5 - Economic Performance

Summary

This chapter examines the consequences for macroeconomic performance – measured in terms of annual rates of real GDP growth, inflation, and unemployment – of interactions among the balance of political power, labor market institutions, and the integration of national economies into international markets over the period 1966–1990. My primary objective is to determine the impact of globalization on economic performance in social democratic corporatist regimes (characterized by powerful left-wing parties and encompassing labor movements). Most analysts would assert that the macroeconomic consequences of social democratic corporatism deteriorated markedly with the integration of national economies into global markets – citing the perceived competitiveness costs of larger government expenditures, bigger budget deficits, and increased costs of borrowing (see Chapter 4).

In contrast, I hypothesized in Chapter 2 that the social democratic alternative to free market capitalism should be associated with a buoyant macroeconomy where governments are dominated by left parties that are allied with encompassing labor market institutions – even in the global economy. The reason for this is that labor leaders in these cases can be expected to use their market power to regulate overall levels of wage growth in ways that promote the competitiveness of the exposed sector of the economy, in exchange for beneficial government policies. Moreover, this “virtuous circle” (Castles 1978) between government and labor can be expected to generate economic, political, and social stability that is attractive to mobile asset holders.

The evidence presented in this chapter yields two distinct insights into the political economy of macroeconomic performance. On the one hand, my thesis is strongly supported with respect to economic growth and unemployment.