What the Varieties of Capitalism framework does and does not tell us about the troubles of the Big Three

By Vera Šćepanović, CEU PhD Candidate, Political Science

Now that the heat of debates over the US auto industry bail-out has somewhat subsided, here are a few belated thoughts in response to the earlier post “What does Varieties of Capitalism have to say about the bailout of the U.S. auto industry?” (by Kristin Makszin). There’s always something suspicious when a theory comes together so smoothly. Indeed, according to the Varieties of Capitalism (VoC) framework, automobile industry should not have existed in the US at all. To the extent the theory relies on sector-specific properties in the division of labour it envisages between coordinated and liberal market economies (skill specificity, pace of innovation, investment time horizons etc.), a mature manufacturing industry does not sit well with a dynamic liberal market environment which ought to support radical innovation, easily transferable workers’ skills and is characterised by a volatile investment environment.

Now, the demise of Detroit looks like a final victory for the theory, especially since the US Big Three seemed to display exactly the characteristics of a firm embedded in a coordinated market environment: close relations with the trade unions, long-term support of the workforce (instead of the supposedly typical adversarial labour relations and flexible fire and hire policies), and little display of radical innovation (e.g. few “greener” cars). And we know from the VoC that complementarities between the national institutional environment and firm operations are the key to success. If the complementarities fail, somebody is bound to suffer. The debate still rages whether it will be the firm or the national institutional environment.

But the question is, why did the Big Three let themselves be tricked into this trap, why did the companies that have been through the thick and thin of the international markets for the last hundred years fail to see what a handful of academics understood so clearly?

(And the Japanese, don’t forget them. The well-justified worries over Detroit seem to have made everybody forget about “the rest” of the US auto industry – 2008 was a bad year for the carmakers all around, but apart from that for all we know the East Asian transplants in the US have all been rather alive and well. Which sort of spoils the possibilities for sectoral generalisations. True, they found a different way to make cars – the one that calls for fewer skilled workers, no unions and more adversarial labour relations. All that means for the VoC framework is that the I-make-machines-you-make-chips division of labour between CMEs and LMEs may have been a tad too rough if usefully illustrative shorthand.)

The answer, I suspect, lies in the incompleteness of the framework, which is essentially that of a production model. There’s one way in which the stubborn clinging of the Big Three to their big expensive cars and big expensive workforce makes sense, and that’s if we conceive of it as a giant, if restricted, Fordist scheme to secure the market. Which only makes sense if we believe that these multinational juggernauts are that dependent on the US market. Surprisingly enough, that really seems to be the case.

Contributions of North American and rest-of-the-world operations to GM’s global net profit, 1960-2007 (compiled from annual reports, based on Bruno Jetin:2004)

In the example of GM, the foreign operations provided a small if positive contribution to its global profits since the 1960s, and when they plunged with the advent of the two oil crises the gains on the national market were more than enough to offset the losses. It was only at the end of this period that GM started to pursue more aggressive expansion in the foreign markets which paid off during the general recession of the early 1990s, but already since the mid-1990s the national (US) operations started to regain primacy, while the international front appeared was on the retreat. Only since 2005 the contraction of the US market and the success of GM’s Chinese operations have been changing the picture a little. Still, in 2007 GM sold 4.5 million cars in the US, which is only a few less than in all of the other countries of the world put together. The situation is very similar with Ford (see the graph below). Simply, the US carmakers have always relied heavily on their home markets, and the strategy has paid off. Then in 2005 something went amiss (probably with the beginning of the oil price hikes) and the three years since have been too little to make a significant turnaround. The question is, what kind of a turnaround should it be?

Contributions of North American and rest-of-the-world operations to Ford’s global net profit, 1960-2007 (compiled from annual reports, based on Bruno Jetin:2004

The VoC and the concerned observers suggest one direction with several routes: get rid of the overpaid workers (which would imply endangering the market potential even further); get rid of the costs of supporting workers’ purchasing power while keeping the market afloat (presumably by somehow transforming the national institutional environment to externalise the costs of provision of healthcare, unemployment benefits and pensions); or innovate and move into new markets (start making green, hybrid etc. cars). The problem with the first two is that they may take time and be socially difficult to execute. The problem with the latter deserves some elaboration.

