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Industrial policy and economic performance in the developed West: An examination of four policy models, 1960-85

Celso, Anthony Nino, Ph.D.

The Ohio State University, 1989

UMI 300 N. Zeeb Rd. Ann Arbor, MI 48106 INDUSTRIAL POLICY AND ECONOMIC PERFORMANCE IN THE DEVELOPED WEST

AN EXAMINATION OF FOUR POLICY MODELS 1960-85

DISSERTATION

Presented in Partial Fulfillment of the Requirements for

the Degree Doctor of Philosophy -in the Grade

School of the Ohio State University

By

Anthony N. Celso, B.A., M.A.

*******

The Ohio State University

1989

Dissertation Committee:

John Champlin Approved by

William Childs

Lawrence Herson

Brian Pollins Department of Political Science ACKNOWLEDGMENTS

While there are many people who have assisted me in completing

this study, I would like to single out three in particular. First,

my doctoral committee deserves special mention. My adviser, Lawrence

Herson, provided me with invaluable advice and moral support during

the three years that it took me to write this dissertation. Larry

gave me the inspiration needed to complete this study. The junior

members of my committee (especially William Childs) gave me

additional insight into constructing the dissertation's prose, style

and analysis.

Secondly, my mother's generosity and patience needs to be / commended. She provided the material support that allowed me to

finish this study after my graduate school funding was terminated.

Without her assistance, I would not have had the time to devote to my

doctoral research and subsequent completion of this study.

Thirdly, the assistance and support of my girl friend, Alicia

Man, gave me the necessary courage and self-confidence to finish this study. Alicia, moreover, provided me with proof reading and technical assistance that facilitated the data analysis part of this dissertation.

Additional thanks must go to John Champlin who sat in at my dissertation's oral exam with onlyitwo weeks notice and whose spirited criticisms improved my understanding of the theoretical

ii literature in the political economy area. Finally, my editor and typist, Sandy Wood, needs to be congratulated for removing numerous spelling errors and assisting me in constructing this document to meet Graduate School.guidelines.

iii VITA

March 1959 ...... B o m - Columbus, Ohio

June 1981...... B.A. , The Ohio State University, Columbus, Ohio

June 1987...... M.A. , The Ohio State University, Columbus, Ohio

August 1989...... Ph.D., The Ohio State University, Columbus, Ohio

August 1989...... Assistant Professor, Mount Union College, Alliance, Ohio

FIELDS OF STUDY

Major Field: Political Science

Political Economy and Industrial Policy Policy Analysis and Design Comparative Politics (Western Europe)

iv TABLE OF CONTENTS

ACKNOWLEDGEMENTS...... ii

VITA...... iv

LIST OF TABLES...... v

LIST OF FIGURES ix

LIST OF CHARTS...... x

CHAPTER PAGE

I. CREATIVE DESTRUCTION AND INDUSTRIAL POLICY. . . 1

Introduction...... 1 Creative Destruction in Market Societies; 1960-85 ...... 3 The Industrial Policy Debate: Liberalism, Corporatism, and Statism. .. . 8 Methodology and Structure: An Overview . . 18

II. COMPARATIVE POLITICAL ECONOMY AND INDUSTRIAL POLICY...... 21

Introduction...... 21 The Political Economy Perspective ...... 21 Policy Regimes Style: Planning, Markets and Persuasion...... 23 The Corporatist Challenge ...... 25 Liberal and Socialist Critiques of Corporatism...... 28 The Welfare State ...... 30 The Industry Policy Debate: Incomes, Nationalizations and Business Subsidies...... 34 Political-Economy Literature: An Assessment...... 42 Conclusion...... 46

v PAGE

III. FRAMEWORK FOR COMPARATIVE INDUSTRY POLICY ANALYSIS...... 48

Introduction...... 48 Structural Analysis: Growth Cycles, Industry Policy, Adjustment, and Competitiveness ...... 49 Industrial Policy Styles...... 53 Policy Style Evaluation ...... 66 Conclusion...... 71

IV. INDUSTRIAL STRUCTURE ADJUSTMENT ...... 75

Introduction...... 75 Manufacturing Reconstruction and National Industry Structure ...... 76 Adjustment Perspectives ...... 87 Industrial Policy Adjustment: Methodology, Analysis and Results ...... 93 Prime Values and Policy Performance ...... 107 Policy Adjustment: An Assessment ...... 114 Conclusion...... 116

V. INDUSTRY STRUCTURE COMPETITIVENESS...... ' . 118

Introduction...... 118 Economic Factors and Trade Performance. . . . 119 Industrial Policy Styles and Trade Utilization...... 126 Data Evaluation: Competitive Behavior of Six Industrial Ecnonomis...... 137 Competitiveness and Industrial Policy Performance...... 159 Conclusion...... 166

VI. ADJUSTMENT, COMPETITIVENESS AND INDUSTRY POLICY PERFORMANCE: SOMECONCLUSIONS ...... 169 i \ Introduction...... 169 Industry Adjustment and Competitiveness 1960-85 ...... 170 Industrial Policy Style Limitations ...... 173 Industrial Structure Performance: Economic and Political Explanations .... 182

LIST OF REFERENCES...... 189

vi LIST OF TABLES

TABLE PAGE

1. Employment Total Economy, Annual Percent Change...... 5

2. Industrial Production, Annual Percent Change (1960-85)...... 9

3. Evaluation Structure...... 72

4. Rates of Growth in Employment in Manufacturing INdustries By Economic Grouping, 1970-77...... 80

5. Capacity Utilization in Manufacturing (%). . . . 81

6. Degree of Capacity Utilization by Industrial Branches...... 82

7. Manufacturing Employment by Production Category . 85

8. Unemployment: Four Year Averages from 1960 to 8 3 ...... 96

9. Long Term Unemployment Rates: 1960-85...... 98

10. Unemployment Rate Change...... 99

11. Industrial Production, 1960-83...... 101

12. Industrial Production, 1960-85...... 102

13. Labor Disputes (Days Lost Per 1000 Workers), 1960-63 ...... 104

14. Days Lost Per 1000 Workers Recession/Non- Recession Periods...... 106 i 15. Adjustment Experience 1960-85 ...... 114

16. Share of World Exports by Economic Grouping (1960-80)...... 120

17. Structure of EC Exports (1958 and 1 9 8 6 ) ...... 122

18. Value Added to Production Across Industrial G r o u p ...... 125

vii TABLE PAGE

19. Gross Fixed Investment 1960-85 (Percent GDP)...... 139

20. GDP Gross Fixed Investment, 1972-75, 1980-83. . . 141

21. Exports Capacity (GDP Percents) 1960-85...... 145

22. Exports Capacity, 1972-75, 1980-83...... 147

23. Import Dependence, 1960-85 (GDP Percent)..... 149

24. GDP Import Dependence, 1972-75, 1980-83 ...... 151

25. GDP Surplus/Deficit on Current Account, 1960-85 . 153

26. Real Compensation Per Employee, Deflator GDP. . . 158

27. Austrian and West German Performance...... 186

28. Performance of High and Low Value Added Industries Structure...... 186

viii LIST OF FIGURES

FIGURE PAGE

1. Structural Components...... 50

i \

ix LIST OF CHARTS

PAGE

1. Policy Approaches to Industrial Reorganization .. . 94

2. Policy Styles and Trade Utilization...... 136

3. Policy Performance, 1961-85...... 137

i

x Chapter I

Creative Destruction and Industrial Policy

Introduction

The capitalist market economy is a system of production and

exchange characterized by cyclical instability (Chandler, 1977;•

Lindblom, 1977; Bluestone and Harrison, 1980; Gruchy, 1984). The

noted Austrian economist Joseph Schumpeter (1947) explained volatility in a market economy as a "creative destruction" process

in which capitalist growth is predicated upon an alteration of

existing conditions. In Schumpeter's view, creative destruction is

a multi-faceted process; its dynamics anchored in the regenerative

abilities of technological innovation and entrepreneurial avarice.

The introduction of automated manufacturing techniques by profit maximizing capitalists, for example, revolutionized economic exchange by disrupting traditional networks of localized commerce in favor of a centralized system of assembly line production.

Schumpeter argues that recessions in market economies are intimately connected to subsequent waves of entrepreneurial activism and technological innovation. The lowering of wage, rent and capital costs during a economic down-turn triggers a set of conditions that allow entrepreneurs to maximize profits and take the risks attendant to introducing new technologies. The patterns of growth, decline and growth, decline and regeneration resurface as economic expansion

raises wages, rents and interest rates to the point where profit-

making becomes limited. These forces result in a retrenchment of

capitalist activity until price and cost conditions decline to where

they are amenable to enhanced profit-taking. Since a substantial

down-turn in economic activity is necessary to create profit

maximizing conditions, recessions become a necessary and unavoidable

consequence of the market economy.

Schumpeter's genius lies not so much in his observation of the

growth, decline and regeneration process endemic to capitalist

society, but in his realization that the social strains

(unemployment, commercial bankruptcy and inflation) that accompany

this market cycle would be politically unsustainable in democratic

societies. This observation set him apart from other neo-classical

liberals in that he did not assume a self-equilibrating system that

made political regulation of market outcomes unnecessary.

Schumpeter's recognition that market processes and democratic

politics conflict sets the stage for policy discussions over the

desirability of state intervention to combat the disruptive

consequences of growth cycles. In Schumpeters view, the rivalry between capitalism and democracy would be so intense that political

elites would eventually destroy the entrepreneurial spirit of the market economy by socializing production.

In the pre and post-war periods, the frequency and volatility of growth cycles in capitalist economies has set the stage for numerous policy level debates on the desirability of curbing the "creative destruction" process (Galbraith, 1977; Lindberg, 1977; Heilbroner,

1980; Lindblom, 1984). The most traditional of these debates has centered on the effectiveness of fiscal-monetary policy to compensate for inadequate purchasing power during recessions, while the controversy of the last two decades has focused on the desirability of direct sectoral intervention to achieve equilibrium in market economies.

This dissertation examines the relationship between various forms of direct sectoral planning (i.e., industrial policy) and the economic performance of six countries from 1960 to 1985. The present chapter begins by examining Schumpeter's "creative destruction" process in the employment and industrial production areas of major

Western economies, it goes on to identify and discuss three competing ideological traditions that endorse different policies to moderate growth cycles, and it concludes with a sketch of the dissertation's structure that unfolds in the remaining five chapters.

A. Creative Destruction in Market Societies: 1960-85

The post-war period of the 1950's and 1960's was the golden era of

Keynesian demand management in the industrial West; recessions were moderated by increasing public expenditure, reducing taxes and lowering interest rates while inflationary expansions were curtailed through the opposite policy mix of reduced spending, increased taxes, and higher interest rates. Policy manipulation of purchasing power in the post-war Western economy seemed to have overcome the most negative side effects of the creative destruction process and Keynesian success in this area seemed to circumvent the more radical

demands of the European Left. Thus, Schumpeter's fearful prophesy of

a dominant socialist economy failed to materialize in the West.

The effectiveness of fiscal-monetary policies in moderating the unemployment and inflationary consequences of growth cycles did not

endure (Lindberg, 1977; Gruchy, 1984). The severe economic

disruptions of the last two decades have discredited macro economic policy manipulation of market economies (Tufte, 1980; Buchanan and

Wagner; 1980). Table 1 traces the annual percent changes in total employment in seven Western economies from 1961-85.

Disruption in Western labor markets existed throughout 1961-85 with the most pronounced patterns occurring between 1970-76 and 1981-

84. Though mild in comparison with the 1970's and 1980's, the 1960's employment pattern exhibited some deterioration: Italy experienced consecutive employment declines from 1962 to 1966, Germany registered declines during 1966-67, and the U.S., Britain and France had negative employment growth at least once during the 1960's Compared to the volatile pre-war period, counter cyclical fiscal-monetary policies seem to have moderated the frequency and intensity of recessions.

Severe employment problems did not materialize in a consistent pattern until the early and middle 1970*s. During this period, every country in Table 1 experienced some degree of negative employment growth. The pattern of labor disruption was most pronounced in the larger industrial economies: German employment declines started in 5

Table 1

Employment; Total Economy Annual Percent Change

Ger. Spain Fra. Italy Eng. USA Japan

1961 1.4 0.2 0.1 0.2 1.2 -0.4 1.4

1962 0.3 0.8 0.2 -1.1 0.7 2.0 1.3

1963 0.2 0.5 1.0 ■*1.5 0.1 0.8 0.9

1964 0.1 0.5 1.1 -0.6 1.1 1.8 1.3

1965 0.6 1.8 0.4 -1.7 0.9 3.3 1.6

1966 -0.3 1.4 0.8 -1.5 -0.6 4.5 2.1

1967 -3.3 0.6 0.3 1.1 -1.5 2.5 1.9

1968 0.1 0.5 -0.3 0.0 -0.7 2.4 1.7

1969 1.6 0.4 1.5 0/5 -0.1 2.5 0.8

1970 1.3 0.0 1.4 0.0 -0.5 -0.8 1.1

1971 0.6 0.8 0.5 -0.1 -1.0 -0.4 0.5

1972 -0.2 1.8 0.6 -1.1 -0.2 2.4 0.1

1973 0.7 1.7 1.4 0.8 2.3 4.0 1.9

1974 -1.3 1.3 0.9 1.5 0.3 1.5 -0.4

1975 -2.8 -1.9 -0.8 0.2 -0.4 -2.5 -0.3

1976 -0.8 -1.6 0.7 0.8 -0.9 2.7 0.9

1977 -0.2 -0.0 0.8 0.6 0.1 3.4 1.3

1978 0.6 -1.7 0.4 0.6 0.6 5.0 1.2

1979 1.4 -2.2 0.0 1.0 1.5 3.4 1.3

1980 1.1 -3.2 0.1 0.9 -0.2 0.3 1.0

1981 -0.7 -3.0 -0.6 -0.0 -3.9 0.9 0.8

1982 -1.7 -1.0 0.1 0.6 1.8 -0.5 1.0 Table 1 (continued)

Ger. Spain Fra. Italy Eng. USA Japan H CM 1983 -1.5 -0.8 -0.4 0.5 t 1.0 1.7

1984 0.1 -3.0 -0.9 0.8 2.0 4.8 0.6

1985 0.7 -1.0 -0.3 1.4 1.3 2.4 0.7

Source: European Economy No. 33 (July 1987) Table 1, p. 115. 1972 and deepended from 1974 to 1977, England experienced consecutive declines during 1971-72 and 1975-76, Japan's labor market reeled from the 1974-75 recession, U.S. employment gains were eroded in 1971 and

1975, and France suffered employment decline during 1974. In short, the global recession of the early to mid 1970's filtered throughout the industrial West, deepened employment problems, and provided a real world validation of Schumpeter's hypothesis.

Thus, employment turbulence deepened in length and severity during the 1980's. Excluding Japan, every country in Table 1 experienced some negative employment growth in their economies: Britain averaged a 2.3% employment decline (1981-83), Germany registered a 1.3% negative employment growth average (1981-83), Spain an average drop of 1.6% (1981-85), France a 0.5% decline (1983-85), the U.S. a 0.5% decline (1982) and Italy a -0.0 decline (1981).

The existence of creative destruction processes are even more pronounced when examining Western industrial production rates. Table

2 traces annual percent changes fin industrial production between

1960 and 1985 in seven advanced market economies and the subsequent analysis identifies synchronized waves of disturbance across countries.

The volatility of 1980-85 industry production is dramatic testimony to the continued presence of growth cycles in Western market economies. The data in Table 2 indicate a systematic pattern of industrial disturbance highlighted by sever disruptions in the

1970's and 1980's. During 1975, industry production rates declined 4.7% in England, 10.5% in Japan, 8.9% in the United States, 8.9% in

Italy, 7.5% in France, 6.2% in Germany and 6.5% in Spain.

While industrial production recovered in the late 1970's a second

round of industrial deterioration occurred in the West during the

early 1980's. The rate of industrial production fell in France

(1981-84), Germany (1981-82), Italy (1981-83), the United Kingdom

(1981), Spain (1981-82) and the United States (1982). The data in

the industrial production area co-vary with employment patterns of

growth, decline and regeneration and indicate that creative

destruction still takes place in the market economy.

The sequences of concerted industrial and employment disruption in

advanced market economies in the 1970's and 1980's has heightened the

debate over political management and regulation of capitalism

(Bluestone and Harrison, 1980; Tufte, 1980; Lindblom, 1984). This,

debate has given rise to various policy traditions that claim to have moderated the most destructive aspects of growth cycles in market

economies. Accordingly, the next section introduces and discusses

three policy traditions that have figured prominently in the debate

over the curative effects of industrial policy.

B. The Industrial Policy Debate: Liberalism, Corporatism and

Statism

The industrial policy controversy has centered over the effectiveness of state versus market direction of the economy; liberals claim that government direction imposes economic rigidities

(e.g., price, wage and investment restrictions) that impair 9

Table 2

Industrial Proudction (Annual Percent Change)

Ger. Spain Fra. Italy Eng. USA Japan

1960 11.7 na 8.9 15.7 £.8 2.2 24.4

1961 6.1 na 5.5 10.8 0.0 0.7 19.4

1962 9.2 10.1 5.1 9.6 1.1 8.3 7.9

1963 3.5 11.9 7.1 8.9 4.0 6.0 11.4

1964 7.7 11.2 6.1 1.2 7.9 6.8 15.6

1965 5.3 14.3 1.9 4.6 3.3 10.0 4.0

1966 1.3 15.2 5.4 11.4 1.4 8.8 13.0

1967 -2.5 5.9 2.5 8.3 0.2 2.3 19.2

1968 9.7 7.4 3.5 6.4 6.7 6.3 15.2

1969 12.7 15.8 10.4 3.7 3.3 4.5 15.9

1970 6.1 10.0 5.3 6.5 0.5 -3.0 13.7

1971 1.4 3.2 4.8 -0.6 -0.2 1.7 2.7

1972 4.2 15.9 6.7 4.9 2.2 9.2 7.3

1973 7.2 15.2 2.3 9.7 8.7 8.4 14.9

1974 -1.1 9.2 -7.5 4.0 -2.4 -0.3 -3.9

1975 -6.2 -6.5 8.7 -8.9 -4.7 -8.9 -10.5

1976 7.4 5.1 1.9 11.6 2.7 10.8 11.0

1977 2.1 5.3 2.4 0.0 4.7 5.9 4.1

1978 3.0 2.3 4.1 2.1 3.8 6.5 6.1

1979 5.1 0.8 -0.5 6.7 3.9 3.9 7.1

1980 0.2 1.2 -1.4 5.0 -6.7 -1.9 4.6

1981 -1.9 -1.0 -0.3 -2.2 -3.4 2.2 1.0 Table 2 (Continued)

Ger. Spain Fra. Italy Eng. USA Japan

1982 -2.9 -1.1 -0.1 -3.1 1.9 -7.1 0.4

1983 0.6 2.7 0.4 -2.4 3.5 5.9 3.6

1984 3.0 0.8 0.8 3.3 1.3 11.4 10.9

1985 5.7 2.0 2.0 1.4 4.8 1.7 4.5

Source: European Economy, No. 33 (July 1987) Table 9, p. 119. 11

manufacturing adjustment while corporatists and statists argue that

the private economy is incapable of coordinating the necessary

investment and technology linkages needed to re-energize production

in the industrial economy (Bluestone and Harrison; 1980; Shultlz,

1985; Hudson, 1985; Brooks, 1987). Indeed, the debate over public-

private industry direction has given rise to three separate industry

policy traditions that are sharply divided over the appropriate mix

of planning, bargaining and market control of economic activity.

None of these policy traditions has had an exclusive voice in setting

national economic directions in the post-war period, but for the

purposes of analysis, each will be examined as an "ideal" policy

form. As such, liberalism, corporatism and statism will be

introduced as policy traditions that endorse particular sets of

institutional arrangements to direct economic change.

1. Liberalism

Market liberalism endorses the rights of individuals to pursue

their own interests free of state restriction and control (Dolbeare,

1977). This emphasis on individual freedom has led liberals to

endorse market relationships (eg., free interaction between buyers

and sellers) as the dominant mode of acceptable economic exchange

(Friedman, 1980). The core of market liberalism lies in its belief

that private enterprise, individual initiative and the price system maximize efficient economic outcomes because goods and services

reflect the interests and capabilities of buyers and sellers.

Liberals reject comprehensive industrial policy in favor of a 12

Incremental approach that Incorporates selective trade protection,

industry subsidies and training assistance to displaced workers

(Lawrence, 1981; Shultze, 1984; Hudson, 1985).

Market liberals argue that industrial targeting and bargaining approaches to economic restructuring are ineffective because lobbies would distort public sector investment decisions into supporting failing industries. According to this argument, the level of industry subsidy would be commensurate with the political leverage that unions and firms could exert on the policy process. Liberals thus argue that industrial policy would divert capital into failing industries and would eventually impair the competitiveness of the entire economy.

Given the political and economic difficulties attendant to industrial targeting, liberals endorse private sector direction of investment flow in the economy. Under liberal theory, market economies possess self-correcting tendencies that government bureaucracies find elusive; wage, production and capital movements change in response to alterations in price and cost. Misallocation of market resources is less likely because decentralized networks of buyers and sellers impede the ability of inefficient firms to survive. Alternatively, the lake of competitive signals in the government sector distorts investments and ensures a higher propensity toward ineffective results. State planners, for example, may overestimate.market for targeted industrial groups.

Liberals depart from collectivist traditions in their belief that growth cycles have long-term curative effects. Under this 13

perspective, weak firms are replaced by strong producers, capital is

reallocated where it can earn the highest rate of.return, and labor

is displaced and reemployed to where it is most effectively utilized.

While liberals believe that creative destruction is a necessary part

of a market economy's regeneration, they recognize the need for some

state intervention to mitigate the social effects of economic change.

In selective cases, liberals use government to compensate firms and

workers harmed in the economic adjustment process. Market industry

policy copes with the consequences of economic disruption without

exerting control over investment, production and wage flow in the

economy and as a consequence leaves the private sector free to

dictate the scope and pace of economic change.

Among the three traditions, liberalism is alone in its

endorsement of the autonomy of the private sector to direct

investment flow in the industrial economy (Lindberg, 1977; Gruchy,

19984). Both corporatism and statism reject private sector

investment freedom in favor of greater government planning. These

traditions, however, differ on the relative autonomy of the state

vis-a-vis labor and business in determining industrial structure

change.

2. Corporatism

In contrast to liberalism, corporatism espouses the use of public-private partnerships in directing economic change (Schmitter,

1974; Lembruch, 1977; Cawson, 1982). Because corporatists value

group stability, the disruptive effects of growth cycles need to be 14 moderated by state, business and labor partnerships. In effect, group interactions, allocations and outcomes are valued over market interactions, allocations and outcomes.

The corporatist vision of a well functioning economy begins with respect and concern for the inescapable fact of modern societies: dominant social groups. Under this economic framework, large producers cartelize their markets, unions join federations to control wages and governments buy shares in dominant industries to maximize their leverage over investment. The mosaic of group power in the corporatist economy establishes the boundaries of market freedom.

Wages, for example, are allowed to increase to levels negotiated by labor, business and the state while capital can move within sectoral targets. Corporatist systems, however, differ on the degree of market freedom allowed in their planning structures (Cawson, 1982;

Katzenstein, 1985).

Katzenstein (1985) differentiates between liberal (business) corporatism and societal (state) corporatism. The basis of this distinction lies in the power capabilities of institutions to direct change, with business-corporatism characterized by strong links between industry and the public sector and state corporatism characterized by a substantial labor-government associations. The nature of group relations produces different levels of government intervention in the economy; business corporatism reflects the priorities of commercial elites and the need to maximize profits through cartelization while state corporatism reflects union demands 15 for industry nationalization, income redistribution and full employment.

These variations restrict the range of market determined wage, production and investment outcomes. Under the business-corporatist approach, industry policy reflects an interaction between plan and market as industry subsidy levels are adjusted depending upon underlying market conditions. Thus, capital and technology are shifted into modernizing uncompetitive industries and leading economic sectors are targeted for public subsidy.

Alternatively, the state-corporatist system protects wage, investment and employment conditions irrespective of global market­ place change. The nationalized sector of the industrial economy, trade unions and state planning ministries collaborate to achieve appropriate investment and employment balances. Economic outcomes in state-corporatist societies are preconditioned upon government-labor accords that contain markets and supplant the investment autonomy of the private sector.

Since growth cycles reflect market competition and entrepreneurial dynamism, corporatist societies restrain the frequency and severity of the creative destruction process by imprinting the interests and capabilities of institutional actors on economic outcomes. Group power in corporatist societies is dependent upon the maintenance of a coalitional structure and the continued avoidance of socio-economic disruption. Not all non-market systems, however, share corporatism's enthusiasm for negotiated state, labor and business compacts. 16

3. Statism

For statists, negotiating agreements with non-government actors

compromises the integrity and autonomy of the public sector to re­

direct economic activity. The statist tradition reflects the

conflicting ideological currents of Western European conservative

collectivism and democratic socialism (Cohen, 1977; Brooks, 1987).

Irrespective of its left-right orientation, statism enshrines the

value of non-market direction of the economy. Under this tradition,

growth cycles reflect the irrationality of market-place competition

that leaves plant workers and communities idle during recessions.

Growth cycles, moreover, re-direct investment into areas of the

economy that maximize profits for private producers. Statists argue

that the failure of the business sector to incorporate societal

interests in its investment decisions results in over production of

private consumer goods and under production of social goods (e.g.,

mass transit, low income housing, environmental control

technologies). Under statist theory, the nationalization of industry

and finance insures that investment will be made on the basis of

social need, not private profit.

Even in its broadest design, the statist economy is not

characterized by Soviet bloc command planning (Cohen, 1977; Gruchy,

1984; Brooks, 1987). Instead, state ministries coordinate investment

flows through incentives designed to coax the nationalized core of

the industrial .economy into producing new services, goods and technologies. The statist planning process reflects the interests 17 and capabilities of government ministries, nationalized industry, subsidized private firms and the governing political party.

These sets of political and institutional interactions are designed to circumvent the frequency and duration of growth cycles by coordinating state resources into production, investment, wage and employment targets. Theoretically, stable planning replaces market anarchy, social investment produces less employment and wage disruption than private capital, and the technical expertise and social consciousness of state planners replaces the dynamism of profit seeking capitalists. Under this conceptualization, the statist economy attempts regeneration without disruption and seeks to break the linkage between decay and growth that is at the heart of the market economy.

