**4. Varieties of capitalism**

Similar to the typology of welfare states, the varieties of capitalism framework popularized by Hall and Soskice [19] highlights systematic differences in the structural characteristics of countries. However, unlike welfare regime theory, it uses market and strategic coordination to differentiate national systems. According to the varieties of capitalism theory, domestic business coordinating capacity is a

crucial factor in understanding the divergent structures, strategies and outcomes of countries. Configurations of national institutions are supposed to function in a complementary manner in order to produce different comparative advantages in innovation and production systems at the national level. As such, the business firm is placed at the center of the varieties framework, with actors formulating their decisions within the framework of institutions such as corporate governance systems, training regimes, wage setting and employee representation, labor legislation and the character and level of coordination between firms. These firms are connected to specific institutional arrangements. They have discretionary powers to make different decisions, but they tend to do so in ways that complement specific production models and competitive advantages. The concept of institutional complementarity is essential to the varieties approach. Complementarity is present when the existence or efficiency of one institution increases the returns from another [19].

The varieties approach is based on a comparison between two ideal types of capitalism—the liberal market economy and the coordinated market economy. In a liberal production regime, market-based mechanisms are maximized, with firms competing and coordinating according to supply and demand factors shaped by exchange rates of products and market actors. In a coordinated regime, nonmarket-based relations play an important role, as firms engage with each other in more collaborative ways, achieving coordination via partner networks and other institutionalized arrangements. Liberal economies are defined by an outsider corporate governance system, which promote general skills whereas coordinated economies are framed by an insider system of corporate finance, instead favoring vocational training programs and specific skills for long-term employment relationships. The varieties framework complements welfare-regime explanations insofar as liberal market economies and liberal welfare states overlap, while coordinated economies can be embedded within social democratic and conservative welfare regimes [20].

A third type of production system, the Mediterranean economy, is presented as a hybrid between the market and coordinated varieties of capitalism. It is characterized by specific kinds of non-market coordination in the area of corporate finance and more liberalized labor relations. Mediterranean economies are said to have a large agrarian sector and more extensive forms of state intervention in the economy. They sometimes have greater employment protections but lower decommodification rates and low product market competition with less short-term pressures for profits because of their centralized financial systems that can devalue national currencies. They also tend to have more limited qualifications that curb a high skill and wage strategy. The Mediterranean economy is said to overlap with the southern European welfare state [19].

Institutional divergence is emphasized in the varieties framework because of the recognition that there is no 'one size fits all' approach to capitalism. Different institutional configurations, themselves products of political development, culture and historical processes, support different production, market and investment strategies, resulting in different types of comparative advantages. Another important element in the varieties school is the recognition that firms make discretionary choices that are shaped by national institutional factors, which in turn influence, constrain and support those decisions. The varieties approach is therefore mainly concerned with the ways in which different types of economies co-exist, given their respective strengths and weaknesses in specific areas.

The varieties approach has been widely debated. It has been criticized for being too parsimonious for identifying only two types of economies or exaggerating the differences between them. Others claim it faces problems explaining changes over time [21, 22]. There could be important processes common to both types of production regimes, which the varieties perspective not only fails to explain but

**27**

*The Political Economy of Crisis Recovery DOI: http://dx.doi.org/10.5772/intechopen.92586*

promotion of market participation [26].

unemployment compensation and wages [32].

capitalism paradigm.