The financial crisis of 2008 caused an awful drop of the car sales in the US across all market segments. The small car segment suffered the least (only – 1.1%, as compared to the -18% in the industry), but the small car segment in the US market represents only about 15% of the overall sales (as compared to West European market where the market share of the equivalent segment is 27%). The fact that the US manufacturers choose to focus on the bigger, more expensive and less fuel-efficient cars is therefore the function of their dependence on the US market with its peculiar characteristics (which, incidentally, may also have limited their success internationally, given the different preferences in other markets, and has also made them more vulnerable to the downturn which took a greater toll on the large and luxury segments). Forcing the Big Three to rethink their production strategy and start making smaller, fuel-efficient cars or innovate in the direction of hybrid and electric cars in exchange for the bailout will only work if there is a market to sell them. And taking a cue for Toyota’s decision to delay the production of its Prius hybrid in the US indefinitely, one suspects that the times are not propitious.

This is all not to say that the Big Three are not ripe for restructuring or that the humanity is not in a dire need of a cleaner solution for transportation. But the two may not go together as smoothly as we would like to think they should. The Varieties of Capitalism is a story of how every wheel of the system comes together like clockwork, but we just might be seeing them grind each other to halt.

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Who loses in the economic crisis?

By Katka Svickova

As the crisis progresses from the financial into the real economy and starts hurting the businesses as well as their staff, what is a better defense of an individual against its vagaries: his or her brain- or muscular power?

At the moment, we do not yet have a clear picture about how badly hit in terms of real production cuts and subsequent unemployment the Central European economies really are and will be by the global financial crisis. Yet there are already a few signs of who is affected...

In the Czech Republic, especially the trouble of the car and car part manufacturing sectors are put into spotlight. Skoda Auto, the Czech Republic's largest car manufacturer and a subsidiary of Volkswagen since 1991, has cut down production. The Czech Automotive Industry Association predicts that nearly 10 percent of the country's auto workers, or around 10,000 people, could lose their jobs within six months. So far, however, the redundancies started with contractual manual workers, partially „imported“ from countries like Vietnam and Mongolia to overcome bottlenecks on the domestic labor market. Also in the case of the glass, textile and logistics branches, the unemployment hit predominantly manual workers. In the whole Czech economy, up to 40 000 more redundancies are expected in 2009. Conversely, Slovakia, called also the Detroit of Europe, has not yet heard of any mass lay-offs by the automotive investors or in any other economic sectors.

At the same time, reading these forecasts, one should not forget that the seasonally adjusted unemployment rate in the Czech Republic was 4,4 % in October 2008 (Eurostat) – one of the lowest in the EU. Besides lay-offs, there are also many vacant positions on the labor market (albeit their number is lower than a few months ago). Qualified and skilled IT workers and engineers are still in high demand.

Also in Hungary, which was hit very hard by the financial crisis, the real economy started to feel the pain. National Labour Service (AFSZ) reported that there were 420 000 job-seekers in October 2008 whereby their number increased by 21 000 in a single month. As of February, further 14 000 employees could lose their jobs besides the already announced lay-off plans. Firms cutting their staff are for example Laird Technologies (electronics component manufacturer), Suzuki, Foxconn (manufacturer of spare parts for mobile phones), Videoton or General Electrics. In all, the crisis is felt most in the construction, automobile, electronics, IT and equipment manufacturing, tourism, hotels and processing industries.

Hungarian government plans to linder the effects of the crisis on workers by creating jobs in public work programs: in 2008, 25,000-30,000 poor and jobless Hungarians had temporary work and further 50,000-90,000 jobs should be created. This indicates a message about the skill level of workers made redundant – these public work programs can be hardly dominated by highly-skilled positions. Moreover, engineers, IT graduates and other tertiary educated workers are still demanded by employers.

Polish economy is also bracing for lay-offs in its glass, steel, chemical, automotive and electronics branches. At the same time, exporters in Poland were threatening to lay off staff already in summer 2008 (so before the economic crisis). According to forecasts, the unemployment may exceed 10 % - but this is hardly a steep jump compared to 9,6 % in June 2008. One of the sources of increased unemployment is going to be, according to expectations, a return of a part of the large Polish emigrant workers pool from Western Europe.

