Lecture 23: The Comparative Politics of Inequality

Introduction 

Dani Rodrik argues that a delicate balance exists between democracy and processes of international economic integration. This is often described as the global political trilemma, which suggests that there is a political tradeoff between deep international economic integration, the nation-state and strong democratic accountability.

We can only have two of these. If we want democracy and globalization we have to give up the nation-state. If we want democracy and the nation-state we have to give up globalization. If we want the nation-state and globalization we have to give up democracy.

Why?

The starting point of Rodrik’s argument is that open markets succeed only when they are embedded within social, legal and political institutions, which provide them legitimacy by ensuring that the benefits of capitalism are broadly shared.

This is similar to the idea of ’embedded liberalism’, associated with John Ruggie, and the idea of the ‘double-movement’, associated with Karl Polayni.

Different societies have different preferences in terms of how they structure the institutions required to ensure a balanced relationship between competitive markets and social rights  (and what we have described in this course as different national models of capitalism).

Democratic pressures are likely to lead to a variety of different institutions across different territories. For example, French citizens tend to accept higher levels of taxation than Americans. What explains the difference in policy preferences toward redistribution among middle income voters?

The diversity of capitalist democracies inhibits the ideal concept of total global integration of national markets. National markets raise transaction costs across national jurisdictions. It also leads to competition between democratic states, for example, reducing corporate tax rates, to attract investment.

Consequently, a world which is fully responsive to democratic preferences of citizens will be unable to achieve full globalization.

Full global market integration requires global democratic governance, which is not likely to happen, given the commitment to national sovereignty.

The globalisation paradox

This is the core argument of the book The Globalization Paradox: Democracy and the Future of the World Economy. The following 5 steps, outlined by Dani Rodrik illustrate the point:

  1. Markets require a wide range of non-market institutions (of regulation, stabilisation, social protection and legitimation) in order to work well and remain legitimate.
  2. These institutions vary by nation-state, in the sense that ultimate goals such as efficiency or equity can be achieved under a variety of designs and blueprints.
  3. Different democratic societies, organised around their own distinct histories, have very different needs and preferences regarding the shape that market-supporting and market-correcting institutions can take.
  4. A world that is sufficiently responsive to democratic preferences will therefore be one of institutional diversity and heterogeneity rather than institutional harmonisation and convergence.
  5. Since institutional diversity (such as the European Union) inhibits the true global integration of markets by raising transaction costs across jurisdictional boundaries, a world that is sufficiently responsive to democratic preferences will also be one that falls short of full globalization.

Markets and government are complements not opposites. The market works best when the social state is strong.

To illustrate the argument, consider the Eurozone crisis, and the institutional design of the EMU.

National governments (nation-state) have to satisfy two very different constituencies in adjusting to the crisis: international markets and domestic electorates. If governments prioritize international markets they lose the capacity to be responsive to the democratic preferences of citizens (such as not bailing out the banks).

The anti-water-charges protest in Ireland is, arguably, a manifestation of this democratic tension, and reflects what we previously described as the fiscal crisis of the state in contemporary capitalism.

The global political trilemma is even more pronounced in the EMU. Why?

European integration 

Eurozone member-states have delegated macroeconomic tools to an international organization (monetary policy), whilst fiscal and social welfare policy remains at the national level.

The Eurozone needs a banking and fiscal union to deal with the international financial crisis. But there are inter-country conflicts among national electorates on both of these issues. German citizens don’t want to spend their taxes on other countries and the Irish don’t want to give up their corporate tax rates. The nation-state prevails.

Consequently democratic preferences of citizens within nation-states are clashing with the functional needs for more European integration.

There is strong resistance (among electorates) to shifting more power to the European federal level (i.e. giving up the nation-state). The consequence is that neither the nation-state nor the EU has the capacity to solve the crisis, perhaps with the exception of the ECB. International markets reign.

What are the implications of this observation for the globalization paradox?

Democracy is compatible with national sovereignty only if we restrict European economic integration. If we push for more European economic integration while retaining the nation-state, we must jettison democracy. And if we want democracy along with European integration, we must shove the nation-state aside and strive for a federal state of Europe.

