Index of Modern Social Market Economies...The social market economy, as an economic order, emerged...

Index of Modern Social Market Economies

Explorative Study

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Explorative Study

4

Table of Contents

Table of Contents

Introduction 4

DefiningaModernVersionoftheSocialMarketEconomy 6

Introduction 6

TheOrdoliberalConceptofa(Social)MarketEconomy 9

ModernizingtheConceptofaSocialMarketEconomy 13

Operationalization 15

CATEGORYI: COMPETITIVEANDEFFICIENTMARKETS 16

CATEGORYII: EFFICIENTPROPERTYRIGHTS 18

CATEGORYIII: ECONOMICANDECOLOGICALSUSTAINABILITY 21

CATEGORYIV: SOCIALINCLUSION 23

CountrySelection 26

Conclusion 26

IndexResults–InitialFindings 28

CompoundIndexResults–ExecutiveSummary 28

CategoryI:CompetitiveandEfficientMarkets 28

OpenMarkets 28

EffectivePriceSystem 32

Competition 33

CategoryII:EfficientPropertyRights 34

PropertyRights 34

FreedomofContract 34

Liability 36

PrivateInsolvencyRules 36

RatioMedium-sizedCompaniestoTotalCompanies 37

ManagerLiability 39

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Table of Contents

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CategoryIII:EconomicandEcologicalSustainability 40

FinancialStability 40

ConsistencyofPolicy 44

EfficientEnvironmentalProtection 45

CategoryIV:SocialInclusion 47

EffectiveLaborMarkets 47

SocialMobility 52

Outlook 58

Methodology 59

DataSources 59

DataStandardization 60

IndexAggregation 62

CalculationofResults 62

RobustnessChecks 68

Appendix 85

ProductionCredits 122

6

INTRODUCTION

StefanEmpter,CortnieShupe

Thecurrentglobalfinancialandeconomiccrisishasprovokedwidespreaddebateinmarketecono-

miesaroundtheworldabouthowtoregainabalancebetweenprofitandliability,efficiencyand

equityandbetweengrowthandsocial-ecologicaljusticeinnationaleconomicandsocialorders.

Againstthisbackground,many,inparticularinEurope,havebecomeinterestedagaininthesocial

marketeconomymodelasaframeworkforresponsiblecapitalism.

Thisgrowingintereststandsincontrasthowevertothefactthatthereisnocleardefinitionofthe

modelandtheprinciplesandinstitutionsthatconstituteasocialmarketeconomy.Itwasthisthat

promptedtheBertelsmannStiftungtodesignaframeworktofillthegap.Withitspilotproject,

the“IndexofModernSocialMarketEconomies”(MSMEIndex),theBertelsmannStiftungandthe

CenterforAppliedEconomicResearchattheUniversityofMünster(CAWM)soughtouttodefine

andmeasurethefeaturesofamodernsocialmarketeconomyandtoassesstheextenttowhich

theeconomicordersofeightevaluatedcountriesmeetthesecriteria.

Incontrasttoindicesthatmeasureshort-termeconomicperformance,theMSMEIndexfocuses

predominantlyonthestructuralandinstitutionalfeaturesofeconomicorders.

Institutionsintheevaluationencompasslegalframeworksandpolicies,rulesandregulationsand

alsoacollectionofsocialandeconomicrulesandpracticesinwhichspecificpoliciesareembed-

ded.Inthissense,theindexassessmentstakeintoconsiderationbothformaldejureaswellasthe

defactoinstitutionswithineachcountry.

TheeconomiesstudiedarethoseofCanada,France,Germany,theNetherlands,Spain,Sweden,

theUnitedKingdomandtheUnitedStates.Theywereselectedinordertoprovidethenecessary

degreeofvarianceamongcountriesthatidentifytheireconomicandsocialmodelsassocialmar-

keteconomiesaswellasbetweencountriesthathavethisgoalandmoreliberaleconomiesthat

donot.

AspartofalargerprogramundertakenbytheBertelsmannStiftung,entitled“ShapingSustain-

ableEconomies”,theconceptbehindtheMSMEIndexisinformedbyabroadunderstandingof

well-beingandsocialprogressandtheconvictionthatamodernsocialmarketeconomycanonly

bemeasuredaccordingtocriteriasuchaseconomicviability,socialandgenerationaljustice,par-

ticipationandsustainability.Itmustfurthermoreproveresilientyetdynamicfacedwithsystemic

pressuressuchaseconomicglobalization,globalwarming,demographicchangeandtheevolution

ofsocialexpectations.

