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Globalisation, Domestic Politics, and Welfare State

Retrenchment in Capitalist Democracies

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Globalisation, Domestic Politics, and Welfare State

Retrenchment in Capitalist Democracies
Duane Swank

Department of Political Science, Marquette University

E-mail: duane.swank@marquette.edu

Neoliberal reforms in social welfare policy have been common across the developed
capitalist democracies in the latter decades of the twentieth century. A central question
for political economists has been whether or not economic globalisation has played a
significant role in fostering these reforms in public social welfare provision. In the present
paper, I review the best recent work on globalisation and the democratic capitalist welfare
state. I also provide a synopsis of recent arguments about the domestic political sources
of contemporary trajectories of the welfare state. After brief surveys of welfare state
retrenchment and recent scholarship, I utilise newly available data to offer an analysis of
the impacts of globalisation and key features of domestic politics on 1981–2000 variations
in social welfare entitlements and decommodification.

Neoliberal reforms in social welfare policy have been common across the developed
capitalist democracies in the latter decades of the twentieth century (Castles, 2004; Huber
and Stephens, 2001; Swank, 2002). Governments have periodically reduced income
replacement rates, tightened eligibility rules and limited benefit indexation for core
social insurance programmes. They have also employed greater targeting of benefits and
encouraged the expansion of private insurance against labour market risks. Health and
other social service programmes have been subject to budget caps, user co-payments,
internal markets and other efficiency-oriented reforms. A central question for political
economists has been whether or not economic globalisation has played a significant role
in fostering these reforms in public social welfare provision.
In the present paper, I review the best recent work on globalisation and the democratic
capitalist welfare state. I also provide a synopsis of recent arguments about the domestic
political sources of contemporary trajectories of the welfare state. After brief surveys of
welfare state retrenchment and this recent scholarship, I utilise newly available data to
offer an analysis of the impacts of globalisation and key features of domestic politics on
1981–2000 variations in social welfare entitlements and decommodification.

We l f a re re t re n c h m e n t i n d e v e l o p e d c a p i t a l i s t d e m o c r a c i e s

Substantial disagreement exists over the degree to which national systems of social pro-
tection have been retrenched (e.g., Castles, 2004; Clayton and Pontusson, 1998; Green-
Pedersen, 2002; Pierson, 1994, 1996). Early expenditure-based studies of contemporary
welfare policy change reveal little in the way of post-1970s retrenchment of social pro-
tection in the advanced democracies (e.g., Pierson, 1996). Other studies that use data on
social service programmes and welfare state employment (e.g., Clayton and Pontusson,

183
Duane Swank

1998) and detailed surveys of programmatic change across time in large numbers
of developed democracies (e.g., Huber and Stephens, 2001; Swank, 2002) conclude
rollbacks of the welfare state have been more widespread than aggregate spending patterns
reveal.1 Recent availability of the ‘Comparative Welfare State Entitlements Data Set,
1960–2000’ (Allen and Scruggs, 2004), as well as published research from the ‘Social Citi-
zenship Rights Project’ (e.g., Korpi and Palme, 2003), make the systematic assessment of
the scope and depth of social welfare retrenchment much more tractable today than before.
I offer a succinct snapshot of 1981–2000 welfare state trajectories in Table 1. I
display changes in national net (after tax) income replacement rates for unemployment
compensation and pensions by category of welfare state regime (Esping-Andersen,
1990). Unemployment compensation may serve as a proxy for social protection for
current workers, while pension benefits form the core of social protection for dependent
populations outside the labour market. I also display trends in public social service
spending (i.e., for older people, disabled, families and workers); this area involves to
a large extent social protection for those who face ‘new social risks’, attendant to
post-industrial family and labour market structure (e.g., Armingeon, 2004). Finally, Table 1
displays changes in overall welfare state decommodification (e.g., Esping-Andersen, 1990;
Allen and Scruggs, 2004) from the early 1980s to the turn of the century.
As most scholars of the welfare state readily agree, there is no evidence of systematic
dismantling of national systems of social protection, nor is there evidence of significant
convergence across welfare regimes. While unemployment compensation (and other
social insurance areas such as sickness benefits) has been reduced modestly in a
majority of nations (and on average in all welfare regime types), pension benefits have
been remarkably stable. This is so despite moderate cuts in (standard) pension income
replacement rates in some nations, such as the Netherlands, Sweden, France and New
Zealand. Social services for frail older people, families with children, and the long-term
unemployed, among other groups, have been increased on average in social democratic
and corporatist conservative welfare states; interestingly, both passive unemployment and
related support for workers and active labour market policies (a large component of social
services) have been reduced in liberal welfare states. Overall, aggregate welfare state
decommodification has on average modestly declined in both large social democratic
welfare states and predominantly liberal welfare states; some more notable changes in
decommodification have occurred in individual welfare states, such as the Netherlands,
Sweden, Ireland, and New Zealand. Has globalisation contributed to the changes in social
welfare that we can observe?

