The Price of Political Crisis

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The Price of Political Crisis

• Economic Adjustment and Political Transformation
  in Belgium and the Netherlands

Erik Jones SAIS Bologna Center
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Thanks

• Honored to be here
• Great to be back in Belgium
• Even better to be at the University of Antwerp
• Still very humbling to get to talk to you about
  Belgium
• Thanks to all involved
• Dirk De Bievre and Cas Mudde (for the idea)
• Linda Rogiest (for the practical arrangements)
• All of you (for turning up to hear me)

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Apologies for False Advertising

• Original title was for non-academic audience at
  the Itinera Institute in Brussels.
• At the time, the economy was doing well even if
  politics was unstable now the situation is at
  least partly reversed.
• New goal is to emphasize my contribution to the
  literature (aka how we understand the world).
• Promise to give some take-homes for those of you
  more interested in current events.

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Three Part Structure

• First, I want to sketch how my research question
  connects to the literature.
• Second, I want to talk about what I found in the
  empirical record.
• Third, I want to suggest what this means for
  today.

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Part 1

• Theoretical Context

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The Context

• Draws on two strands in the literature
• Varieties of Capitalism national economic
  performance is institutionally determined.
• Small States in World Markets democratic
  corporatism and political consensus can combine
  flexible specialization with political stability
  and so explains small country success.

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The Conventional Wisdom

• Theoretical Institutionalized democratic
  corporatism (or political consensus) is part of a
  winning formula for national success in world
  markets.
• Combines market liberalization abroad with
• Redistributive compensation at home.
• Empirical This formula is more likely to be
  found in small states.

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Un-packing Convention

• Four questions are relevant
• Why do states engage in world markets?
• Why do states redistribute in domestic politics?
• Where does political consensus fit in?
• How is any of this related to being small?
• Bottom-up Approach (start w/ small)

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Three Dimensions of Size

• Conventional use (population or output)
• Economic (price-taker or dependence)
• Political economy (efficiency vs. homogeneity)

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Small as Consensual

• Katzensteins case selection
• Seven consensual countries
• Chosen for success
• Just happened to be small
• Empirical not tautological two kinds of
  consensus
• Liberal democratic (divided societies)
• Social democratic (homogenous societies)

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Consensus in Divided Societies

• Classic consociational democracy model of
  Daalder, Lijphart, Huyse, etc.
• Tends to include large welfare states to cushion
  impact of world market forces as in Cameron.
• Only looks liberal compared to Scandinavia
  because it maintains responsibility for policy
  implementation outside the state.

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From Consensus to Success

• Consociationalism
• (vertical social and political organization)
• Corporatism
• (centralized functional interest intermediation)
• Competitiveness
• (policy manipulation of relative costs and prices)

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My Research Question

• How do the break-down of consociational democracy
  and the process of de-pillarization change the
  possibilities for economic policymaking in
  Belgium and the Netherlands?

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Why De-pillarization Should Matter

• Pillarization or consociational democracy was
  the formula for consensus
• Consensus was the basis for social partnership
• Social partnership was necessary for wage
  moderation
• Wage moderation was the key to competitiveness
  and flexible adjustment
• Without pillarization, Belgium and the
  Netherlands should not succeed in manipulating
  relative prices and so cannot maintain their own
  competitiveness (at least not in a way that is
  superior to market performance)
• They may begin to question the merits of European
  integration as well

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The Theoretical Stakes

• If de-pillarization doesnt matter, then we need
  to explain enduring consensus in heterogeneous
  societies like Belgium and the Netherlands.
• If de-pillarization does matter, then we need to
  reconsider the durability of the small state
  model for success both in terms of domestic
  compensation and in terms of engagement with the
  outside world.

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The Argument (Three Claims)

• First, the possibilities for economic policy
  making are now more restricted in Belgium and the
  Netherlands.
• Hence we need to reconsider the durability of
  small state success (at least in heterogeneous
  states).
• Second, the practice of consensual economic
  adjustment has encouraged the process of
  de-pillarization.
• Hence the small state model is not only unstable
  but also self-destructive (at least in
  heterogeneous states).
• Third, whatever the causal relationship between
  them, the combination of de-pillarization and
  economic vulnerability is changing domestic
  attitudes about relations with Europe and the
  outside world.

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Part 2

• Empirical Narrative

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The Method

• Paired longitudinal comparison of B and NL
• most similar in the sense that they share many
  common features but differ in performance. I use
  this aspect to highlight the influence of elite
  behavior.
• most different in the sense that they begin to
  share performance attributes as common features
  diverge. I use this aspect to highlight common
  sources of structural change.