Revision (Piketty) 

  • Wealth (everything that can sold on a market, net of debt). Valued at market prices (which fluctuate)
  • Wealth/income ratios (β). These fell over the period 1910-1950. They have since increased, especially in Europe.
  • Income share of wealth owners has consequently increased.
  • Concentration of wealth. Big decrease from 1914-1950. Becoming more concentrated again.
  • Return to 19th century patrimonial society. In low growth economies the wealthy elite living off inheritance, saving more.
  • Labour income. This is a bigger source of income inequality in the USA. This is related to the rise of super managers and executive pay.

Problems of causality – wealth

  • Why has β increased?
  • H1: low growth and over-accumulation of capital (volume effect)
  • R>G means that the wealthy can enjoy high levels of consumption whilst accumulating wealth (high savings). Return to 19th century.
  • H2: Higher asset prices (price effect)
  • Housing now constitutes 60% of national wealth in Europe. This is based on capital gains not real investment.
  • Piketty has under-estimated the importance of housing-wealth.
  • Wealth inequalities are increasing related to housing.

Problems of causality – wages

  • Why has labour income inequality increased (USA)?
  • H1: lower taxes on the rich incentivise super-executives to bargain for higher pay (Piketty).
  • H2: weaker organized labour and different egalitarian norms as to what constitutes fair pay.
  • To explain the dynamics in the middle of the distribution we need to analyze comparative political institutions.
  • Housing and labour market politics missing in Piketty.

This is a story about the 1%

  • R>G focuses on the wealthy and top incomes.
  • It does not tell us much about rising poverty and the changing nature of working class politics. Nor does it tell us much about the home-owning middle classes.
  • There has been a very rapid rise in low income households (measured in terms of market income).
  • From 1945-1980, capital was tamed by democracy.
  • From 1980 to present, democracy has been tamed by capital.

Piketty needs an institutional analysis 

  • The post 1970 shift from the ‘Keynesianism’ to the ‘Neoliberalism’ requires a comparative political analysis.
  • Globalization has affected OECD countries differently. Not all countries have experienced US-style inequalities.
  • Role of ideas, interests and institutions.
  • Comparative political economists focus on institutions:
  • Technology regimes
  • Capital market regimes
  • Labour market regimes
  • Electoral politics
  • Ask yourself: how have these changed over time?

The Keynesian social state

  • Technology regime: Fordist mode of production. Huge demand semi-skilled labour. Full employment.
  • Labour market: strong trade unions, broad collective bargaining coverage, wage compression among low to middle income earners, focus on vocational training.
  • The labour market led to low levels of market income inequality.
  • Electoral politics: in majoritarian systems (UK, USA) democratic politics reinforced market egalitarianism.
  • The median voter supported strong redistributive policies. Governments have to capture the median voter to win elections.

The neoliberal regulatory state 

  • Technology regime: ICT revolution. Global supply chains. Capital liberalization. Knowledge based economy.
  • Labour market: massive decline in unionization and collective bargaining coverage, growing skills differentials, wage divergence. Rising poverty.
  • Labour markets are no longer egalitarian. More fiscal pressure on the state to compensate for rising market income inequality.
  • Electoral politics: much higher fragmentation of the electorate and re-emergence of identity politics?

Comparative politics 

  • In majoritarian electoral systems (UK, USA) political parties now compete for a very different median voter.
  • The asset-owning (housing) middle class are less supportive of redistributive public policies (particularly higher taxes).
  • In proportional electoral systems (IE, NL, DL) the median voter has also shifted. But it’s harder to ignore the poor.
  • To explain why some countries are more unequal than others requires explaining the variation in median income voting preferences. Lower market income inequalities lead to more cohesive redistributive coalitions (and higher taxes).
  • Put simply: Nordic countries are less class divided societies whereby egalitarian labour markets and the welfare state reinforce each other.

Discussion 

  • How do these electoral dynamics play out in the new politics of austerity in the aftermath of the crisis?
  • Who are the winners and losers of globalization
  • What is the interaction between socio-economic and socio-cultural cleavages among the electorate?
  • Demand: preferences and attitudes
  • Supply: new political parties
  • Task for next 7 days: read the Financial Times every day. Identify and make a note of articles that relate to what we have discussed in this lecture.

Slides: lecture-23

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