The statist economy comes closest to Schumpeter's fearful prophecy of capitalism's decline. Yet, the diversity of Western policy responses to the creative destruction process provides fertile testing ground for gauging the relationship between different forms of industrial policy and economic performance. The market economy, historically, has co-existed with varying degrees of state involvement.

C. Method and Structure: An Overview

The chapters to follow examine the connection between different development approaches and economic outcomes in the industrial policy area. The market, corporatist and statist policy traditions are elaborated and refined in the second chapter. Specifically, 18

political science theory and empirical research are reviewed to

determine the strengths and weaknesses of state economic management.

The growth of the welfare state and industrial policy management, in

particular, are traced and compared from the vantage points of

pluralist, corporatist and Marxist scholars.

The third chapter outlines the dissertation's basic approach in

examining industrial policy impact, develops a matrix and set of

scales, and identifies four policy style classifications for case

placement. The matrix is based on varying combinations of state

planning and group bargaining that produce four policy styles. These

are liberal market (low planning/low bargaining), business

corporatist (low planning/ high bargaining), state corporatist (high

planning/high bargaining) and statist (high planning/low bargaining).

The matrix components are refined by the development of two scales

that measure the presence of government economic involvement and the

level of group bargaining in eight advanced market economies from

1960-85.

Six countries are selected and placed into policy categories: the

United States and Australia are classified as market liberal, Germany

and Japan as business corporatist and Austria and France represent,

state corporatist and statist models. The chapter concludes by

specifying the evaluation criteria and control variables that govern

the data analysis in Chapters Four and Five.

The fourth chapter measures and assesses industry policy impact in

the area of economic adjustment. Specifically, country variation in unemployment, industry production, labor disputes and capacity 19

utilization are compared for the 1960-85 period and relative performance rates are assessed during the recession of 1972-75 and

1980-83. The chapter measures policy impact on the adjustment

indicators by controlling for the structure of industry employment

and production in each country. The chapter concludes by assessing

the relative effects of policy and industry structure on performance results between countries.

Adjustment success is gauged on the ability of countries to adapt employment, labor disputes, and industry production to changing global market conditions. The chapter, in particular, evaluates relative changes during periods of exogenous shock (e.g., the 1972-

75, 1980-83 recessions) to determine the relative success or failure of different industry policies. The comparison of adjustment results between countries sets the stage for the next chapter's analysis in the sense that successful industry adaption to global economic pressure should be positively correlated with competitive behavior.

Chapter five assesses the relationship between industry structure, policy and competitiveness. Five data indicators (GDP investment, GDP exports, GDP imports, GDP surplus/deficit on current account and real compensation per employee) are compared for each country from 1960-85. The extent of policy impact is measured by controlling for the value added composition of the six economies and conclusions are formed on the basis of the ability of policy to surpass structural characteristics. Once again, relative rates of change across indicators are compared during the 1972-75, 1980-83 recessions to determine policy behavior. Thus, performance 20

differences between similarly organized economies, facing similar

pressures with different industry development styles are interpreted

as successful indicators of policy impact.

The final chapter reviews the evidence in the adjustment and

competitiveness areas, identifies the chief weaknesses and strengths

of each policy style and states the methodological significance of

the dissertation's results within the context of political and

economic determinants of industry policy performance. The explanatory power of economic theory is critiqued and the

implications of the dissertation's findings are stated. Chapter II

Comparative Political Economy and Industrial Policy

Introduction

The necessity and desirability of the creative destruction

process in market societies has weaved itself indelibly into the

fabric of politico-economic debate and controversy. This chapter

reviews political science literature in the field of comparative

political economy and industrial policy. The beginning sections

introduce the political economy perspective and examine scholarly

work on markets, planning, and bargaining as agents of social

control. The middle sections review the work' of corporatist,

liberal and socialist political scientists and the degree to which

they have explored the ability of the state to intervene in market

societies. The final sections of the chapter examine political

science research in the areas of welfare spending, nationalization

and industry subsidy policies, evaluate the strengths and weaknesses

of these works, and assess the dissertation's contribution to the

existing literature base.

A. The Political Economy Perspective

In recent years a "political economy" approach to politics has become increasingly fashionable in political science. The term

21 22 seems to appear everywhere in books, journal articles and convention papers. Political scientists have used the approach to supplement and elaborate upon traditional theories as well as to create a distinct mode of analysis that is neither political science of economics (Lindberg, 1977; Chilcastle, 1985). Even stalwart defenders of traditionalism like the American Political Science

Review recognize the growing interest in political economy and included as independent litefature review section on this topic.

While no one doubts that political economy approaches to politics are becoming more common there is a general lack of agreement on what the term really means. At its most elementary level, the term implies that politics and economics intersect in ways that affect power relationships in the polity. Yet this explanation is so commonplace that it is meaningless. The lack of unanimity on what constitutes sound disciplinary theory and what methodological tools to use to examine how economies and political systems interact to some extent reflects the divisions of the classical political economists of the seventeenth, eighteenth and nineteenth centuries. The ideological cleavages that divided Adam

Smith from the mercantilists, Karl Marx from the Manchester liberals, and Rosa Luxemburg from the European social democrats set the stage for the conflicts between today's political economists. Thus, public choice, institutionalist and Marxian scholars are not only at odds with each other but also among themselves on such fundamental questions as the level of interdependency between markets and political phenomena, the role of the state in determining economic 23

performance and the relationship between business power and

democratic politics.

At this point, one may wish simply to dismiss political economy

approaches as a hodgepodge of conflicting theories inexorably locked

into stalemate. Indeed, some that have argued for replacing

traditional liberal and Marxist theories with case studies and quantitative estimation techniques. This conclusion ignores the rich diversity these approaches have brought to political inquiry as well as the solid body of research in areas not amenable to conventional modes of political science analysis.

B. Policy Regime Styles: Planning, Markets and Persuasion

Western democracies are by no means monolithic in the type of policies they use to govern their economies: some use planning, some markets and others use combinations of both. Lindblom and Dahl

(1953) point to four central socio-political processes nations can use for societal control and coordination. Their conceptual scheme is important because it represents the first major effort by political scientists to differentiate policy styles. Of the four styles, markets and planning are perhaps the best known, with the former being equated with supply and demand, the price system and private enterprise while the latter is associated with state administration, hierarchy and bureaucratic decree.

Polyarchy and bargaining in the Dahl-Lindblom sense are a bit more elusive. In simplest terms , polyarchy involves a process by which political elites and voters interact in democratic systems 24 through elections, primaries and referenda. The electoral system and its array of secondary interests (parties, the media, pressure groups) thus form the center of the polyarchial process. Bargaining is distinct from polyarchy in that it involves a process of elite interaction (or if you prefer how the leaders of politico-economic systems control one another). This concept in its broadest sense involves both public and private sector entities and the means by which negotiated bargains are struck. Examples of this process can be found in business lobbying of the policy process, union- management relations and cartel arrangements.

The Dahl-Lindblom work stands as a masterpiece of analysis on the strengths and weaknesses of markets, polyarchy, bargaining and planning as agents of social control and economic calculation. Much of the political science literature in the area of economics has at least partial origin in their work (Moran, 1983; Bowler, 1987). Yet for all its brilliance, their work has serious flaws. These flaws to a large extent reflect the euphoric faith in science and the ideological eclecticism that dominated pos-industrial theorists of the 1950's and 1960's (Bell, 1961; Maurice, 1968).

The "grand isms" so reviled by Dahl and Lindblom in Politics.

Economics and Welfare (1953) have come back with a vengeance in both

Anglo-American and Western European politics. The emergence of ideological extremism in the 1970's and 1980's has not gone unnoticed by political scientists (Lauber, 1987). Indeed, even before the re-emergence of Anglo-American market conservatism and the rise of socialism in France, political scientists have noted 25 severe divergences in governments' use of coordination agents. The growth of corporatist political science literature from the 1950's among Western European scholars stands as dramatic recognition of the pervasive influence cultural-institutional arrangements exert on the use of markets, planning and bargaining on economies (Schmitter and

Lembruch, 1979). Even Lindblom (1979) and Dahl (1984) now recognize that societies cannot use coordination mechanisms with the type of ease noted in their earlier writings.

C. The Corporatist Challenge

The debate between market and planned allocation has been accentuated by the development of corporatist coordination and direction policies. Proponents of corporatism argue that an indicative planning strategy which involves a social compact between state, business and labor sectors of the economy is a necessary precondition for stabilizing inflation, unemployment and production in a modern industrial economy. (Hage and Clinget, 1982; Paoheimo,

1984). Under a corporatist system, coalitions are facilitated by a dominant political party that restrains and coordinates interest group demands within the context of a cooperative national ideology

(Hancock, 1982). Thus, both interest group intermediation and the adherence to a holistic philosophy are conditions for a corporatist style of economic governance.

Much of the controversy in the corporatist literature has centered on a precise definitions and how to operationalize corporatism for case placement. Some studies have concentrated on a 26

systemic definition with particular emphasis on the presence or absence of interest group strength in a country (Hollingsworth,

1982). Thus, the more encompassing business or labor power is in a country the greater the potential for corporatism. Other studies have stressed the relative strength and durability of the party system in terms of its ability to coordinate interest group demands in policy formulation and administration (Hancock, 1982).

Accordingly, the more unified the party system and the greater its association with business and labor the more likely the emergence of a corporatist system.

Corporatism, however, need not be systemic and many authors have noted corporatist patterns in certain areas of the economy or in particular policy domains in economies governed by pluralistic arrangements (Cawson, 1982; Martin, 1983). Anton Cawson's (1982) work represents the new breed of corporatist analysis which maintains that interest aggregation and intermediation has the potential of being systemic (macro corporatism), industry specific (micro corporatism), or relevant to certain policy areas (meso corporatism).

Katzenstein (1984) adds a further element of complexity by differentiating corporatist types on the basis of how substantial the state sector is in managing the economy. In Small States in World

Markets (1984) Katzenstein distinguishes between state-centered social corporatism and market-centered liberal corporatism with socialist Austria and capitalist Switzerland representing dominant types. 27

The lack of unanimity among corporatist scholars as to how best

to conceptualize and measure Interest group intermediation of public policies has led to numerous critiques by pluralist political scientists (Diamant, 1981; Martin, 1983). Martin argues that the need for corporatists to develop so many variations represents an acknowledgement that pluralist patterns endure and that political- economic diversification is on the ascendent. Indeed, even where corporatism is acknowledged there is growing controversy over its effectiveness as an economic management style.

The debate is analogous to the political science treatment of the evolution of the welfare state in that government management of the economy is the main issue. The welfare state and corporatism are related but they are not one and the same. The former refers to a system of income support that has some direct and indirect implications for economic growth, while the latter refers to a conscious structure of economic direction that includes income support as one of its pillars. Traditionally, political scientists have examined and tested two major aspects of the corporatist credo, political stability and economic performance.

Corporatists argue that a system of policy management based on interest intermediation and representation of large social groupings creates a environment conducive to ideological moderation and party system stability. Schmitter (1979) and Cameron (1982) have concluded that over time corporatist states experience fewer worker protests and exhibit a greater propensity to reelect governments. The political stability that corporatism affords has obvious implications 28

for economic performance. Corporatist authors argue that countries

that have a style of economic management typified by an indicative

planning between state, business and labor sectors are less prone to

unemployment, inflation and structural disturbance than nations that

rely mainly on fiscal monetary policy and markets to rectify economic

adversity (Hollingsworth, 1982; Poloheimo, 1984).

Japan is viewed as an example of how corporatism works

effectively along these two dimensions (Johnson, 1982). The

Japanese planning system.is based on a coalitional structure that

incorporates the interests of dominant industries, banks, farm

groups, and the bureaucracy. The system is relatively closed to the

consumer and the trade union movements and the Liberal Democratic

Party (LDP) provides both the structure for interest group

intermediation (industry-state-party forums) and an ideology of

cooperation that at its root sanctifies a policy of institutional

adaptation to economic change. Japan's impressive post-war economic

growth rate, political stability and emergence as the world's largest

creditor nation is often attributed to corporatist management.

• D. Liberal and Socialist Critiques of Corporatism

Claims made for the political and economic success of

corporatism have been challenged by market liberal and socialist

political scientists. Marketplace liberals argue that public

planning strategies in the form of social compacts that restrict

prices, wages and production levels in industries hinder

competitiveness by precluding such cost saving measures as wage 29 reduction and the introduction of new technologies to displace high cost labor (Blais, 1986). Proponents of this perspective point to double digit unemployment in Western Europe as dramatic proof of the essential ineffectiveness of corporatist development in a world increasingly characterized by interdependent trade, capital and currency markets.

At the same time, leftist political scientists have attacked corporatism on the basis that planning agreements involving the corporate sector inevitably benefit the interests of capitalists over those of the poor and labor. Bowler's (1987) analysis of profit rates in Western democracies found that profits were higher and wages were lower in societies where corporatism is more pronounced. Thus, far from breaking the boundaries imposed by "privileged position of business" (Lindblom, 1977), private power is more secure in corporatist states because the state has to provide more benefits to business to insure cooperation with state sponsored indicative planning. Accordingly, corporatist incomes policies invariably emphasize wage limitations and deemphasize labor's role in influencing investment, production and plant location to insure maximum freedom for the managerial class. Corporatism, proponents of the Marxian and non Marian left suggest, degenerates into state sponsored monopoly capitalism.

Analysts for the left are confronted with the problem of how to overcome the privileged position of business in market societies.

While nationalization of major sectors of the economy is advocated by some (Brooks, 1987), most on the left argue for.labor control over 30

investment and workplace democracy (Lindblom, 1987; Dahl, 1984). In

the past, socialist governments have found nationalization often

difficult to implement (Feigenbaum, 1982). This development approach

is, however, not without precedent and some members of the left point

to the French and particularly the Austrian nationalization

experience as proof that a state managed approach is preferable to a

market or corporatist approach (Brooks, 1987). Thus, socialism

updated to include greater use of labor control over investment and

competition between nationalized firms is viewed as providing one

possible solution to business domination of democratic systems.

E. The Welfare State

The most conventional and coherent body of political

science literature deals with the growth of the welfare state in the post war era (Cameron, 1976; Teune, 1982; Hicks, 1988). Much of this work operates from the premise that democratic political systems

respond to popular demands for increased services, distribute monetary benefits to build electoral coalitions, and stabilize

adverse economic trends. In effect, a mutually beneficial series of

exchange relationships between political elites and voters is arrived at: governments are elected on the basis of how much welfare spending can be promised and delivered to the electorate. The welfare state thus grows and grows, with spending levels and the proportion of the population receiving income support from the government increasing from year to year. The phrase "tax and tax an spend and spend" has become part of the political lexicon and income 31 security has established itself as the sine qua non of electoral success.

However, the literature's treatment of the growth of the welfare state has changed over time. At first social spending and income support growth were viewed as the natural working of a democratic political system seeking to diminish class conflict and promote ideological moderation. Early studies indicated that

European social democratic systems where more egalitarian, prosperous and stable than less generous market societies (Hancock, 1982;

Hollingsworth, 1982). These systems seemed less susceptible to labor militancy and on average had higher employment rates than Anglo-

American nations.

Proponents of the welfare state often point to Sweden as a prime example of how the m o d e m polity can be both egalitarian and efficient. For a generation, the Social Democratic Party ruled

Sweden under a set of policies that expanded the role of the public sector as a distributor of national wealth and income. Progressive taxation and a broad array of income support programs narrowed income differentials without intruding on the investment autonomy of the private sector. Markets, private enterprise and the price system played dominant roles in both the export sector and the domestic market. Thus, Sweden was the ultimate mixed economy. The idealization of the "Swedish experiment" reached its apogee with the publication of Sweden: The Middle Way (Childs, 1939) in which the country was identified as having created a set of political-economic arrangements that diminished the inegalitarian consequences of a 32

market economy without restricting the productive potential of

private initiative and organization.

But, the depiction of European social democracy as the

desirable "middle way" has been contradicted by evidence that welfare state expansion has contributed to economic stagnation and political instability (Tufte, 1978; Teune, 1982). According to this body of research, greater governmental provision of economic resources, and the associated redistribution of wealth, reduces the ability of market systems to produce. Cameron's (1982) thesis suggests that state expansion is fundamentally constrained in a market economy because it is dependent upon the investment capacity of the private sector. Since the growth of social spending results in greater tax and debt levels, the resources left for the private sector to invest become increasingly limited. Thus, the reduction in private sector investment limits economic growth in the economy and restrains the amount of revenue the government can collect to finance health, old age pensions and income support programs.

This conclusion is especially alarming because it concentrates on the tensions between markets and democratic systems. Tufte

(1978) points to a sequence of electoral business cycles in Western democracies that have increasingly destabilized markets and diminished the growth capacity of the private sector. The implication drawn from both Tufte's and Cameron's research is that state involvement in the economy needs to be reduced to free resources so that the private sector can reenergize production. 33

Yet such an assessment only looks at one side of the problem

and seems to suggest the market is supreme and that the policy

directions of democratic systems need to be subjugated to the needs

of private capital. Oddly enough Lindblom (1977) finds similar

trends affecting Western democracies, but urges a reversal of this

relationship by extending democratic controls on business investment.

The delicate balance of maintaining a political democracy alongside a market economy composed of autonomous producers, suppliers and consumers has been a predominant concern among political scientists

(Dahl, 1984; Lane, 1986). Much of the debate has centered on the egalitarian implications of capitalist versus socialist democracy and the degree to which capitalism is a precondition of, or hindrance to the attainment of democracy.

These debates are of considerable importance for they provide the empirical context for evaluating different policy approaches designed to harmonize, balance or perhaps resolve the conflicts that occur between market and democratic systems. Thus, policy approaches that produce extreme income inequality or result in a drastic interference with property rights may be rejected upon some normative standard created by democratic theory. Lane (1986), for example, argues that free choice necessitates a market system in which the government redistributes income to insure that equality of opportunity and property ownership is maintained. Under Lane's conception, individual liberty is a consequence of having enough material resources to make an informed decision to buy or sell goods and engage in market transactions. 34

While democratic theory can tell us something about the

tensions that exist in market democracies and in some vague sense

tell us we might be able to alleviate them, the debate as presently

constituted does not give much indication of how successful or

unsuccessful different regime types have been in reconciling these

conflicts. Fortunately, some additional research exists that

establishes partial empirical estimates of regime performance in

terms of how well or badly different Western democracies have fared

in controlling unemployment, inflation and reconciling the

conflicting demands of democratic politics and economic growth.

F. The Industrial Policy Debate: Incomes, Policies, Nationalization and Business Subsidies

Political scientists have also treated, in a more limited form,

the socio-economic consequences of particular micro economic policies. Lembruch's (1979) study of incomes policies concludes that wage restraint programs have not been effective because unions impede

their full implementation. Others have found that income policies can be effective depending upon the socio cultural context in which

they are administered. Marks (1986), for example, found that the predominance of a competitive ethos in Anglo American countries thwarts the imposition of wage controls while Hollingsworth (1982) and Polaheimo (1984) found that centralized bargaining institution and a dominant social democratic party facilitate the effectiveness of wage restraint programs in Sweden, Norway, and the Low countries. 35

Other facets of what we might term industrial policy have been treated by political scientists. Weaver (1986) examined the railroad policies of the United States and Canada and has found the absence of unified rail planning has contributed to industry deterioration in America. The Canadian case, Weaver argues, represents a clear example of how industries can be restructured effectively by government planning. The literature has also explored other policy domains ranging from cross-national banking

(Moran, 1983) to the factory closing policies of the United States,

Sweden and France (Hooks, 1984).

These works, while important, are limited in the sense that they deal with policies that affect industrial performance after some market disturbance has occurred. Thus, factories close and workers are laid off, banks collapse and the savings of individual and commercial depositors are imperiled, and companies move their plants from geographical location to another causing corresponding patterns of decline and growth.

While governments invariably respond to market disruptions, the main theoretical and practical justification of industrial policy lies in its ability to alter present and future investment decisions in ways that are congruent with major policy objectives. The aims of industrial policy differ across nations and across time, with job security, international competitiveness, workplace democracy and manufacturing autonomy taking precedence depending on the cultural and economic complexion of the nation initiating the development strategy. 36

Political science studies of non reactive industrial policy are relatively rare and for the most part underdeveloped. The major exception are in the areas of government ownership and industrial subsidy policies. The research on nationalization and public enterprise is surprisingly rich and diverse. The major studies in this area range from Bianchi (1987) case study of Italy's national holding company from the early 1930's to the mid 1980's, Brook's

(1987) comparative examination of French, Canadian and British mixed ownership corporations, and Feigenbaum (1982) review of Western

European public enterprise approaches.

The research on the merits of public ownership in a modern industrial economy illuminates the difficulty and complexity of evaluating pro-active forms of industrial policy. Each of these works examined a key question in democratic socialist theory--, that is, do profit making government enterprises act according to a higher social standard than their private sector counterparts? The conclusions the authors derive in response to this simple question are far from uniform.

Brooks, for example, argues that national governments can impose policy preferences on government enterprises without a drastic reduction in profitability. Socialist theory, he concludes, is correct in its prescription that public enterprise enhances the interests of the democratic polity. Brooks supports his conclusion by noting that the structure of government-management relations, party ideology and most particularly firm integration in government plans are important factors in insuring public enterprise compliance. 37

In France the legal authority to replace recalcitrant managers, and a

democratic socialist government committed to nationalization,

facilitated public sector control. Brooks argues that these

conditions were minimal or nonexistent in Anglo American countries

"because Canadian, and British governments lack the legal authority and

ideological commitment to make a public enterprise strategy work.

Fartizio Brianchi's case study of Italy's Institution for

Industrial Reconstruction (IRI) highlights some of the complexities

and contradictions in a public enterprise approach. The IRI was

created during the depression to rescue financially troubled banks

and firms. After the demise of Italian fascism, the IRI spearheaded

industrial development in such key sectors as oil, petrochemicals,

steel, automobiles and textiles. According to Brianchi, the IRI's

management was given authority to develop Italian industry until the

1960's.

The author's essential thesis is that a coalition of

legislators, Christian Democratic Party elites and parochial business

interests imposed their development priorities on the IRI causing it

to engage in unprofitable business ventures and to provide services

that depleted its working capital. Instead of a vehicle for

industrial development, the IRI became a jobs-creation and social-

service delivery system. Accordingly, plants were located in

underdeveloped areas to aid distressed communities and unprofitable

business lines were maintained to preserve jobs. Patronage, no

profit, became the dominant criteria for IRI investment decisions. 38

Brianchi's closing observation that the IRI's management is fighting to regain control over its operations in the 1980's highlights some of the impediments toward attaining the democratic possibilities of socialized ownership. Public ownership, if the IRI is a representative case, has failed to make the grade as a superior form of organization in that profits and the policy objectives of the democratic polity clash. In effect, one must come at the expense of the other.

The conundrum for some democratic socialists is how to reconcile the delicate balance between managerial autonomy and planning, or the degree to which firm profits and "social needs" can be jointly realized (Brooks, 1987). Yet are these the necessary choices that have to be made? In his review essay on the Western European nationalization experience, Feigenbaum (1982) points to the possibility that the entire conception of socialist enterprise is faulty and that a reformulation is in order.

Feigenbaum (1982) cites the errors, financial miscalculations and public policy resistance of nationalized enterprises in Western

Europe. Concentrating mainly on the IRI and French, British and

Italian national oil companies, Feigenbaum documents a pattern of managerial recalcitrance toward the state, with nationalized companies acting contrary to the best interests of the country and in many cases in direct defiance of established public policy. The

French, Italian and British national oil companies, for example, colluded with major private oil companies to keep supplies tight and prices above normal market conditions. The management of 39

nationalized enterprises, far from being the guardians of socialist

democracy, evolved into autocratic fiefdoms; investments were made to

maximize profits and enhance organizational growth at the expense of

society. Feigenbaum argues that public corporate enterprise is no

more accountable than private corporations. Thus, socialists must

find an alternative instrument to achieve social democratic policy

objectives.

While Feigenbaum concludes that corporate organization and

socialism may be at odds, his analysis is limited in that he does

not give us any indication of what instrumentality, if any, that can

achieve the egalitarian and productive possibilities of democratic

socialism. The problems and dilemmas of public ownership have led most socialists to advocate alternative policies to guide private

sector investments in ways that are congruent with industrial policy

objectives. Among the most common alternatives are industrial

subsidies designed to alter private investment and plant location

decisions.

Political scientists have generally ignored the industry

subsidy policy area. Industry subsidies involve a process by which governments compensate or reward firms involved in the production of goods and services that have significance for the overall health of the economy. Ship building, for example, has received extensive subsidies by governments because of its close relationship to the steel, transport and trade industries. In a interdependent economy, the possibility that disturbances in one sector will spill over to other areas of the economy mandates some form of public policy 40

action. Traditionally, industry subsidy allocation research was the

exclusive domain of economists. The growing recognition that politics plays an important role in determining industry subsidies has changed this situation and activated political science research

in this area. In his study of Western European industry subsidy policies Blais' (1986) regression analysis found that unemployment, political parties, taxation levels, tariff structure, and size of the agrarian economy were strongly related to firm subsidies. He also found that small, relatively open agrarian economies with social democratic governments, high taxes and unemployment have higher subsidy levels.

Blais' findings reflect and reinforce Cameron's (1978) study that welfare levels are highly correlated with trade liberalization because firm subsidies are used to compensate for lower tariffs.

Thus, the more open the economy, the greater the reliance on subsidies to aid corporations. Blais' study is slightly ambiguous in its policy conclusions. The most common'interpretation would be that the set of factors strongly correlated with firm subsidies are also those associated with economic atrophy. According to this interpretation, social democracy with its emphasis on progressive taxation and welfare spending insulates backward sectors of the economy and contributes to national economic deterioration. The high association between unemployment, a large agricultural sector and industry subsidies lends credence to this view. Blais hints at, but does not state this conclusion. 41

This assessment, however, is complicated by the strong

association between low tariffs and industry subsidies. Katzenstein

(1984) argues that the same group of nations that Blais examines

(Austria and the Low countries) use industry subsidies to promote

economic adjustment and competitive trade behavior. In Katzenstein's

view, high industry support is evidence of growth enhancing behavior.