In all, at this stage, it seems that the adverse development in the real economy has not yet bitten the well-educated core of the labor force in Central Europe. Rather, it will probably lead to tuning down of the outcries about the scarcity of welders, metal turners and other manual professions, and the need for more young people to learn these professions.

In the end, therefore, the cloud of unemployment might have a silver lining: a clear message to the policy makers as well as individuals that investment into people´s brains has good and stable returns. Moreover, this kind of investment may not vanish into thin air so easily, like the billions sunk in sub-prime financial investments did.

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Russians are strangling Europe

By: Karel Hirman, Slovak energy policy expert

[Original published in Slovak on 7.1.2009, translated by Andrej Nosko. Translated and republished with the permission of the author.]

Picture by: Shooty. [Text: "So that you don't forget, who is the boss here"]

January 2009 marks the end of 40-years-long fair and mutually beneficial energy cooperation between Moscow and Europe. From now on, European customers must be well aware that the Russian partner is not only trading with them, but his priority is promotion of geopolitical interests of the Kremlin. Vladimir Putin, already in March 2000 declared, that "Our work (meaning the export of oil and gas) will be driven by our geo-strategic interests!" Since then, in a targeted and very effective way, the Kremlin uses energy cooperation and the supply of raw materials for the promotion of its foreign policy interests. Brezhnev's doctrine of limited political and [national] security sovereignty for Eastern Europe was replaced by Putin's doctrine of limited energy sovereignty.


The argument that it is primarily a trade dispute between inadequately paying Ukraine, and tough Russia is ultimately wrong and misleading. Regular followers of these issues known, that these tensions have always been present between Ukraine and Russia. But it is only since February 2004, when Gazprom for the first time deliberately disrupted gas supplies to Belarus, as well as a further transit to Poland and Germany, that switching off gas and oil pipelines has become a regular Russian practice. This has nothing to do with civilized business, because the question of price and the letter of the agreement is always a matter of agreement of both parties, and the third parties cannot suffer due to this. THE KREMLIN AND GAZPROM VERY WELL KNOW THAT WHENEVER THEY CLOSE VALVES TO UKRAINE OR BELARUS, THEY ARE CLOSING THEM FOR EUROPE AS WELL. The subsequent Russian "P.R." aerobics about how evil Ukrainians steal transited gas are spiteful, because in the given technological circumstances, Ukrainians simply do not have enough gas to power their transit compressors, and at the same time to balance their pipeline system. Targeted and repeated discrediting of Ukraine as a reliable transit country for gas and oil, should compel the Europeans to swiftly agree, and primarily to foot, the huge and unnecessary bills for the construction of new pipelines through the Baltic and Black Sea.

Are today's events surprising? For a considerable part of the EU they certainly are. European leaders, particularly those from key countries such as Germany, France and Italy, often prefer narrow commercial interests over international security interests of not only their EU partners, but even of their own citizens.

The real shock is experienced by those countries and governments that still have not done anything for the diversification of gas and oil, and remained totally dependent on the Russian supplies. All Slovak governments, and managements of SPP [Slovak Gas Company] up to date, have failed in this area. Let me be personal. For the past ten years, I have repeatedly emphasized the gravity of this situation in my various articles, analyses, as well as numerous speeches at various conferences, and personal meetings with various politicians.
For years, I have been frustrated over the fact that almost none of them considered this a problem. I was disappointed that representatives of investors repeated phrases about the reliability of Russian supplies, while they knew that the absolute priority of their domestic companies has always been diversification of supplies so that no supplier could blackmail them.

The responsibility for the situation in which we had to declare the emergency, and a real energy crisis is around the corner, is not borne only by Gazprom, but also by all responsible in Bratislava, because they were not properly prepared for this situation.
The hard lesson for citizens and businesses is, that not artificially low domestic prices should be the priority, but fair prices reflecting the highest possible reliability and continuity of supply from abroad.
What's the use of low price, if the pipe is empty? The case of diversification is similar to insurance. It is costly, but if my life, property or business is to be ensured against unexpected events and unfair partners it's a necessary expense. This is one but not the only reason why we have to urgently review the reality of our recently approved energy security strategy.