G l o b a l i s a t i o n a n d c o n t e m p o r a r y s o c i a l p ro t e c t i o n

Political economists have long argued that economic internationalisation reduces the
ability of governments to sustain or expand generous social welfare provisions.2 In the
contemporary literature, the impact of globalisation on the welfare state is transmitted
through three mechanisms (Swank, 2001, 2002). The most commonly recognised mech-
anism involves the ‘economic logic’ of globalisation. The second and third mechanisms
link globalisation to welfare state retrenchment through politics. With respect to the not-
able post-1970s expansion of capital mobility, the economic logic suggests that the inter-
nationalisation of capital markets constrains incumbent governments’ social policy goals
through the individual economic behaviour of firms. Specifically, with technology-driven

184
 Table 1 Trends in social welfare protection and decommodification, 1981–2000.

Unemployment Pension income Social services as a Decommodification

income replacement replacement percent of GDP by the welfare state
Nation 1981–83 1998–2000 1981–83 1998–2000 1985–87 1998–2000 1981–83 1998–2000

Globalisation, Domestic Politics, and Welfare State Retrenchment in Capitalist Democracies

Social democratic welfare states
Denmark 0.824 0.617 0.480 0.523 5.37 6.82 36.58 36.38
Finland 0.327 0.581 0.598 0.629 3.08 4.20 29.70 31.04
Netherlands 0.881 0.733 0.551 0.496 1.97 2.69 37.68 34.56
Norway 0.671 0.657 0.563 0.594 3.18 5.22 41.20 42.11
Sweden 0.803 0.699 0.715 0.612 6.16 6.71 41.14 36.19
Average 0.701 0.657 0.581 0.571 3.95 5.13 37.26 36.06
Corporatist conservative systems
Austria 0.580 0.563 0.815 0.883 1.83 2.56 30.71 34.60
Belgium 0.684 0.634 0.766 0.795 1.60 1.63 34.20 35.63
France 0.664 0.701 0.599 0.547 1.75 3.35 27.19 30.36
Germany 0.680 0.600 0.758 0.751 1.58 2.75 29.58 29.73
Italy 0.340 0.386 0.697 0.885 0.95 1.03 20.64 27.26
Switzerland 0.683 0.720 0.384 0.428 0.40 1.65 27.64 21.45
Average 0.605 0.601 0.670 0.715 1.35 2.16 28.33 29.84
Liberal welfare states
Australia 0.239 0.283 0.293 0.315 0.84 1.64 15.49 14.80
Canada 0.606 0.629 0.385 0.481 0.69 0.46 23.78 26.06
Ireland 0.545 0.293 0.432 0.374 2.09 1.49 24.75 22.07
Japan 0.693 0.613 0.675 0.688 0.40 0.99 21.42 23.12
New Zealand 0.327 0.267 0.427 0.390 0.90 0.80 24.07 20.40
United Kingdom 0.309 0.195 0.419 0.538 1.77 1.42 19.34 21.40
United States 0.712 0.578 0.568 0.555 0.51 0.49 19.65 18.90
Average 0.490 0.408 0.457 0.477 1.03 1.04 21.21 20.96