European industry subsidy policy has also been examined to test

Lindblom's (1977) thesis that business control over investment

constrains public policy.

Bowler (1987) tests the Lindblom argument by comparing capital

outflow in corporatist and pluralist market democracies. In

essence, Bowler explores the corporatist argument that business

autonomy is constrained by social compacts and he hypothesizes that

disinvestment should be less of a problem in corporatist societies.

His analysis of capital outflow rates between countries did not show

this expected relationship. Instead, Bowler found that corporatist

systems experience higher rates of disinvestment. Bowler explains

this result by noting that state intervention in corporatist systems

threatens capitalist interest and that corporatist states attempt to

lure the private sector into investing by expanding public subsidies

to the business class.

Bowler maintains that business power is stronger in corporatist

societies because corporations can exert large subsidy payments from

the government in return for a promise to cooperate with state

sponsored indicative planning. The business class, however, retains most of its autonomy to invest and relocate capital. Disinvestment, 42

in effect, is used as a point of leverage to shape industrial policy

as well as to penalize anti-business governments. Bowler argues that

market imprisonment of corporatist societies could be overcome by

socializing investment. Since this action violates the corporatist

ethic of voluntary group intermediation, Bowler concludes that

corporatism is doomed to be a captive servant of capital.

G. Political-Economy Literature: An Assessment

The dilemma that confronts the policy analyst who seeks to

examine the relationship between industrial policies and economic

performance is essentially two-fold. First, what set of policies

denote a particular regime type or path of development? One, in

effect, needs to define the distinguishing characteristics between

market, corporatist and state centered industrial policies. Second,

what set of phenomena measures industrial policy success? The

selection of different indicators (e.g., steel production, trade

balances, per capita GNP) plays an important role in evaluating

policy results. The analyst who uses only savings and investment

rates, for example, biases his study toward development models that

emphasize capital accumulation.

Studies that relate regime success or failure on the basis of macro economic indicators are not particularly useful in the

industrial policy area. The United States since 1980 is a good

example. During this period assorted macro economic indices

(inflation, unemployment, GNP growth) could be used to illustrate

the re-emergence of American dominance in the world economy and the 43 decline of Western Europe. In these terms, the U.S. market oriented policy is judged to be effective and European corporatism is judged to be ineffective.

Such a representation, however, ignores the effect that foreign debt and investment can have on performance levels. In the 1980's

European and Japanese capital financed American budget and trade deficits which contributed to high growth rates in the United States and low growth rates in Europe. Economic relations in this period were characterized by a decline in American manufacturing capacity caused by an over valued dollar exchange rate and a concommitant influx of cheap, high quality foreign merchandise. The effect of currency movements on the European economy was the reverse; exports were stimulated by dollar devaluation and economic growth was constricted by capital outflow. (The pattern of American expansion and European stagnation will no doubt reverse as a larger share of

U.S. resources are devoted to paying off foreign debt.) Thus, using macro economic indicators to assess industry policy can be misleading and need to be supplemented by other indicators.

In general, then, what is missing from the literature is a systemic effort to gauge the effect of regime types (corporatism, statism, free enterprise) on Western manufacturing growth and development. Such an initiative would need to determine the relationship between policies, manufacturing growth and macro economic indicators. These relationships should be aligned with questions like: Who governs under each system? How different policy models constrain or enhance democratic politics? And how do 44

management styles affect the distribution of wealth and economic

power in market societies?

The theoretical and methodological divisions separating

corporatist, pluralist, and leftist political scientists also need to

be addressed. The present study bridges these gaps by examining the

level of market and state direction of economic management, and doing

so by developing four different management styles. The first two

(statist and market industrial management) correspond to Lindblom's

(1977) model I command society and model II market society. Thus,

statist management relies on centralized planning and government ownership to set prices and production, while market management relies on decentralized coordination between autonomous producers and consumers to dictate the value and allocation of goods.

The third and fourth models (business and state corporatism) represent hybrids of Lindblom's command and market societies. Under corporatist management, the state collaborates with organized groups

(e.g., labor, finance, business and farmers) to set production and price levels. Policy formulation and implementation are subject to negotiated bargains between organized interests. Thus, income policies are developed out of a series of promises: labor promises wage restraint, capital promises job security and the state promises to maintain stable prices. Policy failure under such a system results when one party fails to uphold their end of the bargain.

Traditionally, corporatism has been separated from pluralism on the basis of interest group strength and incorporation into the policy-making system. This method of identifying corporatism has led 45

to variation in corporatist management (Martin, 1983; Katzenstein,

1984). The present study employs interest group strength and

representation to differentiate business from state centered

corporatism, with the former associated with strong state-industry

linkages and the latter typified by a substantial government-labor

connection. Additionally, the study employs policy content (degree

of market and state guidance of industry) as a means of demarcating management styles. Using this method, styles are identified on the basis of interest group strength and their mix of market and planning.

Policy content approaches have been used with some success by

institutional and public choice scholars (Lindberg, 1977; Lindblom,

1977; Hage and Clinget, 1982; Hollinsworth, 1982; Dahl, 1984). The

central proposition of this approach is that a society's mix of markets and planning is dependent upon its social and institutional

structure. Thus, a society that blends the use of markets and planning throughout its entire range of industrial policies reflects a consensus between the state and organized economic interests that private competition needs to be guided and managed. Mixed systems

(like state and business corporatism) not only need a consensus for policy direction, but also need the ability to sustain that direction over time.

This study hopes to make several contributions to the present literature. Most importantly, it examines the relationship between policy styles, wealth creation and crisis management in the democratic polity. In particular, it blends macro and micro 46

economic Indicators to assess the extent of policy effect on

industry performance. Secondly, it uses a policy content approach in

conjunction with traditional comparative politics measures of regime

styles. The definition of management styles is based upon

identifiable patterns of market, state and mixed policy directions

and their relationship with political party and interest group

strength. This combination of policy content, interest group

strength and mix of macro and micro indicators should avoid some of

the problems the existing literature has had in defining management

styles and measuring policy impact.

Conclusion

Our literature review has sketched the broad outlines of

comparative political-economic analysis in the developed West. It has taken us from the economic impact of the welfare state, to the

debate between corporatist, socialist and pluralist scholars on the merits of different economic management styles and, finally, to

specific studies of government ownership and industry subsidy programs in Western Europe and North America. This body of

literature has contributed immeasurably to our understanding of the context in which industrial policies are developed and implemented.

There are, however, some limitations to this body of research.

The ability to gauge industry policy impact is particularly limited in that there is a lack of research comparing the impact of different industrial policies. The evaluation approach now to be used addresses this problem by: (1) using a broad range of indicators to 47 measure policy impact and by (2) constructing a set of definitions that measure state planning, interest group strength and party dominance. The study employs these measures in order to avoid some of the methodological and theoretical confusion that has plagued earlier political science work in the area of industry policy impact. Chapter III

Framework For Comparative Industrial Policy Analysis

Introduction

A major issue in political-economic theory (reviewed in Chapter

2) involves the role of the state in managing the market economy.

Both conservatives and Marxists view public policy as having a

tangential or auxiliary role in facilitating economic growth. The

former see it as a retarding or inconsequential factor (Olsen, 1983;

Hudson, 1985), while the latter view it as being subjugated to the priorities of private monopoly capital (Wallerstein, 1984). This

study rejects both of these views and hypothesizes ' that industrial policy plays a vital role in shaping economic outcomes. In particular, the content of these policies (i.e., the degree of market vis-a-vis state guidance) may have a significant effect on the composition of the industrial sector and its performance.

The goal of the present analysis is to determine the connection between different industrial policies and economic outcomes in the developed West. In particular, the analysis concentrates on the impact that statist, corporatist and market models have on reducing the socio-economic costs of industrial organization and the degree to which economic adjustment and competitiveness has either been enhanced or restricted in six countries from 1960 to 1985. The

48 49

chapter begins with a restatement of our analysis, continues with a

literature review, introduces a matrix on policy coordination styles,

and concludes with evaluation criteria to approximate the success or

failure different approaches have in fostering economic adjustment

and competitiveness.

A. Structural Analysis: Growth Cycles, Industry Policy, Adjustment

and Competitiveness

The essence of intellectual endeavor is the creation of a

structure to guide and shape human inquiry (Gruchy, 1984). Thus our objective is to determine the relationship between industrial policy types and economic performance in six industrialized countries from

1960 to 1985. Formulating goals and establishing relationships between variables create definitional and methodological problems for even the most skilled analyst. In effect, what does one mean by

"industrial policy types" and "economic performance"? Moreover, how does one determine or at least approximate relationships between such seemingly vague concepts?

Fortunately the task, while difficult, is manageable because structures can be created to offset impediments that arise when complex issues are studied (Babbie, 1983). Thus, it is imperative that a model be constructed so that the relationship between the variables is reasonably clear. The dissertation essentially posits a sequence of structural links between four components. These elements

(represented in Figure 1) form the nucleus of the dissertation. 50

Industry Policy.

Growth Cycles Adjustment

Competitiveness

Figure 1. Structural Components

As previously noted, the history of capitalism is one of severe cyclical transformation. The roots of this economic transmutation are multifaceted and lie with such diverse factors as technological innovation (Lewis, 1978), fluctuations in entrepreneurial activity

(Schumpeter, 1949), and changes in business organization and practice (Chandler, 197). Abrupt alterations in manufacturing capabilities also have profound repercussions for a country's power and status in the international economy. Wallerstein (1974), for example, argues that changes in global capitalist development produce hierarchical divisions of power between nations that change over time.

Given the profound effects industrial growth cycles have on employment, investment and purchasing power, governments have historically responded to severe upward and downward movements in economic activity (Hawley, 1966; Galbraith, 1977; Heilbroner, 1980;

Tufte, 1980). States, in particular, have used trade barriers, loans and sector subsidies to moderate cycles of industry growth and decline (Olsen, 1980; Johnson, 1982). These forms of industrial planning constitute attempts to adjust manufacturing labor markets and production in ways that minimize economic disturbances (e.g., 51

avoiding high unemployment and labor disputes) while promoting growth

oriented behavior (e.g., raising capital formation) that enhance a

nation's competitive standing in the world economy. The success and

failure nations have in responding effectively to industry growth

cycles should in turn have an effect on the severity and frequency of

future global market disruptions.

Our model thus has reciprocal linkages: growth cycles

stimulate nations to use sectoral policies to alter manufacturing

price and cost conditions which shape and influence the intensity of

subsequent economic disruptions. Under the most successful scenario,

national industry policies coordinate production and investment flows

in the global economy to the point where the "creative destruction"

dynamic of capitalism has been moderated and eventually overcome.

In the ideal global economy, the uncertainty of market outcomes

is replaced by the stability of planned results as policy-makers

adjust their economies to develop industries that have strategic

trade advantages. The technique of industrial planning, however, has not been refined to point of perfect certainty. Instead, planning in market societies reflects a complex mosaic in which social-economic forces elude even the most stringent policy controls and calculations

(Lindblom, 1984). Given the imperfectness of the planning process, one would expect variation in the ability of states to influence economic forces. Depending upon the structure of labor markets and production, industry policies may encounter success in some areas and failure in others. Accordingly, process of industry response to 52

growth cycles and the result in patterns of adjustment and

competitiveness are likely to rough.

The linkage between growth cycles and industry policy is assessed by relating global market changes in manufacturing with the effectiveness of policy responses during periods of recession and growth from 1960-85. Accordingly, Chapter Four evaluates adjustment by relating manufacturing branch employment and capacity utilization rate alterations with changes in employment, production and labor dispute levels in different countries, while Chapter Five assesses competitiveness by relating economic interdependency (measured by GDP export dependence by region and country) to changes in GDP gross fixed investment, current account GDP surplus/deficit and employee compensation rates between nations. The global recessions of 1972-75 and 1980-83, in particular, are used to evaluate rates of change between countries along the adjustment and competitiveness indicators. Thus, maintaining low unemployment, high industry production and low labor dispute rates during period of external stress is evidence of successful adjustment while the capacity to maintain positive investment, trade and purchasing power levels during recessionary periods is evidence of competitive behavior.

In the model, industrial policy is specified as the major mediating variable between the frequency and severity of growth cycles and national success in the adjustment and competitiveness areas. Since nations differ in the degree to which they use markets, bargaining and planning to cushion their economies from external disruption, it is not unreasonable to expect that national patterns 53

of adjustment and competitiveness should reflect the degree of

planning and exchange in their economies. Accordingly, the next

section establishes policy criteria to identify the set of countries

and industrial development approaches to be examined in the

dissertation.

B. Industrial Policy Styles

The process of economic growth, decline and regeneration is not

independent of state influence and manipulation. Indeed, how nations respond to global economic pressures may well dictate the

scope and degree of their politico-economic status in the world economy. This section explores the ways governments react to economic forces that affect domestic manufacturing markets.

Governments play varying roles in regulating factor movements in economies. Some nations emphasize government planning and control while others rely on private enterprise and free markets to cope with

trade disturbances. These policy differences are outgrowths of complex webs of socio-cultural and historical forces that induce societies to take different developmental paths (Hawley, 1966;

Johnson, 1982). The relationship between political culture and industrial policy is important because it shapes and influences the role of the state and interest groups in the economy.

Industrial policy styles refer to the development approach (free markets, planning, and mixed systems) that advanced societies use to promote and stabilize capital and labor flows in the manufacturing branch of the economy. Policy style theory has its origin in the 54 core pluralist political economy literature of the 1950's (Lindblom,

1953; Lindblom and Dahl, 1956) and has been progressively refined, critique and elaborated upon by both pluralist and nonpluralist scholars (Lindblom, 1977; Lindberg, 1977; Hage and Clinget, 1982;

Moran, 1983; Dahl, 1984; Preston, 1986).

The policy style literature focuses mainly on the strengths, weaknesses and social consequences of using markets, planning and persuasion to control and coordinate politico-economic activity.

While impressive in its analytical detail, the literature both complicates and oversimplifies policy regime classification.

Lindblom and Dahl, for example, have incomplete conceptions of persuasion as a device for economic coordination. Lindblom (1977) treats persuasion as entailing a preceptoral system in which social elites instruct the masses to engage in morally correct behavior, where Dahl (1984) defines the concept as a process by which concentrated power centers (e.g., the business sector) distort and manipulate policy outcomes in Western democracies.

While both definitions capture facets of the persuasion process, neither envisions the possibility of a democratic framework that incorporates the interests of major social groupings within the policy process. This system, commonly known as corporatism, has been found operating in large segments of European and Japanese industry

(Schmitter, 1984; Schmitter and Lembruch, 1982; Katzenstein, 1984).

Since the problem originates with the Lindblom-Dahl conceptualization of persuasion, a reformulation of this method of economic and social control could enhance this literature's ability 55

to construct a framework that accurately classifies different types

of politico-economic arrangements. Borrowing from and refining the

literature, I have constructed a matrix that identifies different

industrial policy styles available to developed countries. These

industrial coordination modes are defined and placed according to

their juxtaposition along the matrix's components. The first of

these (Freceptoral Planning) delineates an environment characterized by direct government control over the production and distribution of

economic resources. Elites (e.g., party officials) support this hierarchically managed system by manipulating nationalistic and

ideological appeals to guide mass behavior. The command economies of

the Soviet Union, Cuba and Eastern Europe are archetypes of an economic coordination style that emphasize planning and moral incentives.

Bargaining, the matrix's other component, delimits a context in which large producer groups use advertising, negotiated agreements and financial size to influence production, price and cost levels in strategic centers of the economy. The market power of these enterprises is reinforced by banks, labor union and governmental agencies whose actions become interwoven with large firm production and allocation. Economic outcomes, within this system, are determined by markets and institutional interaction. Galbraith

(1971) identifies this network of government, labor and business interaction as comprising a "new industrial state" that has supplanted competitive market allocation in key sectors of the economy. 56

Persuasion in the matrix is both authority and exchange centered. Thus, preceptoral guidance has its origin in elite control and utilization of the state administrative apparatus and bargaining is rooted in the market power of producer, finance and labor group confederations. While not completely a separate method of social control, persuasion facilitates authority and exchange mechanisms by rationalizing their existence. Persuasion is thus a vital link that allows elites to inculcate societal norms and practice in command, corporatist and market systems. Indeed, once instituted, ideas like the work ethic, the new socialist man, the national good and the sanctity of property and corporate autonomy become powerful constraints on social behavior.

Persuasion also involves negotiation between organized interests in the economy. Analogous to Dahl's (1971) concept of polyarchy, economic performance is dictated by the interest and capabilities of labor, government, banking and business groups across markets.

Indeed, one of the oddities of the policy style literature is that polyarchical or bargaining modes of coordination are never explicitly extended beyond the legislative and bureaucratic spheres of the political system. The failure to incorporate polyarchical coordination into the processes of economic production and exchange may account for this school's inability to identify corporatism as an alternative to command and market models. Persuasion is treated here as a multifaceted concept that involves both moral appeal and a set of rules governing resource allocation between different groups. The 57 matrix (below) identifies four possible industrial coordination systems or styles of production and allocation.

INDUSTRY POLICY STYLES

BARGAINING

HIGH LOW

PRECEPTORAL HIGH State Corporatist Statist

PLANNING LOW Business Corporatist Free Market

These policies are general types and fragments of each can be seen operating in all Western manufacturing societies. Consequently, markets determine some industrial production and prices in statist policy systems and government planning shapes some manufacturing activity in predominately market systems. The classification scheme should be viewed as a general framework and not as a complete conceptualization of regime coordination styles.

The typology's upper left quadrant (state corporatist) combines high levels of government planning, administered markets, bargaining and nationalistic appeal to influence production and capital flows in the manufacturing system. This method of industrial coordination is quite common in societies like Austria and Israel (Lembruch, 1977;

Offee, 1983; Schmitter and Lembruch, 1983).. Under the matrix, state corporatism represents the highest stage of industrial coordination.

The remaining industrial policy systems (statist, business corporatist, free market) use coordination methods less intensively with government planning and preceptoral guidance predominant in 58

statist systems, oligopolistic markets and institutional interaction

preeminent in business corporatist regimes and no matrix coordination

set dominant in free market systems. Thus, nationalized industries

and banks play decisive roles in dictating capital movements between

industrial branches in France (Cohen, 1977), markets and government

macroeconomic policy are dominant in Anglo-American countries (Urban,

1983; Hudson, 1985) and tri-'partite bargaining between business, the

Liberal Democratic Party and the state bureaucracy is predominant in

Japan (Johnson, 1982; Adams and Ichimura, 1983),

The typology also allows for the possibility that nations can move from one coordination set to another. The British experience with industrial planning is an interesting study of policy change.

The Labour government's nationalization and central planning policies of the late 1940's were altered by limited privatization and

deregulation under the Conservatives in the 1950's which were

supplanted by corporatist arrangements under both parties in the

1960's and 1970's. The Thatcher government's intensive denationalization, industrial subsidy reduction and market oriented

industrial policies in the 1980's add a further element of complexity in characterizing British industrial policy in the postwar period.

Fortunately, most developed nations exhibit greater consistency in their industrial policy styles than Great Britain. This is not to suggest that alterations in Austrian, American, French and Japanese planning have not occurred. What is argued is that these changes have not transformed the basic foundation of the policy style pursued in the post war era. Thus, Japan has moved from a state to a market 59 centered corporatism and France has experimented with a varying mix of planning and markets within its predominately statist industrial policy approach (Adams and Ichimura, 1983; DeVitt, 1983).

Policy system continuity is crucial because it increases the probability that conclusions can be reached. Patterns of continuity provide a basis upon which statist, corporatist and market models can be compared in their ability to improve market conditions in the manufacturing sector. In effect, some policies may be more successful than others in reducing unemployment and expanding growth.

Long periods of uninterrupted policy activity also allow the observer to conclude that industrial coordination types have little or no impact on manufacturing performance if a high degree of performance convergence between' the models is found.

The task of classifying developed nations into statist, corporatist and market oriented models remains. The answer to this inquiry is far from simple because the literature is divided on nation-state placement into policy regime camps. Japanese industrial policy after the Second World War is illustrative. Some observers have identified it as explicitly corporatist (Johnson,

1982) and others have characterized it as market based (adams and

Ichimura, 1983). Similar controversies have erupted over the nature of West Germany, British, Austrian, Italian and French industrial coordination (Gruchy, 1977; King, 1982; Bolino, 1982; Cawson, 1983).

Since the dissertation compares the effects of different industrial policy paths, it is important that specific criteria for case placement be established. The absence of specific criteria 60

hinders the analyst's ability to place nations into policy types and

consequently jeopardizes impact evaluation of industrial policy

performance. Fortunately, indexes and scales measuring policy

development between nations can be constructed to overcome these

problems (Babbie, 1983). The dissertation constructs and uses state

intervention and bargaining indexes to delimit the parameters of

statist, corporatist and market based development between selected

advanced market economies.

The state intervention index measures the presence of

government in the manufacturing sector of the economy and indicates

the significance of the public sector's role in affecting ectoral

performance from 1960 to 1985. Gases are chosen on the basis of

index scores that indicate low, medium, and high patterns of statist

industrial coordination. Low scores are equated with market oriented

models, medium range scores with corporatist modes of development and high scores with statist industrial policies. The index (below)

ranks eight advanced market economies along five components of

industrial policy, specifies scores for each component and aggregates

these values to arrive at a numerical measure of state impact per

country.

The matrix other component (bargaining) needs to be measured in order to insure consistency and reliability in determining the range of market, state corporatist, business corporatist, and statist

industry policies among the eight countries. The present study uses a bargaining index to measure the leverage political parties, trade unions and interest groups have been able to exert in eight market 61

State Intervention Index

U.S. U.K. Fra. Ger. Aus. Japan Aust. Can.

1. R&D Support (GNP %) MM P M/P P M/PM M

2. Incomes Policy M M/P P M/P P M/PM/PM

3. Percent State Ownership M M/P P M/P P M M M/P

4. Industry Subsidy M M/P P M/P P M/PMM

5. Import Protection M/P M/P P MP M/P M/P M/P

State Intervention 9 21 50 21 41 21 13 13

Market (M) - 1 Market/Planning (M/P) - 5 Planning (P) - 10

Sources: Policy index components are based on: Allan Gruchy's "Uncertainty, Indicative Planning and INdustrial Policy” Journal of Economic Issues. Vol. XVIII, No. I, March 1984, pp. 159-179; Anton Blais "the Political Economy of Public Subsidies" in Comparative Political Studies. July 1986, pp. 201-616; and Guy Marks "Neocorporatism and Incomes Policy in North America and Western Europe" Comparative Politics, April 1986, pp. 253-277. 62 economies in the postwar period. Cases will be chosen on the basis of index scores that low, medium, and high party-state-interest group linkages. Low to moderate linkage scores indicate non-corporatist scores indicate corporatist patterns. The index on the next page ranks eight countries alon five conditions conducive to bargaining, specifies scores for each component, aggregates these values to arrive at a numerical summary of bargaining in each country.

Of the eight countries, six were chosen because of their politico-economic status in the industrialized world (GNP and representation in economic summit meetings). The Austrian and

Australian cases were selected over Italy because that country's extreme political volatility in the postwar period. With the exception of Gough Witlam's Labour government in the early 1970'.s, policy turbulence has been notably absent in Australia, and Austria has been a model of stability since its independence in 1955. The indexes are used to demarcate numerical zones of policy development between the eight cases.

These mathematical ranges can be objected to on the basis that they are arbitrary measures of policy development. While some form of arbitrariness is endemic to the construction of indexes, they are preferable to approaches that merely assume that countries, for cultural or historical reasons, fall into a particular coordination index can be rigorously examined and its outcomes can be placed under greater scrutiny if the assumptions are specified.

The construction and interpretation of the state intervention index is based on the assumption that free market and statist 63

Bargaining Index

U.S. U.K. Fra. Fra. Aus. Japan Aust. Can.

1. Party-Group Linkages P C M / C C C P M/C

2. Organizational Unity of Labor Movement P C P C C M/CM/CP

3. Average Percent of Labor Force Unionized P M / C P C C C M/C M/C

4. Work Council and Codetermination P P M/C C C P P

5. Social Democratic Presence in Government P M/C P M/C C P P M/C

Bargaining 5 31 13 40 50 36 13 17

Pluralist (P) - 1 Moderate Corp. (M/C) - 5 Corporatist (C) - 10

Sources: Party-Group Linkages Cores (1964-75) from G. Bingham Powell Jr., Contemporary Democracies: Participation. Stability and Violence (Harvard University Press, 1982), pp. 90-91. Components 2-5 from David Cameron, "Social Democracy, Corporatism and Labor Quienscence" paper presented at the Conference on Representation and the State, Stanford University, October 1982. Components 2-5 measured from 1965-80. 64

development paths are extreme coordination styles and country

that fall within these camps must exhibit extreme scores. Extreme is

defined as a range of fifteen points at both ends of the spectrum.

Thus, free market development is identified by a 0 to 15 point range

and statist systems are delimited by a 35 to 50 range. These ranges

identify extreme patterns of state influence (statism) or absence of

state influence (free markets).

The bargaining index is based on a similar assumption that

corporatist paths should exhibit scores that are high and that state

and market models should register relatively low scores. Gradations

of corporatism are measured on the basis of high, moderate and low

aggregate index scores with 35-50 point range denoting advanced

corporatist development, a 16-34 point range typifying an

intermediate phase of corporatist coordination and a 0-15 point range

a low level of comparatist intermediation.

When comparing the eight countries across the two indexes, we

find low state intervention and minimal bargaining in the American,

Australian and CAnadian economies, high levels of bargaining and

extensive state planning in the Austrian economy, substantial

government intervention and minimal bargaining in the French system,

moderate levels of state involvement and interest intermediation in

the United Kingdom, and extensive bargaining and moderately low

levels of state intervention in the Japanese and German economies.

The country index scores reveal that France uses a statist model,

Austria follows a state corporatist approach, Germany and Japan utilize a business corporatist style, and the United States, 65

Australia and Canada use market industrial policies. The range of

British index scores indicate an approach that does not fall into a specific matrix policy style.

Of the free market group, the United States and Australia register lower state involvement scores than CAnada and as such the market industry style is' best represented by these countries. The corporatist group has three representatives with Germany and Japan serving a proxies for business corporatism and Austria serving as an ideal candidate for the state corporatist model. The remaining country (France) best represents the statist model. The matrix below places these countries into their respective policy camps.