Introduction

7

Thesocialmarketeconomy,asaneconomicorder,emergedfromadistincthistoricalbackground

inthecontextofGermanhistoryandphilosophyandtheideasofitsfoundingfathers,inparticular

WalterEucken’sconceptofacompetitivemarketeconomy,servedasaninspirationfortheindex

concept.However,givenboththechallengesandsocietalexpectationsoftoday,itwouldnotsuffice

tosimplymeasuretraditionalGerman-stylecapitalismor thedegreetowhicheconomiestoday

measureup toEucken’sprinciples. Itwasnotwithout reason thatAlfredMüller-Armack,who

builthisworkuponEucken’sideasandwasin1946thefirsteconomistrecordedasusingtheterm

“socialmarketeconomy”,placedasignificantlystrongerfocusonsocialpolicy.WhileEuckendid

takenoteofissuessuchasenvironmentalprotection,whichdemonstratedincredibleprescience

forhistime,hisconceptunderestimatedtheimportanceofsocialinclusionandinparticular,social

mobility,bothofwhichfindconsiderationintheMSMEIndex.

In addition tomodernizing the concept to reflect global challenges aswell as the evolution of

societalvaluesandtheexpectationsoftoday,wehavedefinedtheinstitutionsbroadlyenoughto

includefunctionalequivalentsandsimilar featuresof the institutionsweseektomeasurethat

existinothercountries.Infact,notonlyGermany,butmanyothercountriesexhibitfeaturesofa

socialmarketeconomythatshouldalsofindconsiderationintheconcept.Forthesereasons,we

added“modern”tothetitleoftheindexinordertoemphasizethenecessaryadaptationofEuck-

en’sprinciplestodojusticetothesedemands.

Usingbothqualitativeandquantitative indicators, theMSME Indexmeasures theexistenceand

quality of the central institutional principles that comprise a modern, sustainable social market

economy.Forthepurposesofclarity,theseprinciplesareorderedaccordingto4thematiccategories.

QuantitativedatacomesfromtheOECD,WorldBank,InternationalMonetaryFund,theWorldEco-

nomicForumandotherorganizations.Fortheremainingdatanecessarytocompletetheindex,but

forwhichnoexternalsourcescouldbefound,theprojectteamdrewupaquestionnaireforexpert

review.Answerstothequestionnaireincludedbothanumericalscoreaswellasanaccompanying,

writtenelaboration.Thelatterhavebeencombinedandsummarizedinthecountryreports,allof

whicharepublishedseparatelyfromthisreport.

Thisfollowingsummarymarkstheendofthefirststageofthisprojectinwhichwesoughttotest

therobustnessoftheconceptandgaininsightsintothestrengths,weaknessesandtrade-offsof

modernsocialmarketeconomies.Expertevaluationsprovidedintheformofthecountryreports

offer a fascinating wealth of information about the interaction between individual institutions

and lendcredencetoEucken’sassertionthat theprinciplesof thesocialmarketeconomyonly

demonstratestrengthintheirentirety,asaninseparablesetofinstitutions.

This explorative study is the result of a collaborative effort amongmany involved in theproj-

ect,whetherasconceptualpartners,expertcoordinators,orcountryevaluators.Theirinputwas

invaluable.OurpartnersattheCenterforAppliedEconomicResearch(CAWM)attheUniversity

Introduction

8

Figure 1: Modern Social Market Economies

Introduction

Competitive and Efficient Markets

Open Markets Property Rights Financial Stability Effective Labor Markets

Effective Price System Freedom of Contract Consistency of Policy Social Mobility

Competition LiabilityEfficient Environment

Protection

Efficient Property Rights

Economic and Ecological Sustainability

Modern Social Market Economies

Social Inclusion

ofMünsterincludedUlrichvanSuntum,TobiasBöhm,JensOelgemöllerandCordeliusIlgmann.

GostaEsping-AndersenandFelixHüfnerservedasexpertcoordinators.Thesummaryreportis

basedoninformationprovidedbythecountryevaluators:BenitoArruñada,AndreasBusch,Nagore

CalvoMendizabal,StephenGross,BobHancké,FriedrichHeinemann,SvenJochem,AnkeKessler,

Jacques Mistral, Ola Olsson, Kees van Paridon, Friedbert Rüb, Willi Semmler, Andrew Sharpe,

HenrikUterweddeandFransvanWaardenaswellasbytheexpertcoordinators.Wefurthermore

appreciatecontributionsfromChristinaBusch,datacollectionfromDr.MargitKrausandediting

workbyTimJudah.