Note: Income and pension income replacement rates apply to standard net (after tax) benefits for the average (unmarried) production worker; the measure
of decommodification follows Esping-Andersen (1990) and indexes the benefit levels and programme quality (e.g., wait times, duration of benefits,
185

population coverage) for unemployment, sickness, and pension programmes. Source: The Comparative Welfare State Entitlements Data Set, 1960–2000.
Social services include publicly provided services for older people, disabled, families and workers. Source: OECD (2004).
Duane Swank

reduction in transactions costs and the liberalisation of national capital controls, mobile
asset holders seek the highest rate of return on investment in global markets. In the
absence of substantial international coordination of national policies, national policy
makers face a prisoner’s dilemma: even though some clear policy choices remain (e.g.,
public infrastructure and human capital policies), incumbent governments in each nation
confront strong incentives to engage in competition to retain and attract mobile capital
through reductions in ‘non-productive’ social spending and the large (often progressive)
tax burdens that finance it. Trade openness, in the conventional view, also places
significant pressures on social policy makers. Expansions of trade may force governments
to retrench social protection in order to reduce labour costs, the disincentives to work
and invest, public sector debt (and hence interest rates), and to otherwise foster efficiency
and international competitiveness.
In terms of the ‘political logic’ of globalisation, economic internationalisation may
foster welfare state retrenchment through conventional democratic politics. Indeed, the
credible threat of capital flight certainly increases the electoral and organisational political
resources of private enterprises. For instance, firms and their interest associations often
lobby governments for rollbacks and efficiency-oriented reforms in national systems of
social protection by arguing that social programmes negatively affect profits, investment,
and job creation and by invoking the advantages of foreign investment environments.
Furthermore, rises in capital mobility and trade bolster the appeal of neoliberal economic
orthodoxy. That is, business economists and centre-right parties commonly use the
‘economic logic’ of globalisation when appealing for market-oriented reforms of social
welfare, tax and a variety of economic policies.

E m b e d d e d l i b e r a l i s m a n d t h e w e l f a re s t a t e

A major challenge to the conventional globalisation thesis comes from those who, like
Polanyi (1944), see the welfare state as integral to embedded liberalism. Specifically,
in seminal work on post-World War II public policies, David Cameron (1978), John
Stephens (1979) and Peter Katzenstein (1985) argue that a large public sector and welfare
state enables governments to lesson insecurities and risks attendant to internationalisation,
and otherwise pursue flexible adjustment to international openness.3 John Ruggie (1982)
echoing these themes, argues that, in fact, a multinational regime of embedded liberalism
emerged in the post-war era in which the international liberal trading order was supported
by varying albeit significant levels of government intervention and social insurance.
More recently, Geoffrey Garrett (1998a, 1998b) and Dani Rodrik (1997, 1998), among
others, stress that the welfare state continues to provide ample social insurance against
international market risks to employment and income as well as compensation to those
who lose from international competition. These scholars have, in fact, argued that it may
be desirable to maintain systems of ample social insurance and compensation in order to
minimise socio-political volatility that can emanate from public anxiety over economic
vulnerability and from realised job and income losses.

The evidence

Do rises in trade and capital mobility negatively impact the welfare state or do they
reinforce the demands and purported structural imperatives for social insurance and

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 Globalisation, Domestic Politics, and Welfare State Retrenchment in Capitalist Democracies

compensation? After a near decade of systematic research on this question, political

economists have generally concluded that there are few if any strong, direct and systematic
impacts of economic internationalisation on social welfare provision. In fact, some of
the best recent research has argued that welfare policy change has been driven by
deindustrialisation (Iverson and Cusak, 2000) or both deindustrialisation and the fiscal
stresses that flow from ageing populations and sustained higher unemployment rates
(Hicks and Zorn, forthcoming). In my own work (Swank, 2001, 2002, 2003), I find
no systematic relationships between the multiple dimensions of international capital
mobility and multiple dimensions of social welfare protection. The two partial exceptions
to this conclusion, confirmed in extensive econometric and case study analysis, is that
high capital mobility, on the one hand, and high public sector deficits and debt, on the
other, interact to pressure moderate programmatic retrenchments (also see Mosley, 2003).
Second, where national configurations of political institutions disfavour pro-welfare state
coalitions (i.e., the Anglo liberal political economies), post-1970s rises in capital mobility
are associated with rollbacks with social provision.
Other recent research largely supports these conclusions that the welfare impacts
of internationalisation are, at best, limited or conditional.4 Using extensive expenditure-
based measures of welfare state retrenchment, Castles (2004), Hicks and Zorn (forth-
coming), Huber and Stephens (2001) and Kwon and Pontusson (2002) find virtually no
robust associations between trade and capital openness, on the one hand, and various
dimensions of the welfare state, on the other. Reflecting a recent spate of studies that use
the Luxembourg Income Study data on income inequality, Bradley et al. (2003) report
no robust trade or foreign direct investment impacts on measures of fiscal redistribution.
Another set of rigorous, systematic studies effectively reports substantively very weak,
mixed or inconclusive evidence on the effect of the dimensions of trade and capital
openness on areas of social policy change or redistribution (Allen and Scruggs, 2004;
Burgoon, 2001; Garrett and Mitchell, 2001; Kittel and Obinger, 2003; Korpi and Palme,
2003). Burgoon (2001) offers one of the most interesting analyses (albeit built around
simple expenditures data alone); he theorises and reports supportive evidence for the
argument that where concerns over compensation are low or diffuse, and political actor
hostility over welfare policy is significant (e.g., investor concerns with pension or health
costs), rises in economic internationalisation engenders retrenchment. Where social
policy is highly relevant to compensation or domestic adjustment to internationalisation,
and is minimally damaging to potential political opposition (e.g., active labour market
policies), the systematic relationship between internationalisation and social welfare is
modestly positively. Again, the thrust of recent research has been to suggest that rises
in trade and capital openness are not systematically related to notable retrenchment of
the welfare state; the relationship between globalisation and social protection is more
complex.