Bargaining

High Low

High Austria France

Planning

Low Germany United States

Japan Australia

In sum, six countries and four development paths are compared according to their ability to affect domestic manufacturing levels.

This is no easy task because the four policies differ not only on the means of industrial coordination, but also on the goals of the development process. These stylistic disparities are quite significant with statist and state corporatist systems concentrating on high domestic employment, income and production, market models 66

emphasizing high factor mobility, profits and price efficiency and

business corporatist approaches entailing a combination of domestic

manufacturing growth and international competitiveness (Lindberg,

1977; Hage and Clinget, 1982; Gruchy, 1984).

C. Policy Style Evaluation

Numerous factors complicate industrial policy assessment between

countries. Among some of these are the multidimensional nature of

the policy models, international trade, capital and currency flows,

different military spending and foreign policy commitment levels, oil

price increases and Third World debt accumulation. These factors

constrain and frustrate the analyst's ability to compare cross­

national industrial policy impacts because they affect national

performance in different ways. The United States because of its

extensive political, economic and military commitments may be more

affected by international economic events than other advanced market

economies.

This does not mean that policy impact on manufacturing

performance is not attainable. The length of time examined (twenty

five years) and the relative continuity of policy content in the six

countries facilitate the ability to arrive at comparative

assessments. Impact evaluation, moreover, is made easier by

increased economic integration in that nations are affected by

similar forces. Thus, the effects of trade, capital and currency

distortions can be taken into account and their impact gauged on how well policies have responded. 67

The present analysis explores the relationship between

manufacturing growth cycles, public policy and economic adjustment

and competitiveness. The economic impact of industrial policy must

control for variances in industry structure in order to gauge the

impact of non-policy factors. This is particularly important in

light of a body of literature that argues global markets and

structural organization play more of a substantial role in

determining economic performance (Chandler, 1977; Lewis, 1978; Adams

and Ichimura, 1983).

The study's control variable (industry structure) 'is defined in

terms of the product market organization of the manufacturing

economy. Specifically, employment percentages across nine

industrial branches are identified for the six economies to gauge

the effect of non-policy factors on a nation's pattern of economic

adjustment and percentage of value added across nine industrial branches are used to estimate the effect of economic forces on

industry competitiveness. The employment data is introduced in

Chapter Four (Industry Structure Adjustment) and the value added

figures are employed in Chapter Five (Industry Structure

Competitiveness) to filter the effect of non-policy factors on performance disparities between countries.

Economic outcomes in the industrial policy area are difficult to measure because of the absence of uniform criteria and the use of indicators that often distort or oversimplify manufacturing sector output (Bluestone, 1984). The use of a single measure like gross domestic capital formation would likely bias assessments of 68

industrial policy success toward development models that emphasize

high saving and investment rates. Approaches like these are

inadequate because they fail to take into account variation between

the models regarding appropriate employment, production and

merchandise trade balances in an industrial economy. The lack of an

adequate construct to measure manufacturing activity mandates the use

of a multiple indicator approach.

The analysis treats its dependent variable (economic

performance) as a multilayered process that encompasses two major

themes and various subcomponents. Each of these themes capture

facets of how well nations react to the manufacturing reorganization

and integration process. The first theme (Industrial Structure

Adjustment) includes domestic economic activity affected by the

economic repercussions of rapid disinvestment in the production goods

sector. The adjustment theme reflects concern over the loss of high wage manufacturing jobs and the contraction of construction and

distribution associated with the manufacturing economy. The

shrinkage of the production goods sector has been linked with

emerging patterns of labor market atrophy and diminished industry capacity (Bluestone, 1984; Harris, 1984). Consequently, manufacturing adjustment is an important policy question and needs to be incorporated into an evaluative framework.

Adjustment levels are operationalized along unemployment rates, industry production rates and man days lost per 1000 workers in the six countries from 1960 to 1985. Policy success is interpreted as abating the level of job and output reduction in this sector. As 69

such, styles that perform better at preserving employment and

production rates are judged superior to those that do not.

Adjustment also entails maintaining harmonious labor relations by

stabilizing the number of man days due to industrial of this sphere

of the economy. Thus, the abrupt increases in number of man days

lost over time is an indications that industrial policy is not working well across this dimension.

The rate of adjustment in a country's economy is only one facet of performance and needs to be supplemented by other measures. In particular, how competitive or productive the sector is needs to be included as evaluation criteria because it is possible that a shrinking manufacturing base need not come at the expense of productivity loss within that sector (Thurow, 1980). According to this school of thought, rapid levels of disinvestment in heavy manufacturing are necessary to free resources to accelerate growth in other areas of the industrial sector.

The framework's second theme (Industrial Structure

Competitiveness) examines the nexus between public policy and product market transformation in the manufacturing sector. Schumpeter (1947) argues productivity results from a "creative destruction process" in which climates of economic decline induce patterns of economic expansion as entrepreneurs take advantage of low costs to identify and expand production opportunities where rates of return are the highest. Under this theory, the decline of light manufacturing creates price and cost conditions that allow for the movement of labor, capital and expertise into economic ventures (consumer 70 electronics) that are higher up the value added scale of the production process. Thus, manufacturing evolution is shaped and predetermined by cycles of continuous decline and growth.

The problem, however, is to determine the basis upon which one operationalizes competitive transmutation in an economic system. The present study approaches the question of manufacturing competitiveness by comparing manufacturing integration with the level of investment, purchasing and trade in the six economies.

Specifically, those countries that maintain capital formation, GDP trade surpluses and purchasing power in their economies would be considered more competitive than nations that experience growing GDP trade deficits and declines in investment and employee compensation.

Policy success along this measure is dependent upon the industrial policy's ability to shift resources into production capabilities that result in favorable trade, investment and purchasing power balances. The approach assumes that competitive behavior follows a sequence in which investment affect export potential and the subsequent ability to maintain favorable trade balances and raise living standards. Alternatively, the inability to channel investments into export production results in higher GDP trade deficits and lower living standards. Policy styles, in effect, are compared according to their ability to transform the product market composition of their manufacturing sectors to achieve greater congruence with international market patterns.

The specific indicators used to measure competitiveness in the six industrial economies are gross fixed investment as a percent of 71

GDP, imports and exports as a percent of GDP, current account

surplus/deficit as a percent of GDP and compensation per employee

adjusted for inflation. In order to arrive at policy conclusions

that have historical validity, the data indicators are compared from

1960-85.

The necessity for historical continuity has shaped and

influenced the methodology used in the dissertation. The adjustment and competitiveness indicators are broken down into four year averages so that rates of progress from one historical period to another can be compared. In particular, rates of performance in recession years (1972-75, 1980-83) are compared to determine the effect of industry policy in responding to external disturbances.

While rates of progress across crisis periods are important, long­ term perspectives need to be obtained to determine how countries have adapted their economies to global market pressures.

Policy styles are evaluated according to their ability to promote economic adjustment and competitiveness. How statist, state corporatist, business corporatist and market policies perform along the indicators will not be known until the data is collected, synthesized and interpreted. Table 3 sketches the evaluation measures according to policy theme, indicator, and data source.

Conclusion

The evaluation structure is designed to insure that economic outcomes are measured in ways that do not give preferential treatment to one particular policy styles. Accordingly, the range of 72

Table 3

Evaluation Structure

Policy Theme Indicator Data Source Adjustment Unemployment rate OECD MEI (1960-85) Industry Production European Economy 1987 Man days lost per Bureau of Labor 1000 workers Statistics (1983)

Competitiveness Gross Fixed Investment European Economy 1987 GDP Exports (%) European Economy 1987 GDP Exports (%) European Economy 1987 GDP Current Account (%) European Economy 1987 Employee Compensation European Economy 1987

variation between policy styles is likely to be diverse: some policies may perform better than the others on one dimension, but not on the other. Alternatively, one policy style may prove superior in the adjustment and competitiveness areas. This presumes that countries within the same policy style exhibit similar patterns of industrial performance. Conceivably, the results could prove the opposite with business corporatist countries like Japan and Germany performing differently along all three measures. In effect, the greater divergence between countries, within the same policy camp, the greater the importance of nonpolicy factors in determining industrial performance.

Our review and analysis of the comparative political economy literature in Chapter Two leads me to the conclusion that policy content (i.e., degree of market and state guidance) does matter.

Thus, we expect business and state corporatism to adjust better than 73 market and statist models to structural change. In these systems the cooperative relationship between state, business and labor, and the flexible mix of planning and markets creates conditions conducive to an orderly transfer of production activity between manufacturing branches. These adjustment mechanism are absent in both market guided societies, where change is too quick (e.g., rapid deindustrialization of basic industry), and state guided societies where change is too slow (e.g., preservation of unprofitable nationalized companies). Accordingly, corporatist variations should outperform market and state models along the adjustment measures.

Market and state approaches should also exhibit identifiable patterns in the analysis with free enterprise scoring high on indicators pertaining to the rate of return going to capital and nationalized systems performing well on indicators of labor equity.

Thus, imbalances in the distribution of power between capital and labor should be highest in market systems, lowest in state systems and moderate in corporatist systems. The competitiveness theme is perhaps the most difficult section to hypothesize policy effect.

Economic theory and analysis suggest that fluidity of factor movement in market systems establishes the necessary foundation for price and trade competitiveness.

The problem with this argument is that it may overestimate the ability of private enterprise to pool resources and develop technologies conducive to manufacturing competitiveness.

Corporatist systems get around this problem through state-business financing and coordination of capital and technology flow in the 74 economy. Given the importance of technological innovation and application in a m o d e m world economy, corporatist systems should outperform market policy styles on the competitiveness dimension.

These hypotheses are derived from values inherent in the policy styles: group adaptation and cooperation (corporatism), income equity and work place democracy (statism), free factor movement and profit making (free enterprise). The chapters to follow analyze the ability of these policy styles to actualize their prime values.

Accordingly, Chapter Four begins with the corporatist and statist values of economic adjustment and labor equity and Chapter Five examines the capitalist precept of economic competitiveness. Chapter IV

Industry Structure Adjustment

Introduction

Chapter One defines the industrial policy problem in terms of growth cycle management, Chapter Two reviews and critiques the works of pluralist, corporatist and Marxist scholars and Chapter Three has sketched the dissertation's evaluation structure. The focus of this chapter is to evaluate manufacturing adjustment in six industrial economies from 1960 to 1985. In particular, we are interested in the degree to which countries have been successful in using industrial / policy to control employment, production and labor dispute levels during times of economic crisis in the twenty five years examined.

Policies that restrict unemployment, maintain high industry production and control time lost due to labor disputes are interpreted as successfully adjusting manufacturing to competitive pressures and disturbances in the domestic and world economy.

The chapter is organized into four parts. First, a brief sketch of the sources of disruption affecting manufacturing is presented along with a specification of the employment and production compositions of six industrial economies. This section is designed to control for the effect of industry structure on 76 performance outcomes. Second, four industry policy styles are compared according to how they view and manage economic pressures in manufacturing. Third, three major indicators are identified and data for each dimension over time are analyzed. Finally, conclusions are formed in light of how well industry policies have adjusted manufacturing to economic crisis.

A. Manufacturing Reconstruction and National Industry Structure

This section examines the relationship between global competition, manufacturing change and economic factors that mitigate policy effect. The first part traces the evolution of global competition and its effect on Western employment and operating capacity. The second part examines the employment composition of six industrial economies and the degree to which they accentuate or diminish industry policy impact.

1. Disturbances in Mass Production Economies

Western industrialized nations have experienced vast economic change in the last thirty years. Some of this transformation is endemic to the very nature of market systems: variances in supply and demand intersect to set price, production and allocation levels in the economy. The quantity and prices of goods and services change in response to variations in supply and demand with some products gaining at the expense of others. Thus, low grade records are replaced by high quality compact discs, fuel economy cars are 77 substituted for expensive,large automobiles and specialty steel production replaces conventional blast furnaces.

The structural organization of market economies often shapes and influences the scope and severity of economic change. The transition from a mercantile economy of small scale buyers and sellers to an industrial economy of large corporations and mass markets created unique economic problems (Galbraith, 1973; Chandler,

1977). During and after the period of industrialization, severe imbalances between supply and demand often contributed to over production, high inventories, and depression. The inability of market forces to correct for structural imbalances between consumer demand and mass production created pressures for state intervention in the industrial economy (Heilbroner, 1980).

Initially, governments responded to the problems of overcapacity and depression by placing restraints on production and prices in a number of key industries (Hawley, 1966). During the 1930's, the

National Recovery Administration imposed production and price limits on American industry and found itself powerless to halt declines in employment and consumption. The relatively dismal experience with industrial production and price constraints during the 1920's and

1930's in North America and Europe set the stage for a new policy direction to cope with the depressionary tendencies of mass production economies.

The exigencies of war time planning and the necessity of financing budgetary expenditures through mass borrowing established the context that allowed states to balance consumer demand and 78

industrial production. The lack of synchronicity between industrial supply and demand seemed to be overcome by a set of policies that cut taxes and increased welfare support programs during times of declining consumer demand (Galbraith, 1977; Heilbroner, 1980). What started as an experiment in pre war Depression Germany, Sweden, and the United States gradually began to filter throughout the industrial

West as both conservative and social democratic governments became increasingly reliant on macro economic policy to promote consumer purchases of industrial products (Tufte, 1980). The state's calibration of consumer demand to meet expanded industrial production seemed to moderate the incidence and severity of recessions in the developed West through the 1950's and I960's.

Global competition and the internationalization of trade, energy and capital markets of the 1970's posed problems for Keynesian demand policies (Bergsten, 1982; Lindberg, 1982). During this period, governments found it increasingly difficult, to harmonize domestic production and consumption levels as increased competition from third world producers altered the flow of trade in the world economy.

Table 4 identifies rates of employment growth in manufacturing industries from 1970 to 1977 between developed market economies, developing countries and centrally planned economies.

Western manufacturing employment decline, documented in Table 4, is most pronounced in the textile, footwear, non-ferous metals and iron and steel industries. In these industrial branches, Western employment growth declined by 3.0, 2.7, 1.3 and 1.2 percent while

Third World employment growth increased by 6.4, 10.1, 6.1, and 10.4 79 percent. The process of manufacturing reconstruction that began in the early 1970's intensified in the 1980's. Table 5 documents trends

in capacity utilization by identifying high and low rate periods during the 1970's and 1980's for major Western countries.

The capacity utilization data reveal patterns of systemic rate decline in 1975 and in the early 1980's. These two periods were characterized by significant disturbance in the manufacturing sectors of Western economies as global recession and greater competition by

Third World producers diminished demand for industry products. While manufacturing in general was adversely affected by global economic

trends, there are substantial differences in the operating capacity

of different industry branches. Table 6 traces the degree of

European capacity utilization per industrial branches for 1982, 1983

and 1984.

The data in Table 6 indicate some significant disparities in the

operating capacity of different industrial branches. Among the range

of industries represented, shipbuilding, non-metallic minerals and

metal industries seem to be under the most competitive pressure.

Capacity utilization rates for all three industrial groups is under

76 percent for the three year period with shipbuilding maintain only

66% of capacity in 1984. In sum, the industrial structure evidence

presented in the three tables indicate that growing global

competition in the 1970's and 1980's has adversely affected Western

manufacturing and that particular industries (basic metals,

shipbuilding, textiles and non-metallic minerals) have suffered the

greatest damage. The global recessions of 1972-75 and 1980-83, in Table 4

Rates of Growth in Employment in Manufacturing Industries,

By Economic Grouping 1970-77

Centrally Developed Developing Planned Branch West Countries Econoi

Total Manufacturing -0.4 8.5 1.7

Food Products 0.1 4.8 1.3

Beverages -1.0 7.0 1.8

Tobacco -0.7 1.3 1.7

Textiles -3.0 6.4 0.9

Wearing Apparel -0.7 13.8 1.0

Leather and Fur -1.0 13*5 0.9 Footwear -2.7 • 10.1 0.7

Wood and Cork -0.6 3.8 -0.6

Paper -1.0 7.6 1.2

Printing -0.1 4.1 1.3

Industrial Chemicals -0.2 3.9 2.1

Rubber Products -0.9 10.5 2.9

Iron and Steel -1.2 10.4 0.7

Non-Ferous Metals -1.3 6.1 6.4

Metal Products 0.1 7.8 2.8

Non-Electrical Machinery -0.1 13.6 2.5

Electrical Machinery -0.2 .15.3 3.1

Transport Equipment 1.1 7.7 2.7

Source: UNIDO, World Industry Since 1960, p. 44. 81

Table 5

Capacity Utilization in Manufacturing (%)

High Low High Low 1973 1975 79/80 82/83

Belgium 85.4 70.4 79.1 74.4

Germany 88.1 74.8 86.0 75.3

France 87.8 76.6 85.3 81.1

Italy 78.8 68.0 77.3 69.1

Netherlands 86.0 76.0 83.0 75.8

United Kingdom 90.6 75.5 87.6 73.0

European Community 86.4 75.0 83.9 76.4

United States 87.6 72.9 82.6 70.6

Sources: European Economy, No. 25 (September 1985), the U.S. capacity utilization data is from OECD Main Economic Indicator Historical Statistics 1960-79 and the 1984 OECD annual supplement. Table 6

Degree of Capacity Utilization by Industrial Branches

European Economic Community

Degree of Capacity Utilization in Percent

Industries 1982 1983 1984

Textile Industry 80.0 81.5 84.1

Footwear and Clothing 85.1 86.7 86.9

Timber and Furniture 75.9 80.9 82.6

Paper Products and Printing 80.4 81.4 84.9

Leather 80.9 79.9 82.3

Metals 71.7 69.0 75.4

Non-Metallic Minerals 72.5 73.8 77.1

Man Made Fibers 80.3 75.0 89.3

Metal Articles 76.0 74.5 76.8

Mechanical Engineering 77.4 75.8 79.5

Electrical Engineering 79.2 79.7 81.3

Shipbuilding 73.6 69.2 66.0

Source: European Economy No. 25 (September 1985). 83 particular, had the greatest impact in lowering manufacturing operating capacity in North America and Western Europe. Accordingly, those countries that have a manufacturing base organized around traditional industries should have suffered the most during these crisis periods.

2. National Industry Employment Structure

The central thrust of the present study is that policy plays a role in shaping industry performance. There are, however, many aspects of manufacturing adjustment which are attributable to non­ policy forces. The product market composition of industry, for example, can play an important role in shaping adjustment levels in that countries that have abundant resource endowments (e.g.,

Norwegian North Sea oil) can withstand more economic pressure than nations that are resource poor. This sub-section examines that product market composition of manufacturing employment in all six countries to determine what unique features differentiate the countries from one another and the extent to which they may explain different adjustment levels.

In particular, we are interested in the influence that the sectoral organization of manufacturing plays in shaping the severity of unemployment and labor disputes. The more unique a country's labor market (e.g., a high concentration of workers in particular branches relative to other countries) the greater the probability that performance levels are shaped by the particular characteristics of that industry branch. Conversely, the more similar the 84 manufacturing labor markets are between nations the greater the likelihood that policy plays a role in explaining national differences.

Table 7 breaks down the industrial labor force of each country along nine production categories. The table examines the product market composition of manufacturing employment for the six countries in the 1980's. Data for five countries is based on OECD aggregate numbers and is converted • into percents. The Australian data was supplied by the Australian Bureau of Statistics.

The table reveals some differences in the employment composition of manufacturing between nations. In effect, some countries have particular orientations in terms of their employment structures.

Relative to other nations, West Germany has a higher proportion working in fabricated metals and chemicals, Austria has a slight basic metals employment bias and Australia has a greater percentage working in food, beverages and textiles. There are some other notable orientations as well; U.S. paper products and printing employment is a relatively large 11.2% and Austrian textile employment is proportionately twice as large as Germany's.

These differences are dwarfed by the similarities in employment structures. Fabricated metal production, for example, accounts for more than a third of manufacturing employment in each six countries.

Aside from a few deviations, the range of employment variation in textiles, wood products, non metallic minerals, basic metal industries, and chemicals is not substantial. Employment for most 85

Table 7

Manufacturing Employment by Production Category

National Industry: Employment

(percent)

Aust. Aus. Fra. Ger. U.S. Japan Production Category 1982 1984 1984 1985 1985 1983

Food, Beverage and Tobacco 15.4 10.3 12.9 6.0 8.4 10.9

Textiles, Apparel and Leather 10.0 13.9 11.6 7.0 10.7 12.8

Wood Products and Furniture 6.9 7.0 4.4 3.4 4.9 5.4

Paper Products and Printing 6.0 6.0 6.8 4.6 11.2 7.6

Chemical Products 5.5 9.0 .11.5 13.2 9.9 8.6

Non Metallic Minerals 3.5 5.0 3.6 3.6 2.9 4.4

Basic Metal Industriesi 8.3 9.4 5.8 6.0 3.9 4.8

Fabricated Metal Products 35.6 37.0 40.8 52.7 45.8 43.1

Other Manufacturing 8.7 2.4 2.6 3.5 2.3 2.7

Data Sources: Industrial Structure Statistics (1985) Australian Bureau of Statistics, Manufacturing Establishments. Details of Operation by Industry Class (1983). countries tends to be clustered around fabricated metals, textiles,

chemicals and food, beverages and tobacco.

The employment structure of the various economies suggests that

adjustment should be most difficult in those countries that employ a

proportionately higher percentage of their work force in traditional

industries. In this case, Austria, Australia and France should have

greater difficulty in adjusting their labor markets to competitive pressures while Germany, Japan and the United States should have a comparatively easier time in the adjustment process. Indeed, the

true effectiveness of industry policy would lie in its ability to overcome structural liabilities or at the very least build on

industry organization strengths. Thus, substantial performance deviations between similarly organized economies is evidence of the effectiveness of industry policy.

The relative convergence of employment structure in the six economies and the concurrence of global economic pressures since the early 1970's suggests that industry performance should be relatively similar with those economies that exhibit a traditional industry bias being at a disadvantage in adjusting their economies. Alternatively, finding different performance patterns would be evidence of the ability of industry policy to overcome structural disadvantages. In this vein, the next section examines four industry policies in terms of their economic restructuring approaches. 87

B. Adjustment Perspectives

Governments use varying approaches to adapt industry to change in world markets (Hancock, 1982; Hollingsworth, 1982). Among the broad canvas of potential policy options we will concentrate on mixes of three coordination mechanism (planning, markets, and bargaining) and develop adaptation perspectives that nations employ to manage employment and production disturbances in their manufacturing sectors. Each policy type is discussed according to their prime value in managing industry reorganization, their institution and processes that determine the rate of structural change, and their mix of market, planning and bargaining controls.

The Liberal Market Perspective

Proponents of a market economy often cite efficiency as a prime value governing economic organization and public policy (Stokey and

Zeckhauser, 1978). According to this perspective, economic efficiency is a function of variances in market supply and demand that determine price, production and allocation rates. Perfectly competitive markets respond to consumer preferences and producer costs schedules in ways that maximize the production of highly valued goods in the least costly manner. Thus, obstruction of markets lead to supply and demand distortions that impede efficient allocation of goods and services.

Markets, however, are often imperfect and government allocation is viewed as the major alternative coordination mechanism. Liberals maintain that market imperfections are relatively limited in a 88

developed capitalist economy and the state should intervene only as a

last resort. Markets and private organization of economic activity

are presumed to be superior agents of economic organization and

government intervention generally leads to more harm than good.

Economic change accordingly should be determined by markets and the

private institutions and processes they embody.

Historically and culturally, the liberal market tradition has been most pronounced in Anglo-American countries like the United

States and Australia. Both countries have no history of extensive nationalization of industry, central planning or corporatist style national bargaining. Instead, the independence of the private sector

to invest freely and the ability of markets to determine production and allocation has been consistently maintained, protected and

supported. When it has intervened, the state has acted mainly in

defense of business-labor groups (e.g., high Australian tariff rates) or in response to depression or wartime crises that markets seemed unable to handle. The dominant policy mix within this tradition is

to let markets dictate the scope and pace of economic change and to use government to cope with the structural consequences. Thus, both

Australia and the United. States generally avoid direct industrial planning and rely extensively on indirect macro economic policy to rectify economic adversity in the industrial system.

The liberal market variant of capitalism' and public policy has never been particularly prominent in continental Europe and Japan.

Instead, different sets of institutions, cultural factors and historical processes have taken hold in which the state is more 89

directly responsible for industry management and development. Market

forces, while respected, are often compliments to state-business-

labor strategies that combine planning and bargaining to restructure

manufacturing employment, production and investment. The most

traditional of these arrangements takes the form of a national

bargaining structure that shapes and guides industry organization to

reflect the preferences of business elites, state bureaucrats and

party officials.

The Business Corporatist Perspective

Gorporatist systems of economic governance are driven by the

need to maintain balance or harmony between major organized

interests (Schmitter, 1974). Within business centered corporatist

systems, the need of major industrial groups are adjusted with the

imperatives of global competition. Johnson (1982) uses the concept

of a "development state" to describe business corporatism in Japan.

Development states identify potential growth areas in world trade,

pool government-business funds and technical expertise into export

industries, and shift capital and labor from low to high growth

industries. Japan's Ministry for International Trade and Industry,

for example, has targeted industrial products for development, co­

financed research and production of goods and has marketed manufacturing exports.

States in business-corporatist systems often act as a "junior partner" in the industrial adjustment process by gathering trade data

for export industries, underwriting business investment in products, 90

and financing research groups for assorted industries. Under such

systems, governments consult and persuade industry to invest or cut

back certain product lines in return for tax relief, loans and

assorted subsidies. West Germany, for example, uses joint

government-labor-business arbitration counsels to influence the level

of wages, investment and production in the manufacturing economy

(Hollingsworth, 1982), and Japanese planning ministries consult

extensively with industry representatives before developing sectoral

policies. Business-corporatist planning at its core is indicative

and relies heavily on bargaining and markets to change sectoral

production, investment and employment rates.

The State Corporatist Perspective

Critics of business corporatism argue private ownership and

control of investment frustrate the industrial policies of leftist

governments (Brooks, 1987). In effect, critical labor issues like wage equity, workplace democracy, and protection against unemployment

are often subordinated to profit-making. Under this view, the state

and organized labor in business-corporatist societies lack the resources and power over the means of production to authoritatively determine change in industry practice and organization. According to

this perspective, nations need to socialize investment to promote necessary changes in the direction of real labor equity.