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Anti-crisis policies in knowledge-intensive economies

By Ugo Pagano, visiting professor at Central European University. web.me.com/ugopagano

A long period of neo-liberal academic dominance is coming to an end. Unfortunately, it is being wiped out by a difficult economic crisis and not by an end of the inertia of cross-citations-based academia. Some “old theories” (which were academic pariahs until a couple of months ago) offer the main intellectual framework for anti-crisis policies. Re-considering past theories and policies is certainly a very useful re-starting point. However, policy suggestions should not ignore how much the economy has changed since the thirties. At that time, the main focus of policies stimulating aggregate demand was on traditional infrastructures, like bridges, roads etc. In a modern knowledge-intensive economy, the focus should be different. Policies should exploit the new opportunities that contemporary economies offer for Keynesian-type measures.


The knowledge-intensive economy is characterized by an unprecedented share of privately owned knowledge (or, in other words, by widespread monopoly rights on intellectual assets). While global institutions (WTO and the related TRIPs agreements) have made private intellectual property more profitable, no global institution has increased the convenience of public intellectual property. The present (and, even more, the missing) institutions of the global economy have made it convenient to over-privatize knowledge and over-monopolize the economy by an intensive web of intellectual property rights (IPR).
Intellectual private property rights (IPR) can be a cause of economic stagnation. Monopoly prices restrict production. The drive to acquire monopolies may initially stimulate investments but, after a while, the stimulus is increasingly offset by the fear that the use of new knowledge may be blocked by monopolies on pre-existing complementary knowledge (the so called anti-commons tragedy). Moreover, IPR involve asymmetric arrangements for rich and poor countries. While developing countries export their commodities in competitive conditions, many firms of the first world countries can sell knowledge-intensive goods under the monopoly shield granted by IPR. Although being sold as a necessary ingredient of free trade, IPRs offer stronger protection than the strongest protectionist tariffs. They grant total protection not only for the home market but also everywhere else in the World. Similarly to high tariffs, they can make the economic crisis only worse.

The present institutions of the knowledge-intensive economy are likely to become one of the causes of a prolonged stagnation. However, the knowledge-intensive economy offers great opportunities for more effective Keynesian policies. Instead of being used to nationalize inefficiently the assets of firms producing private goods, Keynesian policies could be used to decrease the monopolization of knowledge and to transfer efficiently knowledge from the private to the public sphere. The WTO, which has made intellectual private property more convenient, should be balanced by the institution of a strong WRO (World Research Organization) which helps to make intellectual public property feasible whenever it can better foster development. Countries should acknowledge that knowledge is a non-rival good which should be treated as the most precious and specific global common of humankind. In Jefferson’s vivid image, knowledge is like the flame of candle: lightening one more candle is not diminishing the flame of the other candles. By contrast, allowing others to contribute to the fire increases the shining of each candle!
Anti-crisis policies should include the funding of public research infrastructures.
This funding should be coordinated at supranational level to avoid the free riding problems among countries, which are presently fettering the development of investments in public research.
More important, in the present crisis, the funding can immediately take the shape of a public acquisition of well-established IPRs from private firms. The effects of this policy would go well beyond those entailed by many current anti-crisis measures:
In the first place the funding does not involve a nationalization of the firm or the use of taxpayers money without any counterpart. By contrast, while the IPR is paid at its private value, it is transferred in the public arena where it has a greater public good value and decreases costs for many producers.
Secondly, financial support is granted to firms who have proved to be innovative. A powerful stimulus for new investments is given to the most efficient firms. On the one hand, these firms receive fresh funds but, on the hand, having sold the old intellectual property rights, they face tough competition. Therefore, they have an urgency to invest in the production of new intellectual assets, which boosts aggregate demand.
Thirdly a monopoly price for the asset is replaced by the lower competitive price, which has again a positive effect on aggregate demand.
Finally, the “anti-commons” problem is eased; everyone can now invest in new knowledge with the awareness that complementary pre-existing knowledge is less likely to be owned by other firms. The policy decreases the costs of future risky transactions necessary to use the fruits of innovation. While the immediate funding goes to incumbent innovative firms, which may often belong to the richer countries, the increase of the knowledge freely available to everyone has widespread beneficial effects and contributes to the overall development of the world economy.
The multiplicative effects, which we have indicated, are stronger than those traditionally associated with standard Keynesian policies: their total effects are more powerful both on aggregate demand and on the level efficiency of the economy. An investment “super-multiplier” can be made to work in knowledge-intensive economies

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