D o m e s t i c p o l i t i c s a n d w e l f a re s t a t e re t re n c h m e n t

The conclusion that globalisation is not strongly and systematically linked to welfare
retrenchment leads one back to domestic politics and institutions in search of theory and
evidence to explain contemporary trajectories of welfare reform.5 Recent theory on the
‘new politics’ of the welfare state, originating largely in the work of Paul Pierson (1994;

187
Duane Swank

1996), has emphasised that welfare states are highly resistant to pressures attendant to
international and domestic structural socio-economic change (e.g., internationalisation,
deindustrialisation, and ageing). Incumbent governments find it very difficult to reduce
concentrated benefits to well-defined, mobilised constituencies in return for future,
diffuse benefits. Generally, welfare states are path dependent in that the cognitive and
political consequences of past policy choices constrain and otherwise shape efforts at
programmatic and systemic welfare retrenchment.
While the ‘new politics’ literature tends to focus on extant programme structures
and the constituencies that they have formed, political economists have increasingly
emphasised the welfare roles of ‘varieties of democratic capitalism’. In this view, as in
the traditional power resources school of welfare analysis (see below), the institutionally
embedded interests of labour, capital and the state are brought centre stage. Specifically,
the nature of the production regime should be important to the pace and depth of
neoliberal welfare reforms. As Soskice (1990, 1999) has argued, countries may be
classified by the extent of national level coordination through centralised collective
bargaining among relatively well-organised union and employer associations. Second,
nations will vary according to the extent of sector (or business group) organisation
of the economy, or the level of cooperation by enterprises in organising product,
financial and labour markets. With regard to national coordination, supply-side oriented
economic policies emphasise growth and employment. Active labour market policies
generously fund training, relocation and general employment services (and social transfer
programmes contain strong work incentives). Macroeconomic and supply-side policies
have sought full or near-full employment, and extensive public control of finance has
allowed governments to channel credit. High marginal tax rates on uninvested profits,
coupled with general investment reserves, investment tax credits and other incentives
for saving complement other supply-side policies in fostering growth and employment.
Corporatist institutions, where labour has regularly exchanged wage restraint for full
employment commitments and expansions in universal social protection, complement
macroeconomic and supply-side policies.
Sector-coordinated market economies typically have moderately high centralisation
of collective bargaining; wage bargaining is supported by cooperative arrangements
between business and labour at the firm level. In addition, as Soskice and collaborators
have argued (Soskice, 1999; Hall and Soskice, 2001), the sector-coordinated economy
is structured by significant organisation of economic activity within industrial sectors
oriented to the long-term development and production of high-quality, diversified
consumer and industrial goods. Cooperative business groups typically organise research
and development and technology transfer, export marketing strategy, vocational training,
and some features of competition and pricing behaviour. Coordination of economic
activity by business is supported by stable long-run labour–business relations and by state
regulatory frameworks. Traditionally interventionist tax policy has generally facilitated
state targeting of investment during periods of economic modernisation, and restructuring
and high marginal capital tax rates (and high employer social insurance contributions)
have fostered social solidarity and long-term stability in labour and industrial relations
(Swank, 2002: Ch. 5).
The corporatist conservative welfare state, integral to the sector-coordinated model,
integrates labour and capital and promotes long-term stable if not cooperative employer–
employee relations. Specifically, the welfare state provides generous employment-based