The state corporatist approach is exemplified by the Austrian economic model (Katzenstein, 1984). In Austria, central direction and adaptation of the industrial economy is provided by core 91

nationalized industries, strong labor unions and a national

bargaining system. The Joint Commission on Wages and Prices, in

particular, brings together nationalized industry, organized labor

and the small private business sector to determine appropriate

production, price, employment and wage levels. The nationalized

sector expands and contracts its investment and employment policies within the context of centrally approved goals.

Adjustment within the system has been typically defined as absorbing external shocks (e.g., greater global competition, oil price increases, technological innovation in manufacturing) in ways

that do not sacrifice high labor utilization, wage gains and social services. In sum, state corporatist systems like Austria are equity centered, determine appropriate industry adjustment through government-labor arbitration, and institute change through a dominant nationalized sector.

The Statist Perspective

The state corporatism model is not easily instituted for it depends upon a unique set of relationships that involve a collectivist heritage, weak private capital and strong government- labor ties. Indeed, even if it were possible to institute this approach there are compelling reasons for states not to emulate

Austrian like planning. States in particular may not want to sacrifice a good portion of their autonomy in developing industrial plans by cooperating with labor. Mass or elite demands for national independence may necessitate the construction of a monolithic state 92 sector to manage and direct industry development independent of social groups.

Government direction of industry has a powerful historical legacy in France (Cohen, 1977). French industrial planning uses government enterprise and public sector banking to shape the direction of industry adjustment. The policy preferences of state bureaucrats located in planning ministries and the nationalized sector dominate the construction and execution of industry plans with

French labor and business acting as junior partners in the planning process.

The French statist approach in its most grand design does not involve a command economy. Instead, the cabinet and the bureaucracy develop general plans for sectoral output and government owned enterprises and banks adjust their investments in light of both state directives and market forces. The interplay of planning and markets in the dominant nationalized sector shapes employment, investment and production in the private sector and influences the general course of industry development.

French industrial planning is overtly nationalistic and is based on the principle that nation-state power in the world economy is dependent upon strong government direction. The planning preferences of state bureaucrats trained gt ..the major public administration universities emphasize high domestic industry growth in dynamic world economy. Accordingly, industry products (supersonic aircraft and high speed trains) are selected by government ministries and nationalized firms are directed or created to produce and market 93

these goods. The system is growth oriented with the state sector

acting as the dominant partner in the economic adjustment process.

The industry policy styles we'll examine are divided over the

appropriate role of government in the economy. They differ not only

in the policy mix they employ to govern economic change, but also on

the goals to be achieved in a democratic polity. In effect, all four

traditions have different views on the value of the creative

destruction process and the degree to which growth cycles can be

curbed by planning and bargaining controls. The chart below

summarizes how the four adjustment perspectives rank along, the values they espouse, the policy institutions they employ, and the mix

of planning, bargaining and markets they utilize to control economic disruption.

C. Industrial Policy Adjustment: Methodology, Analysis and Results

The prime values, institutional structures and coordination mechanism of the four industry policy perspective have been

identified along the adjustment dimension. The industry policy styles are. analyzed according to their ability to maintain low unemployment, increase or stabilize industry production rate and lower the level of labor disputes during economic crises from 1960 to

1985. Policy performance is compared along these three key indicators and results are evaluated in light of the prime- values of each system.

Data for each indicator is broken into four averages to gauge the impact of recessions and other disturbances in the domestic and 94

Chart 1

Policy Approaches to Industrial Reorganization

Prime Institutional Policy Perspective Value Direction Mix

Liberal Market Efficiency Market Market-Plan

Business Business- Bargain- Corporatist Adjustment State Market

State Corporatist Equity Labor-State Bargain-Plan

Statist Growth State Plan-Market

international economy in assessing policy performance. Long term

effects are determined by constructing two ten year and one five.year

averages for unemployment, industry production and labor dispute

indicators from 1960 to 1985. Finally, performance rates are

compared for the employment and labor dispute indicators during the

1972-75 and 1980-83 recessions.

Industry Policy Approaches and Unemployment Rates

Unemployment rates measure, in percent terms, the sensitivity of

the labor market to cyclical fluctuations in the economy. Generalized

patterns of upward, downward or stable unemployment denote how

extensively labor is used in the economy. Global competition and

technological innovation in manufacturing trade has increased

extensively since 1960 and has put pressure on Western labor markets.

How industry policies have dealt with market pressures that displace workers is a critical concern of this section. 95

The table on the next page, is based on OECD data, averages

unemployment rate from 1960 to 1983 for six countries. The time

frames are broken down into four year averages to identify how

national labor markets have responded to pressures in the domestic

and international economy during the last twenty-three years. The

countries are placed on the table according to their industrial

policy styles and patterns of labor market strength and weakness are

noted in the analysis of the data. The four year averages are

obtained by dividing the sum of the annual averages by the number of

cases observed for the period.

The unemployment data for the high growth periods of the early

and middle 1960's show low levels of unemployment for each policy

group with statist France having the best and the United States

having the worst employment record. The United States, however, made

considerable progress in lowering its unemployment rate from a high

of 5.2% to a low of 4.3% during the I960's. Thus, labor markets in

all countries adjusted very well to the Kennedy round tariff

reductions of the early I960's.

Labor markets of the countries examined responded in varying degrees to structural change in the world economy in the early and middle 1970's: unemployment ranged from high (United

States), moderate (Australia, France, Germany) to low (Japan and

Austria). Indeed, Austria actually succeeded in lowering its unemployment rate from 2.5% to 1.7% in the middle 1970's. Greater global competition in manufacturing trade, OPEC's ability to Table 8

Unemployment: Four Year Averages From 1960 to 1983

(As Percent of Labor Force)

Business State Market Corporatist Corporatist Statist

U.S. Aust. Ger. Japan Aus. Fra.

1960-63 5.2 1.3 0.9 1.4 2.9 0.6

1964-67 4.3 1.4 1.0 1.2 2.7 0.7

1968-71 4.4 1.5 1.0 1.1 2.5 1.3

1972-75 6.1 2.7 2.4 1.2 1.7 2.4

1976-79 6.6 5.6 4.3 2.0 1.9 5.1

1980-83 8.5 7.2 6.4 2.3 3.1 7.9

Sources: OECD, Main Economic Indicator Statistical Series, 1960-79; OECD, Main Economic Indicator Annual Reports, 1980-83. 97

manipulate energy prices and trade interdependency intensified

pressures on labor markets in Western countries throughout the middle

1970's and early 1980's.

During 1972-75 and 1981-83 the Industrial West experienced the

two most severe recessions in the postwar period. The two recessions

aggravated unemployment in each policy category with market and

statist systems suffering the most and business corporatist Japan and

state corporatist Austria the least. The German economic model, long

admired for its dynamic growth and low unemployment, performed badly

during the last fifteen years with average unemployment rates of 4.3%

(1976-79) and 6.4% (1980-83). Thus, the German variant of business

corporatism seemed less successful than its Japanese counterpart in

maintaining low unemployment.

Anglo-American and French labor markets deteriorated badly

during this period; U.S. and Australian unemployment continued their

sharp ascension from early years while French unemployment reached

double digit rates during 1982-83. Industry policy approaches that

incorporate labor either directly (state corporatist) or indirectly

(business corporatist) seemed better able to maintain labor

utilization rates than market and state models. The most successful

countries (Austria and Japan) performed well in adjusting labor markets to the global recessions of 1972-75 and 1980-83. The

Japanese and Austrian markets averaged unemployment rates of 2.3% and

3.1% during 1980-83 while the United States, Australia, and France averaged rates of 8.5%, 7.2%, and 7.9% in the same period. 98

Unemployment rates, because of their sensitivity to cyclical fluctuations, need to be examined within a historical context to assess industrial policy patterns of success or failure in managing unemployment rates. The table below averages annualized unemployment rates for 1960-69, 1970-79, and 1980-85 for all six countries. The data is based on OECD Main Economic Indicator Account series and averages are constructed by summing annualized figures and dividing by the number of annual observations.

The historical data represented in Table 9 indicate that market and state directed systems had the most difficulty in controlling unemployment; both systems had higher unemployment rates in each time frame examined than do corporatist models. Unemployment in the

United States, for example, was double the rate that existed in West

Germany from 1960-79 and was triple the Austrian and Japanese rates

Table 9

Long Term Unemployment Rates: 1960-85

(As Percent of Labor Force)

Business State Market Corporatist Corporatist Statist

U.S. Aust. Ger. Japan Aus. Fra.

1960-69 4.3 1.4 0.8 1.2 2.8 0.9

1970-79 5.8 3.9 2.8 1.4 2.0 3.8

1980-85 8.1 7.7 7.3 2.4 3.6 8.7 during 1960-85 period. When rate that existed in West Germany from

1960-79 and was triple the Austrian and Japanese rates during 1960-85 period. When comparing unemployment trends for the entire twenty- five years French and Anglo American labor bore more of the burden in the industrial adjustment process than did their Japanese, Austrian and West Genian counterparts.

This conclusion is re-enforced when examining rates of performance during the 1972-75 and 1980-83 recessions. Table 10

(located below) examines employment change in the two recessions by comparing these periods to unemployment rates in the preceding four year time blocks of 1968-71 and 1976-79.

The results indicate a sharp increase in Anglo American,

French, and German unemployment during both recessions. The two periods are also characterized by divergent patterns in Austrian unemployment; a decline of 0.8% in the 1972-75 recession was

Table 10

Unemployment Rates Change

1972-75/1968-71 1980-83/1976-79

U.S. +1.7 +1.9

Australia +1.2 +1.6

Germany +1.4 +2.1

Japan +0.1 +0.3

Austria - 0.8 +1.2

France +1.1 +2.8 100 followed by a 1.2% increase in the 1980-83 recession. Japan, in contrast, experienced only mild increases of 0.1% and 0.3% during these recessions. These results, however, should not be taken as conclusive evidence that Japanese and Austrian employment success denote a ' superior form of policy adjustment. The process off featherbedding, for example, often impedes production capabilities.

Thus, other measures of manufacturing adjustment need to be included for a more comprehensive assessment of industry policy effectiveness.

Industrial Policy and Manufacturing Production

This section examines changes in industry production rates for each policy category between 1960-85. The industrial production rates represented in Table 11 are derived from annualized Eurostat production rate and are broken down into four year production averages. The production averages are represented in percents and data interpretation is based on industry capacity to maintain rates of production over time.

Industry production rates in Table 11 indicate some interesting patterns across and within policy styles. Market and statist systems, for example, do not exhibit the level of industrial weakness that the unemployment patterns suggest. Indeed, French industrial production rates are higher than Germany's and Austria for most of the period and U.S. and Australian rates while erratic do not exhibit any long term deterioration.

Market systems, moreover, may have recuperative abilities that other styles may not. After a 2 percent growth rate average during 101

Table 11

Industrial Production 1960-83

(Percentage Change for Period)

Business State Market Corporatist Corporatist Statist

U.S. Aust. Ger. Japan Aus. Fra.

1960-63 4.3 6.7 8.2 15.7 4.4 6.6

1964-67 6.9 4.1 2.9 12.9 3.5 3.9

1968-71 2.3 5.0 7.4 11.8 8.1 6.0

1972-75 2.5 3.2 1.0 7.8 4.4 2.5

1976-79 6.7 5.5 4.4 7.0 4.8 4.2

1980-83 -4.6 -4.2 -4.0 2.4 2.6 -2.3

Source: European Economy, No. 33 (July 1987).

the late 1960's and early 1970's, the United States experienced a surge in industry production of 6.7% from 1976-79. None of the other policy groups examined were able to replicate the high growth periods experienced during the 1960's and early 1970's.

While industry production rates don't exactly match the unemployment trends they do reinforce our earlier finding that Japan and Austria have responded better to the economic adjustment process.

Both countries have stronger and more stable industry production rates and have been able to adapt to recession periods: Japan was able to maintain production rates of between fifteen to seven percent between 1960-79, Austria increased its industry production levels 102

during the 1970's, and both were the only countries to maintain

positive production rates in the early 1980's.

The long term industrial production averages (represented by

Table 12) indicate a general pattern of successful Japanese and

Austrian industry production adjustment. The policy performance of

other countries is more difficult to evaluate because the differences

between the United States, France, West Germany and Australia are not

that significant. The table on the next page traces industrial

production between 1960-85 by averaging annualized rates within three

time frames.

Table 12

Industry Production 1960-85

Business State Market Corporatist Corporatist Statist

U.S. Aust. Ger. Japan Aus. Fra.

1960-69 5.0 6.7 5.8 15.7 6.1 7-2

1970-79 3.2 2.9 3.9 4.1 4.2 3.3

1980-85 2.0 2.1 1.1 4.0 2.9 -0.1

With the exception of Japan, differences in industry production

rates for the twenty-five year period examined are not significant.

The deviations that do exist are most pronounced from 1980 to 1985:

a period characterized by an upturn in U.S. industrial strength,

German and French manufacturing stagnation, and Austrian

retrenchment. The American industrial recovery from the 1981-82 103 recession provides some evidence that market systems may have regenerative power. Yet such a conclusion is premature until other measures of economic adjustment are included in the analysis.

In effect, conclusions need to be evaluated within the context of how different systems reorganize labor markets to facilitate production capabilities in the manufacturing economy. In particular, labor dispute levels need to be examined in terms of how well policy styles manage industrial relations. Since corporatist systems include labor into the industrial decision-making process, they may have an advantage in reconciling the often competing needs of unions and employers on issues like wage restraint, plant location and the introduction of technology in the workplace. Accordingly, labor dispute levels need to be included in evaluating how successful policies have been in adjusting their workforce to structural change.

Industrial Policy and Labor Disputes

The realm of labor relations has been a dominant concern of corporatist scholars (Schmitter, 1974; Lembruch, 1979). Proponents of corporatist industrial policy argue that strikes are lower, that wage increases are more moderate and that industrial relations are better under corporatism than under state and market directed systems.

This section explores this argument by examining labor dispute levels from 1960 to 1983. Labor dispute are defined in terms of days lost period 1000 manufacturing worker and a table is constructed showing four year averages during this period. Table 13 shows the 104 average number of days lost per 1000 workers within each country for the time frame examined. The data is based on annual aggregate numbers supplied by the U.S. Bureau of Labor Statistics.

Among the indicators examined in this chapter, days lost per thousand industry workers shows the greatest divergence in results between the industrial policy approaches. With Austria and Germany averaging 2.6 and 28.6 days lost during the 1960-83

Table 13

Labor Disputes (Days Lost per 1000 Workers) 1960-83

Business State Market Corporatist Corporatist Statist

U.S. Aust. Ger. Japan Aus. Fra.

1960-63 207 190 29 980 8 228

1964-67 387 212 6 900 2 183

1968-71 557 479 55 1680 1 144

1972-75 272 743 20 192 1 228

1976-79 267 564 57 47 3 215

1980-83 176 622 5 17 1 107

Source: Bureau of Labor Statistics, Handbook of Labor Statistics, 1983.

period, and Japan lowering the number of days lost from a high of

1608 (1968-71) to a low of 17 (1980-83), corporatism is particularly strong in this area. The reversal in days lost per 1000 workers in

Japan is particularly impressive when considering the economic 105

pressures having advanced market societies since the early 1970's.

Japan, in effect, was able to turn around what was the worst record

in controlling days lost due to labor disputes during the 1960's and

early 1970's to one of the best records in the late 1970's and early

1980's.

If corporatism ranks as the best industry policy style to limit

days lost to labor disputes, then the liberal market approach ranks

as the worst. The United States averaged 311 days lost per 1000

workers from 1960-83 and Australia averaged 702 days lost during the

same period. The trends, however,are different for both countries.

The United States has been able to reverse the upward pattern of the

late 1960s and early 1970's, while Australia has experienced

continued labor difficulty and unrest. Indeed, every country

examined (except Australia) has been able to reduce the average

number of days lost between the 1976-79 and 1980-83 time categories.

Australia, contrary to the historical trend of other industrialized

countries, experienced its second worst record in controlling days

lost per 1000 worker (622 average days lost) during the 1980-83 period.

With an average of 184.1 days lost during 1960-83, the record of statist France in controlling time lost due to labor disputes is superior to the United States, Australia and Japan and inferior to

Austria and Germany. The pattern in the number of days lost is random and does not exhibit the strong trend of reduction in average days lost exemplified by the Japanese experience. The French statist model has been relatively successful in managing the number of days 106

lost and has avoided the type of labor difficulties that have plagued

market oriented systems like Australia. Thus, France falls within

the middle category in terms of performance results.

The analysis of the data on days lost per 1000 workers reveal

that corporatist systems (excluding the labor turbulence that

engulfed Japan in the 1960's) have outperformed other systems. The

incorporation of labor in the decision-making process seems to have

insured stable industrial relations in Germany and Austria while

contributing to a dramatic reversal in average number of days lost in

Japan since 1970. This conclusion is reinforced when examining

relative rates of performance between recession and non-recession periods. Table 14 compares days lost per 1000 workers between 1972-

75/1968-71 and 1980-83/1976-79.

Table 14

Days Lost Per 1000 Workers Recession/Non-Recession Periods

1972-75/1968-71 1980-83/1976-79

U.S. - 285 - 91

Australia + 286 + 58

Germany - 35 - 42

Japan -1588 - 30

Austria 0 - 2

France + 84 -108 107

The results In Table 14 indicate a general reduction in number

of days lost due to labor disputes for most countries. Japan, in

particular, succeeded in dramatically reducing man days lost during

the 1972-75 recession. The U.S., France and Germany also made

notable gains during recessionary periods. The lone exception was

Australia in which number of man days lost increased by 264 (1972-75)

and by 58 (1980-83).

In general, the labor dispute results support the desirability

of a corporatist style of economic management. The incorporation of

labor in economic decision-making seems to have contributed to stable

Austrian and German industrial relations and has contributed to a

reversal of labor turbulence in Japan. Corporatism, however, has not

performed along expectations in other areas. What follows is an

examination of each policy category and the degree to which they have

operated along expected patterns.

Prime Values and Policy Performance

The industrial policy approaches examined in this chapter have

particular value orientations. The liberal market approach, for

example, is centered around free factor mobility and efficient

allocation of industry goods and services. As defined by liberal

economists, the efficiency criteria excludes or at the very least

diminishes the importance of equity in the industry reorganization process. Since free markets affect such things as the nature of

industrial relations and corporate profits, the effectiveness of

industrial policy approaches is dependent not only on its ability to 108

maximize its prime operating value, but also on its capacity to

facilitate other secondary values.

The Liberal Market System

Industrial adjustment in Australia and the United States has been weakest in the employment and labor dispute areas. Relative to other nations, both countries have experienced higher unemployment

rates and, excluding the Japanese experience of the 1960's, have lost more days per 1000 workers. These results should not be surprising given that worker equity has not been a paramount concern of market oriented industrial policy. Instead, free factor mobility and competitive allocation have been dominant priorities in such systems.

High unemployment and time lost due to labor disputes may be a necessary precondition to free up resources that are not being used efficiently. Under this interpretation, unemployment and labor disturbance are positive indicators that factor movements are under way (e.g., shifting of labor between manufacturing branches) that could facilitate production in the future. The data on Australian and American industrial production gives some evidence that market systems grow sharply after recession periods.

The analysis of U.S. and Australian industrial production rates further indicate no long-term pattern of manufacturing deterioration.

Indeed, American industrial production rates were higher than German,

French, and Austrian rates during the 1983-85 period. The moderate strength in industry production rates for the period have not translated into labor market gains. 109

The unemployment and days lost per 1000 workers do not show

equilibrating or self-correcting tendencies in countries that

practice market oriented industrial policy. In comparison to the

other countries examined, U.S. and Australian unemployment rates

exhibit patterns of long-term deterioration. Unemployment in both

countries has risen at a sharper rate in the 1960-85 period and,

unlike the French and West German experience, labor market

degeneration is not a response to the global economic stagnation of

the 1980's.

The record of market systems in managing time lost due to labor disputes is not particularly encouraging; the U.S. has made only modest gains in controlling time lost due to labor disputes and the

Australian record has worsened over time. Both countries have

substantially worse records in controlling time lost due to labor disputes than Germany, Austria and France neither have made the progress Japan has in reducing the number of days lost per 1000 workers.

The absence of equilibrating tendencies (e.g., strong employment generation after recessions or significant temporal reductions in days lost per 1000 workers after periods of labor turbulence) indicate that exchange mechanisms have not worked effectively in

Australian and American labor markets. Labor, in effect, seems to bear a disproportionate burden in the manufacturing adjustment process in societies that employ market oriented industrial policy.

The inability of Anglo-American market industry policy to correct for labor market dis-equilibrium cannot be explained on the 110

basis of employment structure disadvantages. While the Australian

economy does have a slight structural bias toward the relatively weak

basic metals and beverage industries, a similar employment

orientation in the Austrian economy has not impeded labor market

stability in that country. The United States, moreover, has a

structural orientation not dis-similar to Japan and Germany, yet

relative to Germany it has a worse record in controlling labor

disputes and its employment record is vastly inferior to Japan.

The Business Corporatist System

The Japanese and German variants of business corporatism have

taken slightly different paths in adapting their industries to

structural change in the world economy. In general, the Japanese

have pursued a growth strategy characterized by low unemployment and

high production rates. Even in the slow growth periods of 1980-85,

Japanese industrial production averaged a healthy 4% and its

unemployment rate of 2.4% was the lowest of the countries examined.

This is not to suggest that Japanese industry was not adversely

affected by structural changes in the world economy. Japanese

industrial production, for example, fell from an average of 15.7%

during 1961-69 to an average of 4% between 1970-85 and unemployment

rates in Japan rose from 1.2% in the 1960's to 2.4% in the 1980's.

What is argued is that Japan has been more successful in adapting its manufacturing to structural change than other countries.

The adjustment centered nature of Japanese industrial policy which puts a premium on restructuring manufacturing production and Ill

innovation from low to highly valued goods has also influenced the nature of labor relations. The labor turbulence of the 1960's was dramatically reversed and by the early 1980's Japan had reduced days lost due to labor disputes to West German levels. The German variant of business corporatism, in contrast, pursued a low growth adjustment strategy throughout most of the late 1970's and early 1980's. West

German unemployment rose from an average of 1 percent in the 1960's to an average rate of 7 percent in the 1980's and industrial production rates from 1980-85 were below all other countries except

France.

While the performance of the West German industry policy model in the 1980's suffers badly in comparison with its 1960's track record, it nevertheless exhibited some strong adaptive effects.

West Germany's ability to stabilize labor dispute levels in periods of rising unemployment illustrates the effectiveness of its co­ determination policies. The U.S. and Australian market systems lack mechanisms that link state, labor and business together in wage negotiations and may explain the co-existence of low production capacity, high unemployment and labor disputes.

The adaptive tendencies of business-corporatism should not be overstated. The weak German employment record of the 1980's and the inability of Japan to quell sever labor turbulence in the 1960's point to difficulties these systems have in representing the aspirations of the trade union movement. The employment performance of the German economy, in particular, suffers badly in comparison to its Austrian neighbor. 112

The State Corporatist System

The Austrian state corporatist model has performed well In

adjusting its labor force to structural change in global manufacturing. The Joint Commission on Wages and Prices, which

coordinates state-union relations and industry employment policy, has presided over one of the best labor management records in the West.

During 1960-85, Austrian unemployment rates averaged 2 to 4 percent and days lost per 1000 workers are the lowest among the nations examined. The policy agenda of the centralized trade union movement, which emphasizes high rates of labor utilization and worker representation in industrial planning, seems to have been successfully implemented.

Industrial production rates, while respectable, have lagged behind the other indicators in this chapter. The labor equity orientation of Austrian industry policy may explain why production rates have not matched its employment and labor dispute performances.

Production rates have been consistently lower than Japanese rates and on average have been commensurate with levels achieved by France,

America and Australia. In effect, high rates of labor utilization and retention in the dominant nationalized sector may have precluded the introduction of production enhancing technologies (e.g., industrial robots).

The Austrian economic record is all the more remarkable when taking its employment structure into account. Despite having a higher percentage of labor in traditional industries (textiles, basic metals and beverages), Austria was able to adapt its labor 113 markets to global market pressures in ways that have eluded

economies (Germany and the United States) that have faced less

industry structure pressure. Thus, Austrian industry policy was

able to overcome its structural weakness and outperform countries

that have less of its workforce employed in basic industries.

The Statist System

The economic record of the French industry model between 1960-85 has not matched its high growth agenda. While manufacturing production levels exceeded or were comparable to U.S., German,

Austrian and Australian levels, unemployment has grown dramatically from a 0.9% average for 1960-69 to an 8.7% average for 1980-85. The

French labor dispute record, measured by number of days lost per 1000 workers, is superior to the Anglo-American and Japanese records, but is inferior to the German and Austrian records.

What emerges in France is a very mixed pattern of industry adjustment characterized by average manufacturing production rates, deteriorating employment conditions and moderate number of days lost due to labor disputes. Some of this performance can be explained on the basis of industry structure; France has a higher percentage of labor employment in the beverage and textile industries. Yet the ability of state corporatist Austria to overcome more serious structural liabilities, suggests the ineffectiveness of a policy approach that does not incorporate labor into planning deliberations. 114

Policy Adjustment: An Assessment

The diversity of adjustment performances between the six

countries indicates the ability of some industry policy styles to

overcome structural disabilities and in some cases outperform

countries with more secure industry structures. The table below

summarized these results by linking basic metal, textile and beverage employment percentages in the 1980's with unemployment,

industry production and labor dispute averages for the 1980-85 period.

During the early 1980's, the industrial West experienced a severe recession that hit traditional industries particularly hard.