Additionally,wewouldliketothankexternalexpertswhoprovidedsuggestionstofurtherimprove

theconceptduringworkshopsinCologne,MünsterandBerlinthroughout2010and2011.Last,

butnotleast,wesincerelyappreciatetheeffortsofcolleaguesattheBertelsmannStiftungwho

providedlogisticalandorganizationalassistanceorhelpfulcommentsandsuggestionsforthecon-

cept,inparticularPiaPaulini,EricThode,DanielSchraad-Tischler,ThießPetersenandBenjamin

Broßmann.

9

DEFINING A MODERN VERSION OF THE SOCIAL MARKET ECONOMY

UlrichvanSuntum,TobiasBöhm,JensOelgemöllerandCordeliusIlgmann

INTRODUCTION

DuringtheworldwidefinancialcrisisfollowingtheLehmancrashin2008,westernindustrialized

countriesperformedquitedifferently inpreservinghighemployment alongwith soundpublic

financesandasocialbalance.NearlyallofthemwerehitbyaGDPslumpofhistoricproportionsin

2009,abovealltheexport-orientedeconomiesofGermanyandSweden(Fig.1a).Bycontrast,these

countriesdidwellinshieldingtheirlabormarketsfromtheconsequencesofthecrisis.Germany

evenmanagedto loweritsunemploymentrateduringthecrisis(Figure1b).Afterhavingbeen

namedthesickmanofEuropeattheturnofthemillennium(Sinn,2003,p.18),itnowappeared

tohavebecome theeconomicpowerhouseofEurope. Incontrast to theso-calledGerman“Job-

wunder”,mostothercountriessufferedfromasevereincreaseinunemploymentrates.Thiswas

particularlytruefortheUS,whichhadoftenbeenlookedatasashiningexampleofthevirtuesof

aflexiblelabormarketbeforethecrisis.Moreover,bigcontinentalEuropeancountrieslikeFrance

andSpainperformedweaklyduringthecrisis.Theirunemploymentrates,alreadyrelativelyhigh,

increasedconsiderablyandpublicdebtclimbedtoalarmingheights,eventuallyresultinginthe

Europeandebtcrisis.Ontheotherhand,amongtheAnglo-Saxoncountries,Canadainparticular,

performedrelativelywell,bothintermsofemploymentandpublicfinances.

Miraclesarerareineconomics,soitmakessensetosearchforsomebetterexplanationforsuch

astonishing differences in economic success, particularly concerning crisis-resistance. In the

casesofGermanyandSweden,commonmacroeconomicanalysiscannotexplainmuch.Neither

havetherebeenexceptionalKeynesiangrowthprograms,nordidexcessivedeficitspendingtake

place.Onthecontrary,whileGermany’spublicdebtrateincreasedonlymoderatelyduringthe

crisis,SwedenandCanadaevenmanagedtokeepitbroadlyunchanged(Figure1c).

Ontheotherhand,therehadbeenconsiderablestructuralreformsinbothcountriesintheyears

running up to the crisis. The IMF (2011, p.6) attributes German labor market performance to

severalfactorsincludingthe“HartzIV”reformsandalsotheflexibilityincorporatedintocollec-

tive labor agreements, e.g., work-time accounts, and the subsidy for reduced work-time hours

(Kurzarbeit).Particularlyforthoseunemployedwhoarenottieddownwithchildcareduties,the

incentivestoworkrosesubstantiallyandnewformsofpart-timelaborandtemporaryemployment

emerged.AmajorpartoftheGermanjobmiraclewascertainlyduetothesereforms,althoughthe

largerpartofthepopulationpaidforthemwithstagnatingrealincomes.

Defining a Modern Version of the Social Market Economy

10


Figure 2: Economic Performance During the Crisis

a) Gross Domestic Product, Annual Growth Rate

b) Unemployment Rate

c) Public Debt/GDP

In percent

-2.77 -2.97

-5.08

-3.53 -3.74

-4.98 -4.37-3.49 -3.78

Source: OECD, Economic Outlook No. 91, June 2012.