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 Globalisation, Domestic Politics, and Welfare State Retrenchment in Capitalist Democracies

social protection for labour without fundamentally altering class and status distinctions
or challenging market incentives. The conservative welfare state provides generous social
security for workers, social stability for capital, and generally facilitates the cooperative
relations necessary for long-term economic development strategies; the occupational
basis of a generous system of social insurance (coupled with employment protection
laws) fosters the acquisition of firm-specific skills by workers and, in turn, enhances the
long-term employment commitments valued by workers and employers (Ebbinghaus and
Manow, 2003).6
The significance to welfare state retrenchment of the coordinated model should
be clear. As Hall and Gingerich (2001) have argued, elements of national economic
models are functionally interdependent. Fundamental reforms in one area have significant
implications for other elements of the model. More concretely, business, labour, and the
state have interests in the preservation of the basic components of the extant model. For
instance, employers in sector-coordinated market economies may not embrace (or they
may even oppose) significant neoliberal reforms when faced with the uncertainty those
reforms generate (e.g., Thelen, 1999). In fact, German employer support for maintenance
of basic features of the generous welfare state (and its funding arrangements) is arguably
rooted in business’ interests in promoting long-term stability in the labour and industrial
relations system (Swank, 2002: Ch. 5). Generally, the greater the national or sector
coordination of the economy, the higher the costs (e.g., economic uncertainty, political
resistance) to policy makers from adoption of neoliberal welfare state reforms in the
face of pressures from globalisation, deindustrialisation or other extant socio-economic
structural changes.

A note on political parties

Although the varieties-of-capitalism literature has fostered a widely accepted recon-

ceptualisation of the welfare interests and roles of labour, capital, and the state, more
controversy exists with respect to the contemporary role played by alternations in
social democratic, Christian democratic, and centre-right party control of government.
Widely held to be the formative political influence on welfare state development
(e.g., Hicks, 1999; Huber and Stephens, 2001: Chs 1–4), the ‘new politics’ thesis and
mainstream globalisation theory both predict minimal influence of partisan government
on social policy change in an era of internationalisation and austerity. In fact, some
long-time proponents of power resources theory have argued that the once robust
partisan effects on multiple dimensions of social policy disappear in the 1980s and
1990s (Huber and Stephens, 2001: Ch. 5). However, as Korpi and Palme (2003) argue,
citizens’ positions in employment and labour relations still determine the resources,
opportunities, and constraints on their ability to realise economic interests and, in turn,
shape their interests with regard to social citizenship rights. In fact, in their careful study
of episodes of welfare retrenchment from 1975 to 1995, Korpi and Palme find strong
evidence that rollbacks in social protection vary by the political strength of traditional
class- and ideologically based parties. Retrenchments are less likely to occur under
left governments than confessional and centre-right party governments; this finding
holds at every level of international openness and socio-economic and institutional
context.