**5. Convergence**

also directs attention away from [23]. For example, it has been suggested that the varieties school cannot adequately account for economic restructuring processes as well as it can describe the institutional sources of comparative advantage [24]. Research has shown, for example, how different institutional arrangements have increasingly morphed into liberal governance systems in order to adapt to short term investor interests [25]. Other research suggests, however, that while internal and external pressures have not yet channeled different institutional configurations into a single converging and parallel model, there have been similar patterns of policy adoption across countries such as the transition from income provision to the

The global financial crisis has raised new questions about the persistence of cross-national differences identified by the varieties perspective. Sympathetic critics claim that convergence toward neoliberal and austerity policies in North America and Europe has diminished the differences within varieties of capitalism, but that path dependent development has nevertheless given way to divergent trends [27]. From this perspective, typical varieties of capitalism can change in degree 'from within', without necessarily transforming to another type of production system [28]. However, very little research has been conducted to assess the outcomes of different market systems over the crisis period as compared to institutional and policy trends [29]. This relatively neglected area can be used to uncover evidence of convergent or divergent trends between different production regimes. The varieties approach has been used with some success to explain the empirical pattern of continuity and change in outcomes in different types of economies [30]. Scholars have used the typology to identify the micro processes of the relationship between institutional structures and certain policy outcomes. For example, one study sought to explain why trade union density and collective bargaining coverage have decreased in mainly liberal market economies but not so much in coordinated market economies [31]. Others have used the approach to make empirical claims about trends in labor market policies and outcomes such as employment protection,

Most of the research in this area, however, has focused on a few socio-economic indicators, a minimum number of country cases, and the period before economic stagnation combined with recession put intense pressure on public budgets and increased the likelihood of negative labor market effects. More research is therefore needed to determine whether the labor market performance of the three archetypal forms of distinct capitalist systems conform to the expectations of the varieties of

Welfare states and varieties of capitalism are depicted as being more or less resilient to internal and external pressures. A number of studies have tried to show, for example, how the core institutional and policymaking characteristics of different welfare and production systems have remained firmly in place since the 1980s, even in the face of common pressures [33]. However, another body of comparative research has argued the opposite that different countries not only experience the same pressures but also in ways that lead them to converge toward a single organizational structure or pattern of output. The convergence theory holds that sociopolitical and structural changes, including globalization and economic crises [15] are homogenizing pressures that push all countries toward the same institutional logics, policies and/or outcomes. In this way, convergence is a process whereby

differences between countries become less discernible over time.

#### *The Political Economy of Crisis Recovery DOI: http://dx.doi.org/10.5772/intechopen.92586*

also directs attention away from [23]. For example, it has been suggested that the varieties school cannot adequately account for economic restructuring processes as well as it can describe the institutional sources of comparative advantage [24]. Research has shown, for example, how different institutional arrangements have increasingly morphed into liberal governance systems in order to adapt to short term investor interests [25]. Other research suggests, however, that while internal and external pressures have not yet channeled different institutional configurations into a single converging and parallel model, there have been similar patterns of policy adoption across countries such as the transition from income provision to the promotion of market participation [26].

The global financial crisis has raised new questions about the persistence of cross-national differences identified by the varieties perspective. Sympathetic critics claim that convergence toward neoliberal and austerity policies in North America and Europe has diminished the differences within varieties of capitalism, but that path dependent development has nevertheless given way to divergent trends [27]. From this perspective, typical varieties of capitalism can change in degree 'from within', without necessarily transforming to another type of production system [28]. However, very little research has been conducted to assess the outcomes of different market systems over the crisis period as compared to institutional and policy trends [29]. This relatively neglected area can be used to uncover evidence of convergent or divergent trends between different production regimes.

The varieties approach has been used with some success to explain the empirical pattern of continuity and change in outcomes in different types of economies [30]. Scholars have used the typology to identify the micro processes of the relationship between institutional structures and certain policy outcomes. For example, one study sought to explain why trade union density and collective bargaining coverage have decreased in mainly liberal market economies but not so much in coordinated market economies [31]. Others have used the approach to make empirical claims about trends in labor market policies and outcomes such as employment protection, unemployment compensation and wages [32].

Most of the research in this area, however, has focused on a few socio-economic indicators, a minimum number of country cases, and the period before economic stagnation combined with recession put intense pressure on public budgets and increased the likelihood of negative labor market effects. More research is therefore needed to determine whether the labor market performance of the three archetypal forms of distinct capitalist systems conform to the expectations of the varieties of capitalism paradigm.