2006

Canada France Germany OECD-TotalNetherlands Spain Sweden United Kingdom United States



2007 2008 2009 2010 2011 2012 2013

-6-5-4-3-2-10123456

0

5

10

15

20

25

30

0

20

40

60

80

100

120

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ConcerningSweden, therehadbeenaremarkablechange ineconomiccourse fromthe former

“Volksheim”welfarestatetoamuchmoremarket-orientedpolicy(Palme2008),althoughitstill

includeshighlevelsofincometaxandaprevailingemphasisonsocialsecurityandcompensa-

tion.1Thusitseemsthatbothcountrieshavefoundcompromisesbetweeneconomicequityand

efficiencythatareworthinvestigatinginmoredetail.Apparently,thisismoreamatterofinstitu-

tionsthanamatterofconventionaleconomic“measures”.Moreover,inordertoproperlyassess

theissue,onehastotakeintoaccounttheeconomichistoryoftherespectivecountry.Economic

institutionsareneithereasilyinventednoreasilychanged,butalwaysaresultofeconomicthink-

ingandculture.Thisofcoursedoesnotmeanthattheyshouldnotbemodernizedandadapted

toneweconomicchallenges.However,toacertainextentatleast,relevantchangesineconomic

institutionsrequireconsiderablechangeinnormativepositionsandpoliticaltraditionsaswell.

Inorder to learn fromeachother,acarefulanalysiscomparing institutionalarrangementsand

theirinteractions,aswellasexplainingtheircomparativeadvantagesmustbeconducted.Thisis

theaimofthischapter.Inparticular,theGermanconceptofasocialmarketeconomy,incontrastto

Anglo-Saxonmarketliberalism,istracedtoitsbasicrootsandtheninasubsequentstep,modern-

izedsuchthatitcanbereconciledwithcontemporaryeconomictheory,practicaleconomicand

societalchallengesandtheexpectationsofour times.Assuch, themodel isan ideal typeand

shouldnotbeconfusedwiththeGermaneconomicmodeloftoday.Infact,manyothercountries,

notablyinScandinavia,havecharacteristicsofwhatwewouldconsideramodernsocialmarket

economy,althoughwithoutbeinglabeledassuch.Thus,wedonottrytodefineGermany’sformof

asocialmarketeconomyasabenchmarkagainstwhichothercountriesareevaluated.Rather,our

purposeistoclarifythebasicidea,fundamentalmeaningof,andtherelationshipofinstitutional

arrangementsto theconceptof thesocialmarketeconomy.Thisseemstobeevermoreneces-

sary,asduringandafter thecrisis thesocialmarketeconomyhasbeenhighlighted inseveral

discussionsasanimportantfactorofGermany’ssuccessduringthefinancialturmoil.However,

theoriginalmeaningoftheconceptneedstobeclarifiedanddistinguishedfromvariousexisting

formsofit.Presentingcleardefinitionsoftheprinciplesofthesocialmarketeconomyhelpsusto

understandtheinterdependenciesofinstitutionsaswellastoevaluateanddiscussothereconomic

modelsagainstthisbackground.

THE ORDOLIBERAL CONCEPT OF A (SOCIAL) MARKET ECONOMY

Thesocialmarketeconomyasaneconomicorderisnotjustwords,buthasaverydistincthis-

toricalbackground.Itentailsasystemofintertwinedinstitutionsthat,intheirentirety,areindis-

pensable for the functioning of the entire concept. Without one of the functioning principles,

theconceptdoesnothold.AttheveryrootoftheidealiesWalterEucken’sideaofacompetitive

marketeconomy (Müller,2007,p.101).His researchquestion,whichallordoliberalauthorsof

thetimeshared,albeitcomingupwithdifferentanswers,was,“Howcanamodernindustrialized


1 SeeLindvall(2006)forabriefoverviewofSwedishreforms.

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economyandsocietybeorganizedinahumanandefficientway?”(Eucken1951,p.27,seealso

Eucken,1950).WhileseveralotherfiguressuchasAlfredMüller-Armack,WilhelmRöpke,Alex-

anderRüstow,FranzBöhmandLudwigErhardalsobelongedamongthefoundingfathersofthe

socialmarketeconomyconcept,Eucken’searlyworkfromthe1930sofferedthemostelaborate

normativesystemofeconomicgovernanceandshapedthelaterdiscoursearoundthesubject.