Yet some countries were better able to handle economic pressures than others. Business corporatist Japan and state corporatist Austria did significantly well in managing labor disputes, stabilizing industry

Table 15

Adjustment Experience 1980-85

Industry Employment Performance Results

Unemploy­ Produc­ Days Metals Textiles Beverages ment tion Lost

U.S. 3.9 10.7 8.4 8.1 2.0 176 Australia 8.3 10.0 15.4 7.7 2.1 622

Germany 6.0 7.0 6.0 7.3 1.1 5

Japan 4.8 10.9 12.8 2.4 4.0 17

Austria 9.4 13.9 10.3 3.6 2.9 1

France 5.8 11.6 12.9 8.7 -0.1 107 115

production rates and maintaining relatively low levels of

unemployment. German business corporatism did comparatively well in

managing labor disputes, but performed less effectively in

controlling industry production and unemployment. Statist France and

the market oriented Anglo-American countries performed badly on all

three measures.

The structural composition of manufacturing labor markets does

not seem to play a major role in explaining differences in economic

outcomes. Indeed, Austria overcame some significant structural

liabilities and outperformed every country except Japan on key

adjustment indicators. When comparing similar economic structures,

Japan effectively outperformed its American rival in every category.

Policy in these cases seems to have made a crucial difference in

determining economic outcomes. The experience of the 1980's

indicates in microcosm that industry policy can be used effectively

to combat economic pressure. The 1980's experience holds for much of

the 1960-85 period with Austria and Japan performing well, Germany

stuck within a middle range and France, Australia and the United

States adapting poorly during the period. Table 15 averages the unemployment, industry production and labor dispute records of all six countries during 1960-85.

While economic adjustment to recessions is important, a major test for industry policy is its ability to adapt labor markets and industry production in ways that maximize competitive behavior.

Accordingly, the next chapter addresses the capacity of national industry policies to enhance trade and growth capabilities. 116

Conclusion

The chapter has examined the relationship between industry

policy and its effect on unemployment, manufacturing production and

time lost to labor disputes. The first section of the chapter traced

the evolution of structural disturbance in industry branch employment

and capacity utilization rates. The evidence indicated that economic

pressures were most prominent in the textile, metals and beverage

industries. The employment structure of the six industrial economies

was introduced as a control variable that could mitigate policy

effects.

The analysis proceeded to identify four industry policy styles

(liberal market, business corporatist, state corporatist, and

statist) and discuss them in terms of their prime values,

institutions they employ, and mix of market, bargaining and planning

controls they utilize. These policies were tested in the

unemployment, industry production and labor dispute areas. The major

findings of the chapter are: (1) industry structure is not a

significant factor in explaining different economic outcomes and (2)

public policy can be used effectively in adjusting labor markets and

industry production to global recessions.

Japanese business-corporatism and Austrian state-corporatism performed particularly well in adjusting their economies during periods of economic disturbance while statist France and liberal market America and Australia adjusted poorly with all three having higher unemployment and bad labor management records. The German business-corporatist response to economic crisis exhibited a mixed 117 pattern of high unemployment, low industry production rates and minimal days lost due to labor disputes. Chapter V

Industrial Structure Competitiveness

Introduction

Economic competitiveness is one of the most frequently debated topics in the industrial policy area. The substantial current account imbalances between the United States, Germany and Japan in the 1980's has heightened the debate over the role of industrial policy and its effect on international trade flows. Proponents of state intervention argue that the absence of coherent planning has contributed to American industrial malaise and trade deficits while comprehensive sectoral policies in Japan and Germany have expanded manufacturing export capacity and trade surpluses.

Industrial policy opponents dispute this claim and argue that the relationship between policy and trade success is minimal or non­ existent and that market relationships, technological innovation and private enterprise are more important factors. According to this perspective, the U.S. current account deficits of the 1980's should be reversed by the 1990's as a weaker dollar makes American exports cheaper and foreign imports more expensive.

The prime intent of this chapter is to explore this debate by examining the effect of different policies on investment, trade and purchasing power in six countries from 1960-85. The chapter is divided into four sections. In the first section, the trade and

118 119

value added compositions of six industrial countries are sketched and

expectations that comport with economic theory and structural

organization are derived. In particular, this section looks at the

value added foundation of manufacturing and contends that performance

results can be mainly attributed to this structural characteristics.

The second part explores the different types of industry policy

styles countries use to manage manufacturing and trade performance

and argues that the particular content of these policies (the mix of

state-market relationships) should effect performance results.

Section three evaluates these two competing arguments by examining

trends in five indicators from 1960-85 and the final section

summarizes the industrial policy experiences of the six countries.

A. Economic Factors and Trade Performance

Global manufacturing production and trade accounts for a

considerable amount of commercial activity between advanced market

economies. Indeed, manufacturing trade has contributed to patterns

of modernization and deindustrialization in the developed West and

has had a profound effect on the development of the Third World. The

flow of manufacturing production and exports between countries

profoundly effects development potential. Recessions in the

industrial West, for example, create rippling effects for Third World

exporters who are heavily dependent on Western markets.

The predominance of advanced market economies in the manufacturing export area has been relatively enduring in the post war period. Figure 16 indicates the dominance of Western 120

Table 16

Share of World Exports of Manufacturing (1960-80)

by Economic Grouping

Developed Developing Communist Market Countries Bloc Economies

1960 3.9 12.4 83.8

1965 .4.4 12.4 83.3

1970 5.0 10.1 84.9

1975 6.3 9.3 84.4

1980 9.0 8.1 82.9

Source: UNIDO, World Industry Since 1960, p. 36.

manufacturing in the export area and highlights the importance of manufacturing for developed economies.

The trade relationships between advanced market economies are important because economic interdependency between these countries has been growing. Indeed, the bulk of trade is highly integrated with countries exporting and importing goods and materials used in the same industry (i.e.g, German furnaces are used to melt American steel). As indicated by Table 17, the countries of the European

Economic Community exemplify this trend toward economic interdependency.

Given the economic connectedness of advanced market economies, r it is clear that imbalances in trade relations over time could cause serious damage. Under conditions of free exchange, however, trade 121 imbalances are self-correcting because markets produce equilibrating pressures that insure that no one nation can exert control over the trading system. Thus, the export sectors of surplus countries experience adverse price and cost conditions because their currencies appreciate while deficit countries encounter favorable terms of trade because currency values work to stimulate exports and restrict imports. The end result of this process is the achievement of generalized equilibrium as trading capacity shifts according to underlying market conditions.

While competition in the global trading system play a role in determining performance levels, economic theory also suggests that trade capacity and economic success is intimately connected to the value added to production. According to this perspective, countries can expand gross output by investing in technologies and industries where production costs are minimal. Countries that are successful in maximizing the production value of goods over their costs should be in a superior trading position to those whose industries are burdened with high, fixed production costs.

Under economic theory, value added to production is highly dependent upon the scarcity of labor, capital and land in the domestic economy. These scarcities are reflected in price values which are coordinated by markets to determine what is produced and how it is allocated. Thus, the commodity organization of the economy is dependent upon the relative scarcity of labor and capital. Since scarcities differ from country to country, some countries may minimize production costs by using a cheaper factor of Table 17

Structure of EC Country Exports by Country and Region, 1958 and 1986

Percent of Total Exports

Export to EEC Non EEC Europe U.S.A. Japan Aust. Canada

1986 1958 1986 1958 1986 1958 1986 1958 1986 1958 1986 1958

Belgium 55.4 72.9* 8.7 7.0* 8.4 5.3* 0.6 0.9* 0.5 0.3* 1.1 0.6

Denmark 59.3 46.8* 16.6 26.4* 9.3 8.6* 0.2 3.4* 0.3 0.6* 0.7 0.9

Germany 37.9. 50.8* 22.7 18.6* 7.3 10.3* 0.9 1.7* 1.0 0.8* 1.2 1.0

Greece 50.9 63.5* 6.4 12.4* 13.6 7.1* 1.4 0.7* 0.1 0.4 0.3 0.7

Spain 46.8 60.9* 12.4 6.1* 10.1 9.3* 1.7 0.8* 0.3 0.3* 1.3 1.2

France 30.9 57.8* 9.0 9.1* 5.9 7.4* 0.3 1.4* 0.5 0.4* 0.8 1.0

Ireland 82.4 71.9* 0.9 6.0* 5.7 8.7* 0.0 1.8* 0.1 0.0* 0.7 1.3

Italy 34.5 57.8* 18.9 11.9* 10.7 5.6* 0.3 1.4* 0.1 0.9* 1.2 1.2

Nether. 58.3 75.7* 11.9 6.8* 5.6 4.6* 0.4 0.7* 0.8 0.7* 0.8 0.6

Portugal 38.9 68.0* 5.1 12.2* 8.3 7.0* 0.5 0.8* 0.7 0.4* 1.1 0.8

U.K. 21.7 47.9* 9.1 9.4* 8.8 14.4* 0.6 1.6* 0.6 0.3* 5.8 2.3

Source: European Econcsnv. No. 33 (July 1987) p. 56. 123 production more abundantly (i.e., investing in capital intensive

industries where labor is expensive).

Economists, moreover, argue that countries that succeed in developing industries or technologies where the spread between production value and cost is high have a competitive advantage in trade. The development of textiles production technology, for example, helped insure English dominance in world trade during the eighteen and nineteenth centuries. In the economic world view, the process by which value is added to production reflects a complex interaction between market supply, demand and technological innovation. The dynamic nature of the process of product innovation means that it is difficult if not impossible for governments to create a planning style capable of channeling resources to maximize production values. Accordingly, only markets are flexible enough to accommodate the process by which cost constraints are minimized and production values are maximized.

If economic theory is correct we would expect significant differences in trade and economic performance between countries that have divergent value added compositions in their industrial structures. In effect, those countries that have industries that are relatively low in value added goods (steel and textiles) should be outperformed by countries that specialize in products that are relatively high in value added goods (industrial chemicals and electronics). Table 18 sketches the percent distribution of total value added between nine industrial categories for six advanced market economies. 124

Table 18 reveals some significant differences in the value added composition in the industrial structures of the six economies.

Specifically Australia, France, and Austria emphasize industries

(textiles, basic metals, apparel and printing) that are relatively low in value added while Germany, Japan and the United States orient production around high value added chemicals and fabricated machinery. Given these differences in structural organization, economic theory would suggest very different performance results.

Germany, Japan and the United States should exhibit similar trade performance patterns and in general all three should outperform Austria, France, and Australia along the competitiveness dimension. If economic theory is correct we would expect to find relatively even performance rates among Germany, Japan and the United

States with no long-term competitive differences between these three countries. Similarly, the structural organization of the Austrian,

French and Australian economies would seem to indicate roughly comparable performance results between these countries.

The evidence, however, may indicate the opposite with substantial performance differences between countries. Finding, for example, that Austria or France out performs the United States on some key competitiveness indicators may indicate the importance of industrial policies in expanding production capacities or finding long-term differences between similarly organized industrial economies could illustrate the ability of planning or bargaining to supplant market forces. Thus, a full analysis must include the capacity of industrial policy, if any, to either compensate for Table 18

Value Added to Production Across Industries

Percent of Total Value Added

Japan Ger. Aust. U.S. Fra. Aus. (1983) (1985) (1985) (1985) (1984) (1984)

Food, Beverages & Tobacco 9.5 10.0 17.8 11.6 17.5 16.0

Textiles, Leather & Apparel 6.2 0.4 0.7 5.3 6.6 8.7

Wood Products & Furniture 3.1 2.7 5.7 2.8 1.4 5.3

Paper Products & Printing 7.9 4.2 10.2 11.3 5.3 7.6

Chemicals 15.0 21.3 13.2 15.8 19.8 12.2

Non-Metallic Minerals 4.7 3.7 5.1 2.8 2.9 6.7

Basic Metals 7.0 5.6 10.4 3.5 6.4 8.7

Fabricated Metals 44.6 47.1 29.0 45.8 38.5 33.2

Other 1.4 0.5 0.9 1.3 1.2 0.9

Source: OECD, Industrial Structure Statistics, 1985. 126 structural inadequacies or to complement an economy that has structural advantages over its competitors.

B. Industrial Policy Styles and Trade Utilization

The effect of industrial policies on trade capabilities may differ depending upon their use of mix of planning, markets and bargaining. The state, for example, may target certain industries for support or protection and distort trade relationships. This section examines four industry policy styles according to the value they attach to trade, how they manage international economic exchange, the way they use markets, planning and bargaining, and the types of group conflicts in each policy group.

1. Liberal Market Industrial Policy

Free trade is an important component in the market liberal philosophy. Indeed, it is the key mechanism in determining efficient outcomes between market economies. Liberals argue that open markets and free exchange promote product specialization between nations and allows for more goods to be consumed than under conditions of state guided trade. Under this point view, competitive markets force nations to use resources in ways that maximize production capabilities and enhance human consumption of goods and services. Efficient outcomes are accordingly consequences of product specialization and free trade between nations. Liberals argue that trade barriers distort the process of product market specialization between nations by insulating real factor prices (i.e., protection 127 allows for higher wage levels) and allows nations to produce goods that under conditions of free trade would be Impractical. Since import barriers and export subsidies distort factor prices and utilization, liberals support an end to state Interference in trade.

While liberal regimes have enshired the value and desirability of free trade, international economic exchange has never been completely open in such societies. Trade policy in Anglo-American countries, for example, has frequently resorted to protecting declining industries to preserve jobs and corporate profits. Since open economies erode the economic power of groups to influence wage and prices, liberal policy has traditionally used public policy to protect displaced- workers and businesses without drastically impairing the efficient outcomes associated with free international exchange.

The conundrum for liberal society is how to reconcile the competing pressures of capitalism and democracy. In effect, the dynamics of capitalist development with its cycles of sectoral growth and decline are often at odds with democratic political pressures that seek to protect groups from economic adversity. The post-war liberal policy of the United States and Australia has coped with the politico-economic consequences of open exchange primarily through fiscal-monetary and exchange rate policies.

The predominant characteristic of these policies is that they coordinate industry investment and production indirectly. Indeed, the hallmark of a market liberal industrial policy is that it does not encompass a grand state guided plan for guiding the manufacturing 128

sector. Instead, trade Imbalances In Anglo-American societies have

traditionally been adjusted through changes in monetary and exchange

rate policies. The U.S. revocation of Bretton Woods in 1971, the

Plaza and Lourve agreements of the middle 1980's and the devaluation

of the Australian dollar in the 1 9 8 0 's were all efforts to adjust

current account imbalances without interfering directly with the

investment autonomy of the private sector.

While monetary and exchange rate policies are the predominant

responses liberal societies have to adverse international economic

trends, some direct sectoral intervention does occur. The most

traditional form of state involvement comes in the form of trade

barriers (import quotasu tariffs, licensing) to protect politically

powerful economic groups. Australian mining and American textiles

are two sectors that have been traditionally protected from foreign

competition and are prime examples of political lobbying and

distortion of free trade policies.

There are occasions, however, where state intervention has gone

beyond protection of domestic industries from imports. The American

government has engaged in a number of actions designed to protect

certain industries or companies from bankruptcy. U.S. industry policy has been particularly active in the public transport area and has ranged from loan guarantees (Lockheed and Chrysler) to direct

grants (merchant marine) to nationalization and partial public

ownership^(Amtrack and Conrail). Sectoral intervention in each case has been primarily reactive and ad hoc with state support rationalized on the basis that the subsidy would be short-term, would 129 not Interfere with company decisions and would be eliminated after

the targeted company or industry reached fiscal solvency. Thus,

federal shares in Conrail were sold oncethe company recovered,

Amtrack is to be sold to private investors in 1990 and U.S. stock

options in Chrysler were never exercised to influence company policy.

The fundamental goal of liberal policy is to maximize market returns for both producers and consumers. This maximization principle often necessitates reconciling the competing interests between ensuring domestic industry profits and maintaining a competitive, open economy. Generally, liberals use markets to guide investment, wages and production in the economy, but deviate from this rule when severe disruptions from foreign imports inflict damage on large domestic companies. In sum, the liberal economy is characterized by pockets of support and protection in a relatively open economy.

2. Business Corporatist Industry Policy

Trade is similarly an important value in the business corporatist credo. Unlike the liberal system, however, international exchange is adjusted depending upon the interests and capabilities of social groups in the domestic economy. The state, in particular, plays a major role in building consensus between labor and business and shapes and influences investment, wages and production•in the export sector. The West German "social-market economy" uses worker-business codetermination councils and state investment banks to guide export performance while Japan's Ministry for Industry and International 130

Trade Incorporates business interests in its industrial support plans. Business corporatist trade policy reflects consensus between groups in the industrial economy over the appropriate pace of domestic economic integration in the world economy.

In business corporatist societies industry power is often dependent upon trade capabilities and the demands of firms and workers for appropriate wage, price and profit levels (Katzenstein,

1984). Industrial policy in these societies expands export capacity by targeting fast-growth industries for support and phasing out slow- growth industries. Business-corporatists accomplish this task by pooling the resources of dominant industries, unions, and the state sector.

Under this system, negotiated bargains are struck between industries, unions and the state sector over the appropriate level of wage, price and production in the economy. Often guided by a dominant political party, the pace of industrial change in the export sector reflects a consensus between large groups over what needs to be done to maintain living standards while competing more effectively in the international economy. The state in these societies performs many roles: the forecaster and technological pioneer that identifies expanding product lines and subsidizes business research, the lender and entrepreneur that underwrites business consortia and provides venture capital for plant modernization, and the broker and peacemaker that persuades industry and labor to cooperate on wages and employment security. 131

Business-corporatist industrial policy is a by-product of group

interaction and public-private partnerships (Hicks, 1988). Thus,

industry support programs are incremental and do not evolve from a

dominant state planning apparatus. The state acts mainly as a

regulator to insure that business activity is adequately harmonized

with international trade flows. Iron and steel industry operations,

for example, are closely monitored by the West German government to

insure wages are kept competitive and investment in cost-saving

technologies are made. Similarly, Japanese ministries provide

venture capital for innovations in the potentially lucrative areas of

super computers and high definition television.

The basic goal of business-corporatist societies is to maximize

trade capabilities by reinforcing group cohesion and cooperation in

the domestic economy. When market conditions threaten domestic

producers the state subsidizes them provided they make the

competitive enhancing changes in industry organization, pricing and

production. Unlike their liberal counterparts, business corporatist

expect the state to play a role in the investment practices of

industry. Trade policy is regulated or managed to insure that there

is an appropriate match between the production capacity of the

domestic business establishment and changes in international demand.

The process of synchronizing the production capabilities of domestic producers with global economic change is a monumental task.

In particular, group behavior may be at odds with competitive performance: workers may refuse to restrain wage demands, firms may be reluctant to move into certain product lines, and the dominant 132 political party may be hesitant to suffer the electoral repercussions of phasing out jobs in traditional industries. Under these conditions, the process by which groups bargain over the appropriate rate of change in wage, investment and production become critical.

Thus, the political and economic success of business-corporatism is dependent upon the effectiveness of its bargaining institutions in guiding the competitive behavior of domestic producers.

3.' State Corporatist Industrial Policy

Trade is not an important policy goal in state corporatist systems. When international economic exchange is considered in the industrial policy formulation process, its effects are often cushioned to preserve labor market earnings. State corporatist systems are equity centered and emphasize high growth in employment and labor earnings by insulating their economies from international economic adversity (Gerlick, Grande, and Mueller, 1988; Pelinka,

1988).

Austria, for example, has traditionally expanded investment and employment in its large nationalized sector to offset global recessions and has contained world inflation by liking its currency to the strong West German Mark. State corporatist view free trade and economic integration as a harbinger of economic difficulty in that national purchasing power becomes tied to trade capacity.

According to this point of view, open economies create equity problems in that wages need to be adjusted to match competitive levels in overseas markets. Since state corporatist systems value 133 full employment and high labor earnings, international exchange needs to be contained to offset potential inegalitarian consequences.

State corporatist industry policy in Austria is often dominated by strong centralized unions (Pelinka, 1988). The labor movement has significant control over the governing Austrian Socialist party and exerts influence on the operations of economic ministries and nationalized enterprises. The Austrian Council on Wages and Prices, for example, incorporates major elements of the Austrian trade union movement in its economic planning deliberations.

The egalitarian policy agenda of Austrian unions is enforced through a number of institutions and processes. The nationalized sector constitutes the fulcrum point of Austrian industrial policy.

The largest industrial group in Austria, the OIAG, is state owned and exerts significant control over manufacturing activity. Under the guidance of the economic ministries and the Austrian Socialist Party, the OIAG has expanded its investment, production and employment to offset recessions.

The expansion of production activity in the nationalized sector is heavily financed by the government: credit is generously allocated through state banks, public works programs supply demand for specialized products sold by state firms and public sector spending on welfare and pensions, insures stable consumption patterns in the economy. The largess of the public sector, however, has limits in that internal and external debet must eventually be paid off to creditors. Thus, the success of state corporatist systems is I

134 partially dependent upon a vital and generally self-supporting nationalized sector.

In sum, Austrian state corporatist industry policy is characterized by close labor-state relations that enshrine a full employment, high wage policy agenda. The policy, in theory, protects the economy from exogenous shocks through a large nationalized sector that limits foreign investment in the industrial economy and expands production capabilities in times of global recession. The Austrian government's labor and credit policies are designed to facilitate the vitality of state owned industries and insure high growth in the domestic economy. Trade relations are accordingly adjusted to limit damage to labor market earnings and purchasing power levels.

4. Statist Industrial Policy

International trade in statist France is one of many avenues the public sector can use to promote national economic growth. Statist reject free exchange because it results in a loss of national control over export activity. While a completely open economy is incompatible with state guidance of industry, a policy of administered trade is considered a vital component of industrial policy. Under this policy arrangement, import barriers are constructed to prevent foreign competition in certain sectors and export subsidies are granted to favor producers. Import and export exchanges are planned by the state to maximize production in key industries and enhance French influence in overseas markets. 135

The core of French statist industrial policy encompasses the use of an indicative planning structure that targets high technology firms for assistance (Loriaux, 1988). In France the state has sponsored national champions in transportation, energy, electronics, computers, and armaments and has changed various forms of assistance to these firms. Like their state corporatist counterparts, statist's utilize nationalized firms and banks to promote technological innovation and growth in the export sector. Public sector assistance, similarly, is substantial with state firms receiving venture capital, credit and import materials at subsidized prices and terms (Cerney, 1988).

Statist trade and competitiveness policy is intimately linked with protecting the nationalized core of the French industrial economy.

Trade is administered to promote export growth, minimize foreign control of key industry sectors and ultimately is designed to project

French national power and prestige in overseas markets through state firm exports. In theory, French export and import balances are subject to state guidance with selected export sectors insulated from competition and imported goods selected on the basis of national industry needs.

The primary goal of French statist industry policy is to lead other countries in the technological development and export of sophisticated products. With substantial state support, the nationalized sector produces these goods which are then solid in the international market. The French economy, however, is not completely autonomous and is dependent on imported materials (e.g., 136 capital goods and technology) to expand export production. Given this dependence, the fundamental problem for a statist industry policy is determined the appropriate level of economic openness; too much dependence on foreign capital and technology compromises national autonomy while too little economic openness restricts access to materials needed to promote export growth. Thus, statist's must access the relative trade-offs involved in opening the economy to international market forces.

5. Summary and Overview of Policy Styles

The four industry policy perspectives differ on the necessity and desirability of trade and diverge most significantly over the means to manage international economic exchange. Chart 1 summarizes each policy according to their trade goals, management style, policy mix and type of conflict presented by international economic exchange.

Chart 2

Policy Styles and Trade Utilization

Trade Management Policy Policy Style Goal Style Mix Conflict

Liberal Market Efficiency Open Market- Bus- Exchange Plan Market

Business Adjustment Regulated Bargain- Group- Corporatist Exchange Market MArket

State Corporatist Equity Limited Bargain- Labor- Exchange Plan Market

Statist Growth Planned Plan- State- Exchange Market Market 137

Trade conceptualization and management policies should exert some

effect on the capacity of nations to compete in the international

market-place. Given the disparities in state-market direction of

industry, we should see significant differences in comparative

performance in trade related areas. Accordingly, the next section

evaluates how different policies have performed in managing

competitive behavior from 1960 to 1985.

C. Data Evaluation: Competitive Behavior of Six Industrial

Economies

This section evaluates the competitive performance of four different industry policies. In particular, per cent changes in investment, trade and purchasing power are compared across and between historical periods from 1960-85 to determine which policy styles, if any, are better at managing international competition.

The analysis is tow-tiered along some of the indicators. First, essential changes between countries are compared for the entire period to give the reader an overview of long-term performance in the investment, trade and purchasing power areas. Second, relative changes between countries are compared during certain critical periods in order to determine how different policies performed under conditions of global recession.

The indicators used in this section are gross fixed investment as a percent of GNP, imports and exports as a percent of GNP, current account surplus and deficit as a percent of GNP and percent increase in compensation per employee adjusted for inflation. The statistical 138

tables for each indicator are divided into 4 year and 10 year

averages to gauge' short and long-term performance across and between

historical period. The indicators form an integrated structure in

that investment change over time should affect trade behavior and

purchasing power between countries. The evaluation section analyzes

each indicator separately and summarizes how industry policy has

performed along the competitiveness dimension.

1. Gross Fixed Investment: 1960-85

Industrial policies often focus on altering capital accumulating

in ways that maximize trade capabilities and export performance

(Hicks, 1988). Governments of varying ideological orientations have

utilized a host of policies (credit controls, tax credits, loans,

operating subsidies) to influence industrial investment. The

attention states pay to gross fixed investment, in particular, should

not be surprising given the impact that plant and machinery

modernization have on production and export capabilities. Thus,

evaluating changes in gross fixed investment is a core element in

assessing industrial policy performance.

The trade implications of gross fixed investment change are

significant in that export abilities may be dependent upon plant modernization to compete effectively in global markets. Table 19 presents gross fixed investment averages as a percent of GNP during 4 year periods from 1960 to 1985 and longer term averages for 1961-70,

1971-80, and 1981-85. 139

Table 19

Gross Fixed Investment 1960-85 (% GNP)

Business State Market Corporatist Corporatist Statist

U.S. Aust. Ger. Japan Aus. Fra.