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Duane Swank

G l o b a l i s a t i o n , d o m e s t i c f o rc e s , a n d w e l f a re s t a t e p ro t e c t i o n
Using new cross-sectional and annual time-series data on welfare state entitlements and
decommodification in OECD nations (see Table 1), I provide a succinct, synoptic analysis
of the central questions raised above. Do rises in trade and capital mobility promote
retrenchment or the maintenance of insurance and compensation? Do domestic forces –
the institutions of national and sector-coordination of markets and the power of left
and Christian democratic parties – determine welfare state trajectories in the era of glo-
balisation and austerity? As such, these two questions reflect the tension between two
fundamental and disparate views of democratic capitalism in the early twenty-first century.
I move to answer these questions by regressing the well-known index of welfare state
decommodification as well as unemployment, sickness and standard pension income
replacement rates on the degree of financial liberalisation (a core indicator of formal
and actual capital mobility), trade openness and measures of national and sectoral
coordination of markets and of party control of government. The period of analysis
covers the years 1981 through 2000 in 18 advanced capitalist democracies. Statistical
and measurement details are given in the notes to Table 2. Based on theory and evidence
reviewed above, our best general expectations are that international factors should be un-
related or positively related to unemployment, sickness, and other programmes that form
the core of insurance and compensation for current workers; internationalisation should
be unrelated or negatively related to pensions. That said, overall decommodification is
likely to be influenced only modestly if at all by internationalisation. As to domestic
factors, the greater the national and sector coordination (i.e., the weaker the liberal,
uncoordinated market institutions), and the greater the political power of social
democratic and Christian democratic parties (i.e., the weaker the centre-right), the higher
the decommodifcation and income replacement rates (i.e., the less welfare retrenchment).
The findings reported in the first two rows of Table 2 largely confirm our expectations
about globalisation and welfare state retrenchment. The majority of possible relationships
are insignificant. Yet, the associations between international financial liberalisation and
trade openness, on the one hand, and decommodofication as well as unemployment
and sickness replacement rates, on the other, are – with one exception – either positive
and statistically significant or in the positive direction (with some associations falling just
below statistical significance). In addition, the effect of international factors on pensions is
negative, and, in the case of trade, the relationship is highly significant and negative. This
pattern of findings confirms the conclusions from the literature of no strong, systematic,
and significant pro-retrenchment impacts of globalisation. It also underscores arguments,
such as Burgoon’s (2001), that suggest capital mobility and trade may prompt continued or
expanded insurance and compensation for contemporary workers, while at the same time
fostering rollbacks in areas only diffusely related to compensation and directly related to
business costs and efficiency issues.
As to domestic factors, the second portion of Table 2 reports strong evidence that, as
we move from liberal, uncoordinated economies toward national and sectoral coordi-
nated systems, the chances of general and programme-specific welfare retrenchment sig-
nificantly declines. Both forms of market coordination are related to overall decommodi-
fication, while national organisation principally supports programmes for contemporary
workers, and sector coordination is associated most notably with maintenance of generous
pension systems. In addition, party government still matters. In fact, left party government,

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 Globalisation, Domestic Politics, and Welfare State Retrenchment in Capitalist Democracies

Table 2 The impact of internationalisation and domestic political factors on

programmatic dimensions of the welfare state, 1981–2000

Unemployment Sickness Pension

income income income
Decommodification replacement replacement replacement

International factors
Liberalisation of −0.0478 0.0059∗∗ 0.0024 −0.0031
capital controls (0.1000) (0.0039) (0.0044) (0.0030)
Trade openness 0.0258∗∗ 0.0005 0.0002 −0.0009∗∗
(0.0106) (0.0004) (0.0004) (0.0002)
Domestic factors
National coordination 0.6236∗∗ 0.0185∗ 0.0327∗∗ −0.0010
(0.2998) (0.0126) (0.0146) (0.0094)
Sector coordination 0.6776∗ 0.0114 0.0629∗∗ 0.1149∗∗
(0.5022) (0.0241) (0.0280) (0.0149)
Left party 0.3108∗∗ 0.0027∗∗ 0.0099∗∗ 0.0015∗
control of govt (0.0446) (0.0015) (0.0016) (0.0010)
Christian Dem 0.0716∗ −0.0007 0.0157∗∗ 0.0050∗∗
control of govt (0.0476) (0.0019) (0.0021) (0.0010)
Constant 0.9489 0.4478 0.7264 0.5600
Observations 360 356 349 336
R-squared 0.7814 0.5950 0.7443 0.8129

Notes: Social welfare models are estimated with annual 1981–2000 data for 18 advanced demo-
cracies by OLS; models are first-order autoregressive. The table reports unstandardised regression
coefficients and panel-correct standard errors. Models contain the following controls: decommodi-
fication model includes the percentage of population 65 years and older, unemployment rate,
and per capita GDP in international prices. Unemployment and sickness replacement rate models
include the unemployment rate and per capita GDP.
∗
significance at the 0.10 level.
∗∗
0.05 level.
Financial liberalisation: 14-point scale of removal of capital and exchange controls (Quinn 1997).
Trade Openness: Exports and Imports as a percentage of GDP.
National coordination: Standard score index of (1) level of bargaining, (2) Union organisation
(standard score index of union density and centralisation of union confederation power; and
(3) Employer organisation: Index (standard score) of the presence of a national association of
employers and powers of that association (See Swank, 2002, 2003 for details on the methodology
and data sources).
Sector coordination: Standard score index of (1) labour management Cupertino; (2) investor-
productive enterprise linkage; (3) purchaser–supplier relations; and (4) cooperative arrangements–
competitive firms. (See Swank, 2002, 2003 for details on the methodology and data sources).
Left and Christian Democratic Government: Cummulative Years of office since 1950 of left and
Christian Democratic parties. (See Swank, 2002).

net of other forces, is significantly related to every dimension of social protection;

Christian democratic government control is most significantly associated with high
sickness and pension income replacement rates (although it too fosters maintenance
of overall decommodification of the welfare state). Additional tests and controls for socio-
economic factors (beyond the controls that are in these models) and other domestic

191
Duane Swank

political factors (e.g., veto points) do not affect the pattern of findings. Moreover, all
effects reported in Table 2 hold if analyses are shifted to the 1991–2000 period, alone.