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Framing Assumptions (Economic Policy Choice)

• Fixed exchange rates
• Hard currency
• Macroeconomic stability
• Free trade (different from regional integration)

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Illustration The 1950s and 1960s

• Similar institutions, different outcomes, common
  patterns
• Consensus was not automatic, it was constructed
• Even once constructed, it required political will
  to operate
• That will tended to break down over time
• Initially ambiguous relationship with Europe
• Emphasis on national autonomy and market
  liberalization

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Interregnum The 1970s

• Without commitment to social partnership, the
  economy became ungovernable
• Distributive conflict undermined international
  competitiveness (and even basic policy
  assumptions)
• Conflict began to break down the institutions for
  consensus as well
• Shift in attitude toward Europe from market
  liberalization to economic stability

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Revival The 1980s

• The institutions for wage coordination remained
  strong enough for one more use
• The challenge was generating the will
• But the wage moderation was successful
• And the EMS/ERM ensured the relative price change
  had effect even as the 1992 project enhanced its
  usefulness

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Measuring Success (1)
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Measuring Success (2)
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Measuring Success (3)
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Measuring Success (4)
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The Netherlands Looks Similar

• This is the story of the famous Polder Model
• Ironically it was celebrated more by the Germans
  than by the Dutch
• The commentary at the time was less democracy
  for a better economy
• Satisfaction with democracy increased nonetheless
• And enthusiasm for Europe as well

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Even So, the Cost Was High

• Decline in trade union membership
• More in the Netherlands than Belgium
• Divisions between trade unions and political
  parties
• Early in the Netherlands but now in Belgium as
  well
• Loss of support for traditional political parties
• More dramatic in Belgium than in the Netherlands
• Ouster of Christian Democrats from government

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The Purple Alternative Did Not Last

• Consensus fuelled opposition and dissent
• Reformist parties (D66, Agalev) fared worst
• Christian Democratic opposition repositioned
  itself to the right (NL) and toward the regional
  level (B)
• Elites began to manipulate Europe in domestic
  political conflicts

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Economic Performance Was Good

• Remarkable consolidation on fiscal accounts
• Continuous net trade surpluses
• Declining unemployment
• Difficult (yet still significant) welfare state
  reform

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But Responsiveness Remained Weak

• Problem was evident in the both countries
• Increasing immobility at home as reforms ran out
  of steam
• Heightened concern about lack of influence abroad
  (and in Europe in particular cf. Nice Treaty)
• In any case, Europe was not the solution
• Lisbon strategy promised new momentum but then
  fell short
• Meanwhile, budgetary wrangles and Laeken
  Declaration suggest that Europe may even have
  been part of the problem

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Waiting for the Shock

• Not an issue so long as things worked.
• The problem only threatened to arise if things
  got knocked out of line.
• The 2002-2003 recession was a first test.
• The current situation is worse.

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Part III

• Current Implications

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The Future is Now

• The combination of shocks is significant
• The need for adjustment is growing
• The apparent choice is between coordination and
  the market
• Pricewage coordination at home and fiscal
  coordination at the European level, or
• A long grinding recession until things work
  themselves out.
• If current trends continue, the market is the
  only viable choice

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Is there a Non-Market Alternative?

• Politicians must express a will to cooperate
• Within and across Belgian regions
• But across countries as well
• This implies an agreed sense of priority
• Economics over institutional reform
• Stimulus over regulation
• Inter-personal solidarity over inter-regional
  distribution
• It will necessitate institutional support as well
• Highlighting the role of social partnership
• Underpinning the national interest (e.g.
  Deschouwer)
• Strengthening coordination at the European level

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Making Clear What is at Stake

• Before politicians choose, they should explain
  what is at stake to the voters
• The choice is not just between Flanders and
  Wallonia, or between Belgium and Europe, but also
  between cooperation and the market
• The market is not necessarily a bad thing, but .
  . .
• Cooperation has been the key to Belgiums past
  success
• The question is what will determine that success
  in the future
• The price of the crisis is that this choice can
  no longer be put off

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What Does this Mean for the Literature?

• Institutions can determine national performance,
  but there is to institutions than just their
  design
• How politicians use institutions matters
• How the people react to institutional
  manipulation matters as well
• Hence there is no single formula for national
  success and no obvious reason why any successful
  formula should be stable.
• On the contrary, there is reason to believe that
  every successful adjustment creates challenges
  of its own.

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Many thanks for your attention