1960-63 17.8 25.2 25.2 31.6 25.5 21.2

1964-67 18.3 25.9 25.3 30.9 26.8 23.4

1968-71 18.0 26.7 24.3 33.5 26.9 23.4

1972-75 18.4 25.1 22.8 34.4 28.1 23.7

1976-79 19.2 23.1 20.7 30.8 28.8 22.1

1980-83 18.0 20.2 21.3 31.1 26.1 20.9

1961-70 18.0 25.7 24.9 32.4 26.1 22.9

1971-80 18.8 24.3 22.3 32.7 28.0 22.9

1981-85 17.9 19.8 20.5 28.8 24.8 19.9

Source: European Economy. No. 33 (July, 1987). Table 15, p. 122. 140

Among the six countries, business-corporatist Japan and state-

corporatist Austria are the strongest performers in the gross fixed

investment area. Table 19, moreover, reveals that these countries

have been able to maintain relatively high capital accumulation

patterns across the historical period. Japan and Austria's gross

fixed investment as a percentage of GDP for 1980-85 was 8 and 4

percentage points higher than West Germany's and 11 and 6 percentage

points higher than the United States for the same period. The Anglo-

American societies are relatively weak in this area, but for

different reasons; American GDP gross fixed investment has been

consistently low (averaging around 18 percent) while Australian

investment has declined from 26.7 of GDP in the late 1960's to 19 percent in the 1980's.

Germany and France have similarly encountered problems in the gross fixed investment area. West German levels, for example, reached highest of 25 percent during the 1960's only to decline to around 21 percent in the early 1980's. French levels, have been equivalent to West Germany's and have averaged around 22 percent for the entire period examined. It is notable however, that both countries were out performed by Australia during most of the late

1960's and early 1970's and it is only in the late 1970's and 1980's that these countries have approximated and eventually surpassed

Australian levels. Thus, performance levels for the period 1960-85 are mixed with Japan and Austria exhibiting patterns of strength and the remaining countries encountering varying degrees of problems. 141

While performance levels between countries gives us a picture of industry policy performance, the rate of decline or increase between historical periods may be more useful in assessing policy effectiveness. Table 20 identifies the rate of change from the previous period for 1972-75 and 1980-83. Both periods were selected because of the existence of recessionary cycles in the global economy and country behavior is compared in terms of rate of change from the previous non recessionary four year period of 1968-71 and 1976-79.

Successful competitive performance is judged according to a lower rate of decline or higher rate of increase from the previous period.

The GDP gross fixed investment trends for 1972-75 when compared to

Australia, in particular, suffered significant investment declines in the 1972-75 period while France and the United States marginally increased capital formation in their economies. Most impressive were

Table 20

GDP Gross Fixed Investment (1972-75, 1980-83)

1972-75/1968-71 1980-83/1976-79

United States 0.1 -1.2

Australia -1.6 -2.9

Germany -1.5 0.6

Japan 0.9 0.3

Austria 1.2 -2.7

France 0.3 -1.2 142

Austria and Japan; both countries made significant Investment gains

In an economic period characterized by global recessionary behavior.

Of the four policy models, the liberal market style seems to have adjusted less competitively during this period with Australia experiences deep reductions in investment capacity and the United

States accomplishing only a 0.1 GDP increase.

The ineffectiveness of Anglo-American market industry policy in capital formation area is reinforced by the 1980-83 data which shows considerable structural weakness in the United States and Australia.

These countries suffered GDP investment declines of 1.2% and 2.9% during this period and indicate that capital formation is becoming a more serious problem for market societies. The French and Austrian state oriented systems, which did well during the recession plagued

1972-75 period, but fared badly in terms of 1980-83 GDP investment capacity with Austria experience a 2.7% decline and France experiencing a 1.2% reduction. Conversely, business corporatist

Japan and Germany made GDP gains of 0.6 and 0.3 percent during 1980-

83 recession cycle.

When comparing performance results during the two recession periods, only the Japanese variant of business corporatism was successful in fostering competitive behavior. The French statist and

Austrian corporatist styles reacted competitively during the 1972-75 period .and German corporatism reacted well to the 1980-83 recessionary period. None of these countries, however, have been able to replicate the Japanese experience of competitive adjustment in both periods. Anglo-American investment, conversely, reacted 143

badly to both periods and relative to other models seems to be at a

disadvantage when It comes to adjusting gross fixed Investment flows

In the economy.

The data in the capital formation area does not provide automatic

evidence that one policy model is superior. German investment flows

during the 1972-75 period indicate that investment in business

corporatist systems can be as adversely affected by declining

markets. What is indicated, however, is that there is a positive

association between state guidance of the economy and high levels of

capital formation. This conclusion is buttressed by the Austrian and

to a lesser extent French experience at maintaining gross fixed

investment as well as the inability of market systems to revere

stagnant investment trends in their economies.

2. Export Capacity: 1960-85

Since the availability and cost of capital shapes export capacity we should see some relationship between investment flows and the

trade sector of the economy. This section traces the evolution of

the export sector (measured as a percent of GDP) from 1960 to 1985 in

the six countries. The growth in the export sector implies a greater degree of connection to the international economy and places a premium on maintaining a country's competitive standing. Thus, industry policies in countries that have a large proportion of GDP devoted to trade must insure the effectiveness of its export sector.

Table 21 presents export GDP percentage averages for the six 144 countries In four year periods from 1960-83 and Identifies export averages during 1961-70, 1971-80, and 1981-85.

Table 21 indicate that the export sector in each country grew in varying degrees between 1960 and 1985. The differences in trade dependence between the countries are quite pronounced with Austria,

Germany and France devoting considerable resource to exports and

Japan, Australia and the United States concentrating less on the export sector. The two most export oriented economies of the group devoted significant resource to exports; Austrian exports accounted for 41 percent of GDP in the early 1980's and exports represent almost a third of the German economy between 1980-85. From 14 percent of GDP in the early 1960's to 24 percent of GDP in the early

1980's, export capacity in statist France grew considerably between

1960-85.

The more insular economies in the group exhibit some interesting , variations. Australian export capacity, for example, moved from an average of 12.9 percent of GDP in the 1960's to an aver age of only

14.6 percent of GDP in the 1980's. Indeed, Australian export GDP levels for the 1980's were actually lower the middle 1950's when 20 percent of GDP was devoted to exports. The export dependence of the

U.S. economy grew at a quicker rate than Australia with approximately three percentage points of GDP transferred to trade between 1960-85.

The Japanese export sector is notable for its relatively small size

(14.6 percent of GDP in the 1980's) and its growth from nine percent to over 14 percent of GDP during the period. Table 21

Export Capacity (GDP percents) 1960-85

Business State Market Corporatist Corporatist Statist

U.S. Aust. Ger. Japan Aus. Fra.

1960-63 5.1 13.7 17.9 9.6 26.2 14.0

1964-67 5.3 12.4 18.7 10.0 28.7 13.6

1968-71 5.5 13.0 21.2 10.7 32.2 15.4

1972-75 7.4 13.3 23.4 11.7 35.4 19.1

1976-79 8.3 13.5 25.1 12.3 38.2 21.1

1980-83 9.1 14.1 28.2 14.2 40.9 23.1

1961-70 5.3 12.9 19.2 9.9 28.3 14.0

1971-80 7.9 13.2 24.1 12.2 35.7 20.1

1981-85 8.2 14.6 29.8 14.6 42.1 24.1

Source: European Economy, No. 33 (July 1987) Table 26, p. 137. 146

While levels of export dependence do not necessarily denote the success or failure of industry development styles, the data in this area does present some interesting policy contradictions. Export dependence, for example, is higher in countries (Austria and France) that espouse forms of economic independence than it is in societies

(America and Australia) that proclaim the virtues of international exchange and trade dependency. While geography and the dynamics of

European integration account for a considerable amount of Austrian and French export dependency, the data still needs to be reconciled with the relatively autarkik nature of Austrian and French statism.

Similarly, the lack of Anglo-American economic integration contradicts the economic openness of market industrial policies.

The contradictions, perhaps, can be explained on the basis that

Austrian and French economic nationalism is a response to trade dependency and the lack of Anglo-American integration has spurred liberal trade policies in Australia and the United States. Given the difficulties in evaluating policy effect on the basis of export levels, a better measure may be evaluating the rate of change during certain periods. Table 22 identifies rates of GDP export change during the two major post war recessionary cycles (1972-75, 1980-83) by comparing them to the previous four year periods of 1968-71 and

1976-79. Trade behavior is evaluated on the basis of increase in export GDP compared to the previous period. Thus, the larger the increase in export GDP the more resilient the export sector of the economy. 147

Table 22 reveals that every country Increased its share of export •

GDP in the two recessions, but that export performance varied considerably. The more integrated countries (France, Germany and

Austria) registered strong gains during each period, Japan increased its share of export GDP by over one percent and the Anglo-American countries increased their shares modestly with American export performance particularly strong during the 1972-75 period. Thus, the export sector of the more integrated countries on average responded better to market pressures of 1972-75 and 1980-85.

These results do not indicate that more integrated economies are - more competitive. What is suggested, however, is that there is a

Table 22

Export Capacity (1972-75, 1980-83)

Export GDP Percent Change From Previous Period

1972-75/1968-71 1980-83/1976-79 United States 1.9 0.8

Australia 0.3 0.6

Germany 2.2 3.1

Japan 1.0 1.9

Austria 2.8 2.5

France 3.7 2.0

dynamic in more integrated systems that facilitates export resurgence in periods of economic strain. In effect, greater participation in global economic relations allows exporters to adjust better than more 148

Insulated competitors and may account for the larger increases registered by Austria, France and Germany. This may explain why export capacity is higher in certain countries than it is in others, but it cannot without some comparison to import dependence explain competitive performance. The next section brings us closer to some evaluation of competitive standings among the six counties by examining GDP import levels during 1960-85.

3. Import Dependence 1960-85

Global economic relations between advanced market economies have increased significantly in the post war period. This level of economic connectedness implies a system of exchange where countries must be dependent upon others for the provision of a broad array of commodities. This section operationalizes dependence by examining country imports as a percentage of GDP from 1960 to 1985 and looks at the percentage of GDP transferred to the import sector in the recessionary periods of 1972-75 and 1980-83. Table 23 traces the pattern of import dependence from 1960 to 1983 by constructing four year averages and averages import dependence figures for each country for 1961-70, 1971-80 and 1981-85.

The pattern of import dependence, not surprisingly, is similar to the trend in export concentration examined in the earlier section.

Trade as a percentage of GDP is most pronounced in the European societies where imports amount to well over a quarter of French,

Austrian and German economic activity. Japan and the Anglo-American societies are less trade dependent and in none of these countries do imports amount to a fifth of GDP. Table 23

Import Dependence 1960-85 (GDP Percent)

Business State Market Corporatist Corporatist Statisi

U.S. Aust. Ger. Japan Aus. Fra.

1960-63 4.3 12.8 17.4 10.1 26.7 13.0

1964-67 4.9 12.9 18.8 9.6 29.3 13.8

1968-71 5.6 16.2 20.2 9.1 32.5 16.2

1972-75 7.5 14.0 22.7 12.3 35.5 20.8

1976-79 8.9 16.3 25.0 12.7 40.2 22.0

1980-83 9.2 18.2 28.8 12.5 41.4 25.6

1961-70 4.7 13.7 18.5 9.7 28.8 13.8

1971-80 7.7 14.8 23.1 11.6 37.1 20.5

1981-85 9.6 19.2 29.5 11.8 43.0 25.7

Source: European Economy, No. 33 (July 1987) Table 33, p. 141. 150

These similarities end, however, when one compares the level of

import dependence with the level of export concentration in each

country. Significant negative imbalances occur in both statist and

market oriented models. In state corporatist Austria, for example,

imports are considerably higher than exports throughout 1960-85 and

in statist France imports as a percentage of GDP are higher than

exports from the middle 1970's. The market societies similarly

suffered negative imbalances with Australia and the United States

having severe problems in stabilizing import levels relative to

export capacity.

The business corporatist societies of West Germany and Japan have

been considerably more successful in stabilizing imports relative to

exports. Japan, in particular, was successful in limiting import

dependence with levels of around 12 percent attained from the middle

1970's to the 1980's. Table 24 examines country GDP import changes

during the major recessionary cycles of 1972-75 and 1980-83 by

comparing them to GDP import change in the non recessionary periods

of 1968-71 and 1976-79. Data along this dimension is useful in the

sense that it indicates the responsiveness of imports to exogenous

shocks in the global economy and the capacity of policy styles of

deal with import fluctuations. Under this context, substantial

increases of imports as a percentage of GDP denote some degree of policy ineffectiveness in managing import levels.

Comparing import behavior in the two recessions we find that

integrate European countries experienced problems in containing

import growth as a percentage of GDP. The 1982-85 period presented 151

Table 24

GDP Import Dependence (1972-75, 1980-83)

GDP Percent Change From Previous Period

1972/75/1968-71 1980-83/1976-79

United States 1.9 0.3

Australia -2.2 1.2

Germany 2.5 3.8

Japan 3.2 -0.2

Austria 3.0 1.2

France 4.6 3.6

special problems for energy dependent countries and accounts for a good deal of Japanese GDP import growth. Indeed, the only country to experience a decline in GDP imports was natural resource rich

Australia. The incapacity of integrated economies to curb import growth is reinforced by the 1980-83 data which indicate continued

German, French and Austrian GDP import dependence. Alternatively, the Japanese reversed GDP imports by 0.2 and the Anglo-American countries experienced modest increases in this period.

The data on import growth during recessionary periods illustrate the difficulty highly integrated economies have in containing import growth. This is a particular problem for state guided economies like

Austria and France that put a premium on controlling domestic economic activity. In effect, opening up the economy to global trade compromises ambitious state plans and controls by removing more economic activity from the domestic to the international sphere. 152

While- levels of import dependence are important, the critical

issue is the capacity of a nation to balance its exports and imports.

In general, we need to examine the historical record of current

amount management and compare the degree to which nations have either

maximized trade surpluses or minimized trade deficits as a percentage

of GDP. The next section examine current account management from

1960 to 1985.

4. GDP Surplus/Deficit on Current Transactions 1960-85

The industrial policy and competitiveness debate has primarily

focused on the ability of a nation to manage its current account

surpluses or alternatively the capacity to reduce trade deficits are

often cited as major indices of successful industrial policy

performance. Indeed, competitiveness has almost been exclusively

defined in terms of trade relationships. Table 25 traces the

evolution of competitive performance by averaging country GDP

surplus/deficit on current transactions for four year periods from

1960-85 and averages competitive performance for 1961-70, 1971-80 and

1980-85.

The nucleus of the industrial policy debate has been heighted by

perceived trade imbalances between the United States, Germany and

Japan in the 1980's. In reality imbalances between these countries begin the late 1970's and accelerated in the 1980's with trade

deficits as a percentage of U.S. GDP growing to a 1.2 average in

1981-85. Indeed, the current account GDP position of the United

States has steadily declined from +0,6 (1961-70) to +0.2 (1971-80) to Table 25

GDP Surplus/Deficit on Current Account 1960-85

Business State Market Corporatist Corporatist Statist

U.S. Aust. Ger. Japan Aus. Fra.

1960-63 0.7 0.9 0.7 -0.7 -0.5 1.0

1964-67 0.7 -0.5 0.2 0.4 -0.6 0.1

1968-71 0.2 -3.2 1.2 1.4 -0.3 -0.2

1972-75 0.6 -0.7 1.6 0.2 -0.3 -0.5

1976-79 -0.3 -2.8 0.9 1.3 -2.0 -0.4

1980-83 -0.3 -4.1 -0.7 0.5 -0.7 -1.8

1961-70 0.6 -0.8 0.7 0.2 -0.4 0.2

1971-80 0.2 -1.6 1.0 0.6 -1.4 -0.4

1981-85 -1.2 -4.6 0.8 1.9 -0.9 -1.5

Source: European Economy, No. 33 (July 1987) Table 34, p. 141. 154

-1.2 (1981-85) and are understated by trends since 1985 that indicate even larger GDP deficits. Alternatively, the GDP current account positions of business corporatist Japan and Germany have remained steady or improved during this period with Japan's GDP trade surplus

increasing from 0.2 (1961-70) to 0.6 (1971-80) to almost 2.0 during the middle 1980's. German trade performance has similarly been impressive with GDP trade surpluses averaging close to on percent during 1960-85.

These trade disparities are particularly interesting given the similar commodity organization of German, Japanese and American economies; all three have close to a 60 percent share of value added concentrated in the fabricated metal and chemical industries. Given these similarities one would expect trade equilibrium between these countries. Instead, trade disparities have grown and policy seems to have played a role in producing different trade outcomes. This conclusion is reinforced by high levels of gross fixed investment in business corporatist Germany and Japan and the relatively lower levels found in the United States. Thus, German and Japanese corporatism has been able to guide industry performance in directions that market oriented America has been unable.

While the trade imbalance between U.S. and its major competitors are significant the GDP current account deficits encountered by

Austria, France and Australia are even more significant. These nations have experienced progressively worse current account problems with GDP deficits reaching 4.6% in Australia, 1.5% in France and 0.9% in Austria in the 1980's. The patterns of current account imbalances 155 of these three nations comport with the expectations derived from economic theory in that the structural composition of these economies

(e.g., the high value added shares of textiles, printing and basic industries) lead to trade disadvantages relative to countries that specialize in the more sophisticated fabricated metals and chemical industries.

Economic theory, however, does not account for the differences in the size of GDP deficits between these countries. State models like

Austria and France seem to have done a better job at containing trade

GDP deficits than has market Australia. Despite the structural similarities of these three countries, the Australian GDP trade deficit has been larger through out 1960-85 and its current account imbalances during the 1980's were three times the Austrian and French deficits. This is not suggesting that state guided economies have done a particularly good job in the current account management area;, the imbalances accumulated by France and Austria indicate some serious structural problems for these economies and by implication may suggest a fundamental incompatibility between a strong state sector and an open economy. What is suggested is that state planning may have mitigated the damage created by an industry structure not well adapted to the pressures of a global economy.

Thus, if Australia is taken as a reference point for judging comparative policy performance than the French and Austrian state sectors have not performed as weakly as the trade data indicate.

The capacity of industry policy to overcome structural defects and trade dependence is a critical evaluation question. Indeed, it may 156 be possible for nations that experience sustained GDP deficits to

cushion the impact of these trends on domestic living standards

through wage supports and firm subsidies. Alternatively, it is also

conceivable that long-term GDP surpluses may not be translated into higher living standards. The final data indicator section examines the capacity of industry policies to enhance employee purchasing power in the economy by either containing adverse trade conditions or by maximizing the benefits of GDP trade surpluses.

5. Employee Compensation Rates: 1961-84

While industry policy success has centered primarily on current account management, the litmus test for evaluating success or failure should be whether trade gains can be ultimately translated into increased wealth creation and wage increases. The policy perspectives examined in the dissertation are divided on the wealth created capacities of increased economic integration. The market liberal and business corporatist perspectives maintain that expanding trade is vital for wealth creation. They differ, however, on the best means to effectuate economic exchange; liberals prefer expanding trade by eliminating barriers while corporatist prefer to manage trade by selectively protecting and promoting industries. State corporatist and statist philosophies, alternatively, contend that domestic autonomy and wealth can suffer because of increased trade links and as such international economic exchange needs to be subject to strict political regulation. 157

To be meaningful trade competition policies should have some

relationship with enhanced wealth creation and domestic purchasing

power. Table 25 averages annual increases in real compensation per

employee for each country from 1961-84. The table's data are

adjusted for inflation and traces the evolution of national

compensation averages per employee for four year periods.

The purchasing power figures in Table 26 indicate considerable

variation in the capacity of industry policies to translate trade

gains into enhanced wealth creation. The French and Austrian state

guided economies seem to have been successful in minimizing trade

losses by maintaining increases in real compensation per employee.

Indeed, these countries have not out performed countries that have

superior trade performances; through 1961-84 French increase were doubled those of the United States and from 1969 Austria has

outperformed Germany on this indicator. Trade performance, in effect, does not automatically translate into wage losses or gains.

Instead, industry policy management seems to have exerted effects

that allow high deficit countries to out perform even high surplus countries like West Germany.

The effect of policy in maximizing trade gains or minimizing current account losses is less pronounced in the market and business corporatist models. The U.S. economy shows the expected relationship between declining trade competitiveness and reduced compensation per employee; high GDP deficits accumulated in the 1970's and 1980's coincide with marginal compensation increases. Japan, moreover, confirms the expected relationship of high GDP surpluses leading to 158

high compensation. Excluding the Austrian 1977-80 figures, Japanese

compensation per employee is highest of any country from 1961-84.

The expected relationships, however, do not hold for Australia and

West Germany. Despite having the worst current account management

Table 26

Real Compensation per Employee, Deflator GDP

Total Economy Average Increases Per Period

U.S. Aust. Ger. Japan Aus. Fra.

1961-64 2.5 3.2 4.5 7.8 4.4 5.7

1965-68 1.6 2.5 4.0 6.0 4.6 4.2

1969-72 1.9 2.2 5.1 9.0 5.2 4.5

1983-76 0.3 1.9 3.7 5.7 4.3 4.7

1977-80 0.4 1.2 1.9 2.8 3.9 2.6

1981-84 0.5 0.8 0.7 2.8 2.6 1.2

Source: European Economy, No. 33 (July 1987), Table 23B, p.

record of the six countries, Australian compensation approximated

West German increases during the late 1970's and early 1980's.

Indeed, the West German case contradicts the expected relationship in that high trade deficits coincide with relatively low compensation increases. These divergent results call into question the relationship between trade and enhanced wealth creation and illuminate the capacity of policies to capture trade gains or minimize trade losses. 159

The performance capabilities of the six countries, moreover, does not seem to be well related to levels of economic connectedness. The

United States, Australia and Japan are relatively isolated economies, but the latter has outperformed the others on every indicator.

Austria, France and Germany are open economies with divergent performance results on different indicators. More directly, isolated economies like Japan have outperformed open economies like Austria and France. Industry policies have exerted significant effects on performance in the gross fixed investment, trade and purchasing power areas. The remaining section summarizes the relationship between different industrial policy approaches and economic outcomes.

D. Competitiveness and Industrial Policy Performance

The policies examined in the evaluation section have exerted substantial effects on competitive behavior. State dominated systems, like France and Austria, have been effective in ensuring relatively high rates of investment and purchasing power in their economies. Success on these indicators, however, has not spilled over to the trade area of state oriented economies. Austria and

France have poor records in terms of current account management and trade imbalances have gotten progressively worse.

The experience of the liberal market industry policy group is similarly complex with both Australia and the United States having inferior records on the gross fixed investment and purchasing power indicators. The relative performance of liberal market industry policy in these ares is particularly weak when compared to state 160

corporatist Austria and business corporatist Japan. The United

States does, however, have a superior record to state models in terms

of current account management. While weaker than Japan and Germany,

the American trade performance has consistently outperformed

industrial economies where the public sector is the predominant

influence.

Among the broad range of indicators, business corporatist Japan

and West Germany have been the most successful in maintain a positive

current account management record. The business corporatist management style has not experienced the esharp acceleration of trade

difficulties that have plagued both market and state development models in the 1970's and 1980's. Instead, Germany and Japan have maintained large trade surpluses (measured as a percent of GNP)

throughout the historical period examined and have adjusted their

export sectors well to global competition. The record of business corporatist states in respect to investment and purchasing power

indicators is more ambiguous with Japan performing well in this area and West Germany experiencing performance results that are not considerably different from other industry policy styles.

The fact that different policy categories perform differently along indicators and that performance levels are relatively consistent across time suggests that the value added composition of industry may not be the dominant factor in determining competitive performance. The value added composition of U.S., German and

Japanese industry, for example, reflect striking similarities, yet their competitive behavior is radically different with business 161

corporatist systems out performing market systems on practically

every indicator. Similarly, Austrian, French and Australian industry

performance departs considerably from their structural organization

with state dominated models performing better on investment and

purchasing power indicators and market oriented Australia exhibiting

significantly weaker current account management capabilities.

% Most significantly, the level of a country's economic

connectedness to the international trading system doesn't seem to

exert much effect on competitive behavior. West Germany, Austria and

France are highly integrated into the international economy, yet the

former does especially well on current account management while the

latter two lag badly on trade measures. These results are reinforced by the Japanese, American and Australian trade experiences in than

these three economies are weakly integrated into the global system and, despite their common insularity, perform differently along a host of indicators.

Finding that structurally similar industrial economies perform differently along some key measures presents some significant problems for economic theorists. In particular, American investment, purchasing power and current account management failures cannot be explained on the basis of a unique value added composition and

Japanese success along these measures cannot be attributed either to intense integration into the global economy or a particular industrial structure emphasis. Instead, how trade and industry organization is managed or the types of policies a society uses to direct export capacity seem to be more relevant in explaining 162 variations in competitive performance. The evidence in the

evaluation section suggest that policy and competitive performance

are strongly related. What follows is a summary of performance

results associated with each industry policy style and the extent to which they have actualized their prime operating values.

Liberal Market Systems

The United States and Australia emphasize a doctrine of open exchange, yet paradoxically their economies are the most insulated of the six nations examined. The performance level of both countries are similar in respect to capital accumulation and employee purchasing power with both lagging behind statist and corporatist models. The slowdown in employee compensation rates is particularly pronounced in the U.S. and Anglo-American gross fixed investment as percentage of GDP has lagged behind Germany, France, Japan, and

Austria. As measured by surplus or deficit as a percentage of GDP, trade performance of the U.S. is inferior to Germany and Japan but superior to state oriented France and Austria. Thus, American's market direction of trade seems to have out performed statist economies in the current account management area.

If the U.S. and Australia are to be taken as representative cases, market guided industry policy has some serious disadvantages. The failure of both countries to raise gross fixed investment or maintain employee compensation rates indicate the inability of exchange mechanisms to channel resources in ways that maximize investment capacity and wage earnings. Given the lack of economic connectedness 163 of Australia and the U.S. to the global system, market oriented industrial policy has not actualized its prime value of open exchange. The current account records of liberal market regimes, moreover, indicate a gradual deterioration starting from the 1970's and culminating in both Australia and the United States reaching debtor status in the 1980's. In effect, efficient outcomes have not been achieved in sustaining trade surpluses, expanding investment or maintaining wage gains.

Business Corporatist Systems

German and Japanese corporatism have been successful in adjusting their economies to maximize competitiveness. While both have successful records, Germany and Japan have taken different paths in integrating their economies into the international marketplace. The

Germans have opened up their economy to global trade and have acclimated their export sector to integrative pressures.

Alternatively, the Japanese have been slower in opening up their economy and have concentrated on stabilizing levels of economic connectedness in order to maximize trade surpluses. The economic differences between these countries may be attributable to the differences in integrative levels and may partially explain why

Germany has lagged behind Japan on some key measures.