Conclusions

The latest research on the direction and magnitude of the impacts of economic
internationalisation on the welfare state largely dispels what for a decade or more was
conventional wisdom, namely that globalisation means the inevitable retrenchment of
generous systems of social protection and the diminution of democratic policy choice.
At the same time, recent theory and research on the domestic political sources of
contemporary social policy also suggest that democracy is alive and well. Mature welfare
states deflect significant pressures for dismantlement or dramatic reductions in social
protection; variations in domestic political economic institutions and, in turn, the interests
and behaviours of labour, capital and the state still shape the course of welfare state policy.
In addition, the alternation in power of class and ideological disparate political parties,
now widely regarded as the most important force in welfare state development, still
matters in an era of globalisation and austerity. My own analysis reported above – work
that draws on recent theory and evidence as well as the best new data on social protection
in the advanced capitalist democracies – clearly supports these contentions.
Yet, some caution about these conclusions and the degree they may be extrapolated
into the future is in order. Continuing international integration of markets – both through
conscious regionalisation and broader processes of economic globalisation – continues
to place pressures on governments to reduce the costs and inefficiencies associated
with state intervention in domestic markets. Extension of the European Union to several
Central European nations is just one example of potentially significant regionalisation
pressures on mature welfare states. These pressures are dramatically reinforced by the
ageing of the advanced nations’ populations. As Hicks and Zorn (forthcoming) have
demonstrated, the increase in the size of elderly population and its fiscal implications
is one of the strongest predictors of episodes of welfare retrenchment over the last
couple of decades in the advanced democracies. In addition, further liberalisation of
domestic markets in heretofore sector coordinated economies, and continued pressures
for decentralisation and flexibility of labour and industrial relations systems in nationally
coordinated economies, raises the prospect of a weakened institutional bedrock of the
welfare state. As the first decade of the twenty-first century unfolds, it does seem clear,
however, that domestic politics will have a lot to do with the future course of these
developments and of the welfare state itself.

Notes
The author would like to thank James Allen and Lyle Scruggs for unpublished data on income
replacement rates and decommodification in contemporary social programmes and Dennis Quinn for
unpublished data on financial and capital market liberalisation.
1 Welfare state scholars have also produced volumes of studies on policy area and country-specific
patterns of welfare retrenchment. See, for instance, recent contributions to Journal of European Social
Policy and the literature cited therein.
2 The globalisation thesis dates at least to Adam Smith (1976[1776]). For extensive surveys of the
literature on the globalisation thesis and its challengers, see Swank (2002) and Genschel (2004), among
others.

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3 These scholars also pointed out that trade openness is often associated structurally with highly
concentrated industrial sectors and, in turn, strong trade union organisations, centralised wage bargaining,
and electorally successful social democratic parties. These factors are strongly correlated with welfare
state development.
4 Two additional indirect mechanisms that link globalisation and welfare state retrenchment have
been touted in the literature: Globalisation induced unemployment (Huber and Stephens, 1998; 2001)
and globalisation induced declines in taxation. With regard to taxation, there appears to be no systematic
downward impact of trade and capital mobility on capital (and other types of ) taxation (e.g., Basinger and
Hallerberg, 2004; Garrett and Mitchel, 2001; Hayes, 2003; Swank and Steinmo, 2002; but see Bretschger
and Hettick 2001).
5 Because of space limitations, I focus my attention primarily on welfare state impacts of models of
national democratic capitalism and traditional power resources theory. I comment briefly on the relevance
of domestic political institutions that serve as veto points. See Swank (2002: esp. Ch. 2) and Bonoli (2001)
for extensive reviews of the literature as well as applications of veto points theory in analyses of welfare
retrenchment.
6 The notion that the absence of general, portable skills, characteristic of liberal market economies,
or more specifically, the presence of significant firm/industry specific skills, has been causally associated
with development and maintenance of generous systems of social protection (Iversen and Soskice, 2001).

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