. Since the German constitution makes the federal government

responsible for guaranteeing social protection and because the basic pension scheme does not affect

the financial burdens of the Lnder,70 however, the law did not need the approval of the upper house

of Parliament, or Bundesrat, where the Lnder are represented and where the CDU had enough votes

to block the measure. As a result, the reform of the basic pension scheme, adopted by the Bundestag

on 26 January 2001 over the opposition of the CDU/CSU (most of whose demands had not been

satisfied) and heralded by Labor Minister Walter Riester as the greatest social reform of the post-war

era,71 reflected almost none of the CDUs priorities.

By contrast, the second law required a majority in both houses and in particular the votes of

Berlin and Brandenburg, both of which were governed by SPD-CDU grand coalitions. As a result,

the government could ignore neither the Lnders concerns about the increased costs that the reform

would entail nor the CDUs opposition, which centered on the Ausgleichsfaktor, said to deal a serious

blow to generational justice, the laws alleged lack of consideration for families with children, its

insufficient reduction in benefits and social contributions, and its use of federal money to subsidize

69 Interview, Michael Guggemos, IG Metall Vorstand, 19 January 2001.70 Much has been made of the Bundesrats ability to block legislation. As the pension reform demonstrates,

however, the governments control over the ways in laws are drafted and gray areas in the constitution provide flexibility in determining which laws are subject to the upper houses approval.

71 Riester spricht von der grten Sozialreform der Nachkriegszeit, Frankfurter Allgemeine Zeitung, 27 January 2001, 1.

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pensioners below the poverty level.72 In navigating the law through the Bundesrat, however, the

government employed a strategy that permitted it to preserve the laws core provisions, using state

resources and the logic of German federalism to break the ranks of the opposition. It agreed to delay

the application of the law until 2002 in order to relieve some of the costs of implementation to the

Lnder, at an additional expense of DM1 billion to the federal government,73 and provided DM21

billion to cover administrative costs and subsidies to participating workers. This federal money and

the lure of the administrative jobs that the law would require prompted Berlin and Brandenburg to

support the reform.74 Even in the face of CDU and public opposition, the clever navigation of the

legislative process had allowed the first major structural reform since the pension systems inception.

In the case of pension reform, therefore, exclusion and control rather than consensus and

compromise were the hallmarks of the governments approach. While the tripartite structure of

German labor-market policy has called for a subtle and shifting combination of incentives and

intervention, significant pension reform has required a more unalloyed interventionist strategy.

Despite these policy-specific patterns of policy-making, the German state has played a critical role in

shaping reforms in both areas, even when it has not been able alone to dictate the character of

reforms. At the same time, its influence over policy outcomes has depended to a large degree on its

ability strategically to read and respond to the opportunities and constraints of particular policy areas

and specific political contexts, all within a relatively fixed institutional landscape. Although

authorities have had to confront the constraints represented by inherited corporatist institutions, they

have in some cases also been able to exploit possibilities for more unilateral action. To the extent that

the German state has been able successfully to see through policy changes that are consistent with

72 In part, the incoherence of these objections reflected competition among various CDU constituencies, but it also mirrored internal disorganization resulting from a major party financing scandal that broke in 1999. One CDU member actually admitted privately that his party had no coherent positions on social-policy reform. Interview, member of CDU/CSU Arbeitsgruppe Arbeit und Soziales, 15 March 2001.

73 The additional money was required because the Lnder were already suffering decreased revenues as a result of the 2000 tax reform. This DM1 billion supplement was provided in addition to existing subsidies to the pension system, which by 2001 had risen sharply to an annual DM114 billion.

74 The government used a similar strategy in the case of the 2000 tax reform, for which it secured Bundesrat approval by granting federal money for infrastructure projects to Lnder whose votes were needed.

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both a functioning market economy and a just and sustainable network of social protection, therefore,

it has done so by both recognizing its limitations and working to convert institutional liabilities into

assets. German corporatism is thus a complex institutional setting within which the state has ample

room for strategic intervention and the character of reforms is shaped by policy-specific relationships

among the government, political opposition, and social partners. As we shall see, such flexibility and

indeterminacy have also characterized recent Dutch reforms, to which we now turn.

State Responses to the Contingencies of Dutch Corporatism

Most observers agree with Gerhard Lehmbruchs characterization of the Dutch political

economy as an example of corporatism par excellence.75 Far more than Germany, the Dutch

political economy is furnished with a firmly established apparatus of bi- and tripartite boards for

nation-wide social and economic policy-making. The Foundation of Labor (STAR, or Stich