The business-corporatist policy of regulated exchange has on average worked better along the competitiveness indicators than state and market oriented trade models. The Japanese case, in particular, is an exemplar of superior performance on every indicator and, 164 excluding the purchasing power data, the German record Is quite respectable. Business corporatist Industrial policy seems to have operated according to its adjustment orientation; relative to other models GDP grossed fixed investment is higher and GDP current account surpluses are larger. The mix of planning, bargaining and markets employed under this style seems to have effectively channeled resources to maximize competitive ability.

State Corporatist Systems

In terms of openness to global trade, the Austrian state corporatist economy is at fundamental odds with its doctrine of limited exchange. Austria as measured by trade GNP is one of the most integrated economy in the West and most of its policies have attempted to cushion the domestic economy against adverse trade flows. State corporatist Austria has a high percentage of GNP devoted to gross fixed investment and has maintained high rates of purchasing power in the domestic economy.

Success on these indicators, however, has not translated into a successful current account management record. Among the countries examined, Austria has one of the highest GDP trade deficits during the period. The state corporatist doctrine of labor equity, which puts an emphasis on protecting employment in nationalized industry and raising wage levels, has had severe repercussions for Austria's current account experience. Austrian trade problems, moreover, have worsened since the middle 1970's. The ability of state corporatist industry policy to maintain domestic purchasing power and labor 165 equity in an economic climate characterized by mounting current account difficulties may reach a critical point. In effect, wage and employment gains may have to be limited, operating subsidies to nationalized enterprises may need to be cut, and the export sector reinvigorated to correct for trade imbalances. These policy changes, however, entail a reconstruction of ideological and cultural processes and thus the productive potential of the Austrian economy may be dependent on the ability of the state and labor to negotiate accords that enhance export capacity within a social democratic corporatist context.

Statist Systems

Industrial development and competitive performance in statist

France parallels the Austrian experience. Though not as successful as Austria, France has similarly out performed market societies in the areas of gross fixed investment and employee compensation rates.

However, compared to West Germany its comparative trade performance is not particularly good. The French trade surplus as a percentage of GDP peaked at 1.0 during the early 1960's only to deteriorate to

GDP trade deficit of 1.5 in the 1981-85 period. France is behind

Australia and Austria in having the worst current account management record of the six countries.

The French policy of industry development through planned exchange is partially realized in the capital accumulation and purchasing power data. Unlike the Austrian experience, French performance In these areas is not strong enough to offset severe 166

trade Imbalances experienced in the 1970's and 1980's. French policy

has not responded well to integrate pressures and it is apparent that

change in statist industry policy directions may be needed. In sum,

statist industrial policy has not actualized its prime value of

growth in terms of current account management and its performance

levels have bean below the traditionally weak American economy.

The industrial policy styles examined in this section can be

characterized on the basis of their connectedness to the

international economy and their effect on gross fixed investment,

current account management and employee compensation issues. Chart 3

'summarizes these effects in terms of average performance of each

country from 1961-85 along each dimension.

Conclusion

This chapter has evaluated the effect of four industrial policy

styles on gross fixed investment trade balances and

compensation rates. The central conclusion of the chapter is that

the value-added composition of national industry structures is not a major factor in explaining competitive behavior in that countries

that have similar product market organizations performed differently on a systematic basis from 1960-85. Industrial policies, alternatively, were found to have significant effects on competitive behavior: state models did well in maintaining high levels of gross fixed investment and employee compensation rates but failed to stabilize current account balances; market models performed badly in spurring investment, purchasingpower and trade capacity; and Chart 3

Policy Performance 1961-85

Gross Fixed Surplus/ Policy Exports Investment Deficit Compensation (GDP %) (GDP %) (GDP %) ( % +)

LIB MKT

U.S. 7.1 18.2 -0.4 1.2

Australia 13.5 32.2 -2.3 1.9

BUS CORP

Germany 24.3 22.5 +0.8 3.3

Japan 12.2 31.3 +0.9 5.6

ST CORP

Austria 35.5 26.3 -0.9 4.1

STATIST

France 19.4 21.9 -0.5 3.8 168

business corporatist models did well along the Investment, trade and

compensation to exert effects that transcend a country's product

market structure and level of economic integration.

The mix of state and market influences in trade and

competitiveness policies seem to play an important role in

maximizing gains from international exchange. Contrary to economic

theory, the level of national openness to global exchange is not a

vital factor in determining competitive behavior. Instead, the

evidence in this chapter indicates that competitive behavior can be

positively adjusted through policy changes in both open or closed

economies. Thus, the traditional liberal market view that

international economic exchange is a vital precondition for wealth

creation does not hold for the six countries examined from 1960-85.

This theme along with a further exploration of policy style performance will be taken up in the next chapter. Chapter VI

Adjustment, Competitiveness and Industry Policy

Performance: Some Conclusions

Introduction

The central conclusion of the two previous chapters is that

industry policies have effects on manufacturing that cannot be

attributable to economic factors (e.g., structural organization,

trade integration and value added production values). Specifically,

gradations of state and private power in the industrial economy have

produced differences in the level of unemployment, labor dispute,

industry production, capital formation and trade between countries.

Our study has concentrated on the connection between policy and the

level of industry structure adjustment and competitiveness from 1960-

85; adjustment was defined in terms of a country's structural

response to exogenous shock (global recessions and competition) and

competitiveness was based on a nation's capacity to coordinate

positive investment and trade balances over time.

This chapter reviews and summarizes evidence of policy impact

in the adjustment and competitiveness areas on three levels. First,

the general patterns of national industry performance are

characterized and major differences between countries are

discussed. Second, the limitations of each policy style are presented and critiqued on their ability to adapt to the global

169 170 marketplace. Finally, the methodological significance of the dissertation's results are presented within the context of economic versus political explanations of industry performance.

A. Industry Adjustment and Competitiveness 1960-85

Lindblom in Politics and Markets (1977) distinguishes between comprehensive/synoptic and incremental/strategic planning. In an ideal world, industry change would be synoptically coordinated with government, labor and business adjusting production, employment, investment and trade in ways that minimize the amount of domestic economic turmoil and maximize a nation's productive potential. Japan is often cited as a model of synoptic adjustment (Johnson, 1982).

While the evidence in the adjustment and competitiveness chapters point to strong Japanese economic performance among a range of indicators, there are underlying weaknesses in the Japanese economy.

The Japanese record in the labor dispute area, in particular, highlights some of the difficulties of coordinating an economy in a business-corporatist direction. In the 1960's Japan had the worst record in the labor relations area with more man days lost per 1000 employees than any other country. Indeed, the record was considerably worse than the turbulent U.S. and Australian 1960's labor dispute indicators. While Japan was able to reverse the number man days lost in the 1970's and 1980's, the adjustment progress was eased by the lack of integrative pressures experienced by the

Japanese economy. Indeed, Japan's degree of trade integration is considerably lower than West Germany and Austria; both of which have 171

been able to out perform Japan In the number of man day's lost per

1000 employees.

The German and Japanese economies, however, are remarkably

similar in the trade and investment areas with both managing

substantial GDP trade surpluses and GDP gross fixed investment

during 1960-85. In these cases, business-corporatism seems to have

performed well in linking capital formation with positive trade

balances. While the German and Japanese economies exhibit striking

similarities (trade performance, industry organization, business-

corporatist policies and institutions), adjustment in West Germany

has been considerably more difficult. Unemployment, purchasing power

and industry production rates are substantially worse in Germany than

they are in Japan.

The German economy is an example of a process in which imperfect

adjustment has lead to competitive outcomes. In particular, the

German labor market has exhibited signs of severe decline; during

1980-85 unemployment averaged a post-war high of 7.7 percent and

compensation per employee averaged an anemic 0.7 percent. The

structural weakness of the German labor market, however, has not

impaired the dynamism of the trade sector of the economy. Indeed,

Germany's 1980-85 GDP trade surplus averaged 1.7 percent. German,

adjustment, in effect, has not been as smooth as Japan's where

increasing GDP trade surpluses have not come at the expense of high unemployment and low purchasing power.

The state-corporatist Austrian economic record from 1960-85,

similarly, indicates that there does not have to be congruence 172

between successful adjustment and competitiveness. During this

period, the Austrian economy performed well along adjustment

indicators: unemployment averaged 2.8 percent, industry production

rates averaged 4.4 percent, and man days lost per 1000 employees were

the lowest among the six countries. This pattern of successful

adaptation to economic adversity has not been reflected in superior

Austrian trade performance. Austria's GDP trade deficit, for

example, is second only to Australia and during the 1970's averaged

close to 2 percent. Thus, if Germany represents a co-existence of

incomplete adjustment and successful competitiveness then Austria

represents the counter example of successful adjustment co-inciding

with uncompetitive behavior.

Mixed levels of adjustment and competitiveness were found in

statist France; strong industrial production co-exists with high

unemployment and above average GDP gross fixed investment co-exists with high GDP trade deficits. This pattern of uneven development is most pronounced in the 1980's where unemployment averaged 10 percent,

trade GDP deficits exceeded one percent and at the same time purchasing power and industrial production were above Germany's.

French development, in effect, reflects systemic imbalances that have accelerated since the 1970's.

More conventional patterns of adjustment and competitiveness were found in the Anglo-American countries. The United States, for example, had the highest unemployment rate (6.0%), the lowest GDP capital formation (18.2%), and a significant GDP trade deficit (0.4%) for 1960-85 period. These trends have gotten considerably worse in 173

1980-85 where unemployment averaged 8.1 percent and compensation per

employee grew at only 0.1%. The American economy, in effect,

reflects a structural asymmetry with the global economic order that

necessitates a re-ordering of the trade sector to insure future

current account surpluses.

With a GDP trade deficit of 2.3 percent for 1960-85, Australia

represents an even worse form of structural adaptation to the

international economy. The structural imbalances, moreover, have not

been limited to the trade sector of the Australian economy and have

spilled over to the labor market. The Australian 1980-85

unemployment rate averaged 7.3 percent and labor turbulence (measured

in terms of days lost per 1000 days) has been consistently worse than

any other country. Indeed, with averages of 743 days lost during

1972-75 and 622 days lost during 1980-83, Australian labor turmoil

during recessionary periods has been three times higher than American

averages and twenty times higher than German, Austrian and Japanese

averages.

B. Industrial Policy Style Limitations

Variances in the process of adjustment can be attributed to the

differences in economic organization, political institutions and

industrial policy styles. The economic effects of trade integration

are often filtered, contained and exacerbated by policy mechanism and

institutions. Our review of national adjustment and competitiveness differences indicated that no particular industrial policy has pioneered a perfect adjustment process and associated competitive 174

performance. The four industrial policy approaches examined have

particular strengths and weaknesses. Accordingly, the next four sub

sections are devoted to assessing the major problems and

contradictions of each policy approach.

1. Liberal Market Industrial Policy

As indicated by the adjustment and competitiveness data, the

efficiency oriented values of market liberal industrial policy have not been maximized. Relative to other countries, labor market adjustment in the United States and Australia has been particularly weak. The Achilles heel in the liberal market industrial approach seems to be the labor sector of the economy where unemployment and labor disputes have been higher and compensation per employee has been lower than in countries where the state and labor play more predominant roles in the economy. Indeed, the experience of the market approach is one characterized by a cycle of high unemployment, low compensation and labor turmoil.

In comparison to other development styles, market industry policies have failed to cope with the wage and employment repercussions of de-industrialization. The lack of appropriate wage supports and the absence of effective bargaining institutions between the sate, labor and business sectors have exacerbated the most pernicious aspects of labor market disruption. The presence of such policies and institutions in state and corporatist systems, conversely, have abated the wage and employment effects of economic restructuring and it is notable that outside of the Anglo-American 175 experience one does not see the substantial association between high unemployment, low purchasing power and labor turmoil.

The market approach has also been notably weak in the trade area with economic integration lower and GDP trade deficits higher than most other policy styles. Despite a policy agenda based on free trade, GDP export concentration is below 15 percent in Australia and the United States. While overall trade integration is low, international economic exchange has been growing in both countries in the 1970's and 1980's. The growth of Anglo-American trade has been characterized by substantial U.S. and Australian current account deficits.

The emergence of both Australia and the United States as debtor nations in the 1980's has put additional strains on their export sectors to correct for trade imbalances. Given that the 1980-85 GDP trade deficit averaged 1.2 percent in America and 4.8 percent in

Australia, the magnitude of the problem necessitates that more resources by channeled into investment to stimulate export activity.

The capacity of Anglo-American market industry policy to direct investment activity has not been particularly good. Gross fixed investment in the United States, for example, has historically been the lowest of the six countries and Australian capital formation has declined significantly from the post-war highs of the I960's. Both countries, in effect, must find alternative methods to expand industry investment in order to reverse their debtor status.

The reversal of wage, employment, and investment decline in

Anglo-American societies is complicated by the lack of state 176

direction of investment and the absence of wage supports and firm

subsidies. The burden of reconstruction, in effect, falls on market

forces that take substantial time to reach equilibrium and by

implication suggest that labor, because of its lack of

representation in production and employment decisions, will be

disproportionately impacted in the adjustment process. Thus, barring greater state direction of investment and the incorporation

of labor into the economic decision-making process, adjustment and

competitive behavior will be difficult to achieve in Anglo-American

societies.

2. Business Corporatist Industry Policy

Since business-corporatist policies in Japan and West Germany operate in different trade contexts, evaluation of comparable policy impacts is complicated. Nevertheless, performance levels are strikingly similar in the current account management area. The average 1960-85 GDP trade surpluses were 0.8 percent in Germany and

0.9 percent in Japan. Gains have been most impressive in the 1980's with GDP trade surpluses averaging over one percent in both countries. The good current account management records of Germany and Japan, however, should not mask some of structural imbalances and inequities that exist in business-corporatist systems.

The most significant problem in business-corporatist societies is the inability of labor to maximize its share of wealth during periods of successful adjustment. The equity implications of the business- corporatist strategy are striking in the West German case where labor 177

peace has not been compensated with high employment and purchasing

power levels. Despite a 1980-83 average of only 5 days lost per 1000

workers, the German unemployment averaged 7.3 percent and

compensation per employee rose a marginal average of 0.3 percent in

this period. The co-existence of high unemployment, low purchasing

power and substantial GDP trade surpluses indicate that labor has not

gained proportionately under business-corporatist policies.

The imbalance in interest representation and the inegalitarian

consequences of state-business domination of the policy process

cannot continue indefinitely. Similarly, the reluctance of German business and government elites to stimulate economic activity may

portend a round of labor disturbance as unions demand their share of

economic dividends.

The failure of German business corporatism to adjust the labor

sector of its economy to global competition poses implications for

Japan. The adjustment of the Japanese economy has been facilitated by a relatively protected economy and the general absence of severe

integrative pressures. The opening of the Japanese economy in the

1980's may well force it into a similar situation where labor is forced to share a disproportionate burden in the adjustment process.

The continued strength of the business corporatist model may be preconditioned upon the ability of state-business elites to negotiate wage moderation and channel resources into investment.

The inability of the West German business-corporatist model to compensate wage moderation with increased employment illustrates the fragile basis upon which business-corporatism rests. Thus, without 178 an accommodation with labor, business-corporatism may suffer significant set backs in the future.

3. State Corporatist Industrial Policy

The Austrian state-corporatism has performed particularly well in the industrial investment, employment and purchasing power indicators during the 1960-85 period. These gains, moreover, have been relatively enduring: unemployment has averaged around 3 percent, purchasing power grew at a two percent rate during the 1980's and average GDP gross fixed investment for 1960-85 is the second highest of the six nations examined. In effect, Austria is behind only Japan in having the most successful adjustment record.

The Austrian economy's success in these areas has not been matched with commensurate trade performance. Moreover, Austrian employment, investment and purchasing power gains may be eroded if the substantial GDP trade deficits of the 1970's and 1980's are not reversed. The reconstruction of the Austrian economy is made all the more urgent given its level of economic integration (exports account for more than a third of GDP) and evidence that trade deficits are having adverse employment and investment effects. Indeed, unemployment in the 1980's began to reach post 1950 highs and GDP gross fixed investment fell.

The major dilemma for Austrian state-corporatist industrial policy is that its wage and employment goals may have to be reconstructed to cut production costs. In effect, many of the egalitarian tenets of social democratic corporatism may have to be 179

contained; the nationalized sector may have to subject to more cost

constraints (e.g., shrinking its workforce and scaling back wage

increases) and labor may have to exhibit a greater willingness to

adjust to a less secure economic environment.

Given the representation of strong, centralized unions in the

Austrian industrial policy process, a re-direction of economic

activity toward free markets and price efficiency seems unlikely.

The future success of the Austrian economic model may be contingent

upon state-labor agreements to modernize the nationalized sector by

allowing workers to invest pension funds in national holding

companies. The infusion of worker controlled capital could allow the

export sector to turn around Austria's precarious current account position without experiencing substantial employment and wage

reductions. Policy change in Austria, irrespective of its

ideological orientation, seems unavoidable.

4. Statistic Industrial Policy

With a 10 percent unemployment rate and a two percent GDP trade deficit, statist France has encountered a host of serious employment and trade problems in the 1980's. The process of French economic deterioration began in earnest in the early 1970's and accelerated during the 1980's. The French government's high growth policy agenda failed to materialize throughout most of the last two decades.

Indeed, average French capacity utilization rates have been lower than German and U.S. rates for most of 1960-85 and GDP gross fixed investment have lagged behind Germany, Japan and Austria. 180

The nationalized sector, which is the fulcrum of the French

economy, has not performed according to planners expectations.

Therefore, the state industry sector may have to be streamlined

through reduced industrial subsidies, greater market competition and

partial privatization. The redirecting French industry in this

fashion compromises some of the tenets of statism and will be

extremely difficult to administer in a planning environment

dominated by close interaction between state ministries and

nationalized enterprises.

The duality of French economic performance since the 1960's

(i.e., the concurrence of strong industry production, purchasing power and declining trade competitiveness) can be attributed to the

internal contradictions of statist industrial policy. Statism in

France endorses both autarky and economic integration; autarkic in

that the nationalized sector is protected and integrationist in that export capacity is stressed. The inherent problem with this strategy

is that export growth is preconditioned upon an inflow of goods

(technology, capital, and production materials) to stimulate production. Since few countries are completely autonomous, factors of production are imported and channeled into export industries. The quandary for French statists is how to determine the appropriate balance between import reliance and domestic control of production; greater trade integration compromises national economic autonomy while import controls restrict materials needed to expand export activity. 181

These contradictions have created a mixed development pattern in

which rapid industry growth coincides with large GDP trade deficits,

high purchasing power co-exists with high unemployment and above

average GDP investment simultaneously interacts with diminished

export capacity. Since a third of the French economy is tied to

trade, it is difficult to imagine that French industry direction will

emphasize autarky. Instead, French industrial production may be re­

directed toward greater market competition and economic

liberalization. The trends in the French political-economy since the

1980's seem to emphasize a market oriented direction of state

industry.

The restructuring of the French economy will be facilitated by the

lack of a powerful, centralized union movement. Labor in France has

not been particularly active in obstructing industrial adjustment and

days lost per 1000 workers has been lower than Japan, America and

Australia. Thus, French statist industry policy-makers have more

freedom to institute labor market change than Austria and Germany.

The interplay of state-market forces has produced different

results in countries; the lack of state direction of investment has

contributed to poor adjustment in America and Australia while too

much state direction has impaired French and Austrian

competitiveness. The gradation of public and private power in

industrial economies have changed frequently in the post-war period.

The policy direction of industrial economies have most recently

emphasized market control, private initiative and denationalization.

Given the Anglo-American experience, the efficacy of a market re­ 182 direction is questionable. Yet the acceptance of market approaches in traditionally collectivist societies epitomizes the saliency of liberal philosophy and its capacity to dominate the industrial policy debate.

C. Industrial Structure Performance: Economic and Political Explanations

Economic liberalism has been on the ascendent as a form of policy analysis and prescription (Lindberg, 1982; Gruchy, 1984). There is, moreover, a lack of coherent apparition to liberal analysis in the

1980's: Marxism and social democratic corporatism have been discredited or deemed unworkable in a technologically dynamic global economy. The revival of economic liberalism is one of the most notable ideological trends of the last twenty years.

According to this perspective, economic atrophy is causes.by state intervention. The most comprehensive intervention comes in the form of industrial policy as the government targets firms for support and phases out weak, uncompetitive industries. Liberals argue that supplanting market direction of industry through state planning and national bargaining produces more harm than good (Olsen, 1982;

Hudson, 1985; Blais, 1986).

The basis of the liberal argument is that state involvement in production and investment decisions distort factor prices and impeded efficient allocation of resources: industry subsidies stimulate over production and full capacity, appropriate wage levels are repressed by income policies, credit control insure that capital is misallocated to politically favored producers, and technological 183

innovations are restricted by the lack of foreign competition in protected sectors. Olsen (1982) argues that industrial policy results in a concentration of power between bureaucratic elites that

impedes economic progress, restricts individual liberty and distorts

the operation of democratic systems.

Liberals argue that markets allocate economic resources efficiently because values are derived from variances in supply and demand. Markets, moreover, are characterized by an interactive process that result in a continual industrial evolution as producers seek to meet changes in demand by cutting costs and developing new products. Those producers that fail to adapt to economic change will eventually be supplanted by competitors capable of making newer, cheaper products. Nation-state success in the global market-place is thus preconditioned upon allowing markets to operate freely to reorient prices, wages, investment and production. The free market process allows nations to specialize in products that they can produce most effectively and as a consequence energizes economic growth and competitiveness. Accordingly, market oriented nations should outperform countries where the state sector is a dominant factor in the economy.

The liberal policy framework has had a powerful effect on shaping the perceptions and attitudes of contemporary Western political elites (Lindblom, 1984). Indeed, so dominant is the liberal doctrine in the 1980's that performance deviations (e.g., unemployment, inflation, and de-industrializations) are autonomatically attributed to state curtailment of markets and free exchange. The sanctity of 184 market outcomes Is perhaps best represented by Anglo-American and to

some extent European rejection of Keynesian demand management policies in favor of orthodox free enterprise monetarism.

The remarkable aspect of- the resurgence of free market liberalism

is that it has generally been unaccompanied by evidence that state

involvement has had deleterious effects on industry performance

(Lindberg, 1982; Gruchy, 1984). Instead, free market policy change has been based on a belief that exchange mechanisms will have curative effects. The evidence in the adjustment and competitiveness chapters of the dissertation does not comport with liberal diagnosis and prescription. Liberals believe that trade integration has a curractive effect in that domestic economic activity is forced to become more efficient (Bergsten, 1982). This belief, however, is not validated by the indicators used in the dissertation. The variation in performance levels between the highly integrated German economy and the relatively insulated Japanese economy indicate that closed systems can outperform open systems. Indeed, Japan's ability to stabilize trade integration is one of the key featuresthat have allowed it to maintain high employment, investment and GDP trade surpluses. The German economy, alternatively, has had difficulty containing adverse employment and purchasing power effects of trade integration.

Liberals further believe that trade success and national wealth are associated (Olsen, 1982). The performance of the Austrian and

German economies from 1960-85 contradict this claim; persistent

Austrian GDP trade deficits have not eroded investment, employment

l 185 and compensation gains while German GDP trade surpluses have not abated the erosion of employment and purchasing power. Indeed, the

Austrian economy has outperformed its German rival along every non­ trade indicator. Table 27 compares trade and non trade indicators between Austria and West Germany.

The connection between trade and economic success is further complicated by data on the industrial structures of the six countries. Liberal economic theory claims that high value added economies should outperform low value added economies. While this is true in the trade area, it does not apply to the non-trade indicators. Table 28 decomposes the six countries into high and low value added industrial structures and compares performance in the trade and non-trade areas.

The results in Table 28 point to an inconclusive relationship between industry organization and economic outcomes. The amount of value added to industry production and organization does not explain variation between countries on such critical economic indicators as

GDP investment, unemployment and days lost per 1000 workers. Despite a structural foundation composed of low value added steel, apparel and textiles, France and Austria outperformed the U.S. high value added industry structure on the non-trade indicators.

The major distinguishing factor between the United States,

Austria and France lies in the nature of state economic involvement.

Thus results indicate a positive association between the level of state intervention and beneficial economic outcomes in the non-trade Table 27

Austrian and West German Performance (1960-85)

Austria West Germany

GDP Surplus/Deficit -0.9% +0.8%

Unemployment Rate 2.8% 3.6%

GDP Gross Fixed Investment 26.3% 22.5%

Employee Compensation Rate 4.1% 3.3%

Table 28

Performance of High and Low Value Added Industry Structure

(1960-85)

Surplus/ Invest- Unemploy- Days Deficit ment ment Lost

High Value Added

United States -0.4 18.2 6.0 311

Germany +0.8 22.5 3.6 29

Japan +0.9 31.3 1.6 636

Low Value Added

Australia -2.3 23.2 4.3 615

Austria -0.9 26.3 2.8 3

France 0.5 21.9 4.4 184 187 area. State dominated models like France and Austria have had greater success than market oriented America in dictating positive

investment, employment and labor dispute outcomes. When comparing relative economic performance between the six countries, the liberal prescription for using markets to re-direct economic activity is badly contradicted by the evidence.

This is not to suggest that state involvement in the industrial economy is not without disadvantages. The trade area, in particular, points to an association between a substantial public sector presence and GDP trade deficits. Yet the magnitude of the trade problem does not suggest a reversal of government intervention in the industrial economy. What does emerge in a pattern of costs and benefits that result from state industrial activism; benefits in the investment, employment and labor dispute areas need to be weighed against the trade costs.

The patterns of policy performance between corporatist, state and market industry policies need to be further examined. In particular, more empirical research needs to be done in explaining the capacity of state models to deflect the economic effects of GDP trade deficits on investment, employment and purchasing power. The ineffectiveness of market industry policy in resolving such critical issues as unemployment and labor turbulence, similarly, need to be addressed.

Finally, the lack of congruence between market liberal diagnosis and empirical reality mandates further testing of economic theory and by implication necessitates more careful scrutiny of market based claims and prescription son the part of policy analysts and decision-makers. In general, the major findings and conclusions of the present study are three-fold. First, among the countries examined, policy is a significant factor in explaining different economic outcomes.

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