Beingdisillusionedbywhathecalledthe“ageofexperiments”-thefailureofbothclassicalliberal-

ismandsocialism-Euckenformulatedelevenprinciplesofinstitutionaldesignforwhathecalleda

marketeconomy,inwhichcompetitionwouldnotonlylimittheextentofprivateeconomicpower,

butalsoleadtoanefficientallocationofresources.Bydesigningconstitutionalrulesfortheecon-

omy,Euckennotonlyhopedtocreateeconomicprosperity,butalsoendprevailingrent-seekingin

capitalistsocieties.AftertheSecondWorldWar,theGermanordoliberals–withErhardbeingtheir

mostprominentandpowerfulfigure–inventedtheconceptofthesocialmarketeconomy,which

strovetocombinecoreelementsofmarketcompetitionwithaconsiderabledegreeofsocialpolicy

andhencepublicconsensus(GoldschmidtandWohlgemuth,2008).

All ordoliberals agreedon thenotion that a truly liberal economywasnot agivenper se,but

requiredcarefulinstitutionaldesign.Hencetheyarguedinfavorofafixedsetofrulesforeconomic

activity that would limit both private economic power and public interventions in the market

process.Indeed,theyarguedthatpoliticalfreedomwouldproveimpossibleaslongaseconomic

orderwouldgrantsomeindividualspoweroverothers(Yeager,2005,p.508).Inmanyrespects,

closelinksexisttotheAustrianschoolofeconomics,inparticulartoHayek,whodirectlyfollowed

Eucken as the department chair in Freiburg.2 However, essentially, Eucken’s concept was less

evolutionarythanHayek’sandputsmuchmoreemphasisonastrong,althoughliberallyoriented

state.

The essence of the ordoliberal concept of a market economy lies in what Eucken deemed the

constitutive(C)andregulative(R)principlesinhisworkof1952(seeTableI).3


2 AlthoughHayekwasnotamemberof theoriginalordoliberalschoolandproposedamore fundamentally liberalview,hewasquiteclosetoEuckeninmanyrespects.HayektwiceheldachairinFreiburgandwasevenappointedasthepresidentemeritusoftheEuckenInstitutein1978.FormoreontheirrelationsseePies(2001).

3 SeealsoRichter(2011);theEnglishtranslationisborrowedfromPeukert(2000,p.122).

13

Thesevenconstitutiveprinciplescanbebrieflydescribedasfollows:

(C1) A functioning price system represents the fundamental principle according to Eucken. He

regardedadecentralizedmarketstructureastheonlyroadtosuccessforentrepreneursto

delivervaluetocustomersandclientsasopposedtoemployinghindering,anti-competitive

strategiesandabusingtheirmarketpower.

(C2)Byprimacy of the monetary orderEuckenmainlyhad inmind thestabilityof thevalueof

currency,anideathatbecamethecornerstoneoftheBundesbank’smandateandpolicy.4

(C3)Open marketsmeantheabsenceofprohibitivetariffsandotherrestrictionsonfreetrade,and

alsoofanyformofanti-competitivemeasurestoprotectthehomemarket.

(C4)Private propertyismeantmainlyasameansofpowerdistributionwhichmust,however,be

boundbycompetition.

(C5)Freedom of contractisproposedonlytotheextentthatitiscompatiblewithperfectcompeti-

tion,e.g.,aslongasitdoesnotsupportcartelsoranyotherabusivepractice.

(C6)Theprincipleofliabilityaddressesinparticularcorporatelaw.5Indeedmanyoftheproblems

addressedbyprincipal-agenttheory,moralhazardand,moregenerally,informationalasym-

metriesaretobefoundinthisprinciple.


Table 1: Eucken’s Constitutive and Regulatory Principles

C1 Effective Price System

C2 Primacy of Monetary Policy

C3 Open Markets

C4 Property Rights

C5 Freedom of Contract

C6 Liability

C7 Consistency of Economic Policy

R1 Competition Policy

R2 Income Policy

R3 Correction of Externalities

R4 Correction of Abnormal Labor Supply

Source: Eucken 1952.

4 Eucken’stechnicalproposalonthisissuewasacommodity-bundlestandardinsteadofthegold-standardanda100%reserverequire-mentforbanks,i.e.acombinationoftheplansbyGraham(1937)andSimons(1948).

5 Euckensradicalviewonthisissuewasthatthemajoritystockholdersshouldbefullyliable.

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(C7)Continuity of economic policymeansthatthelattershouldbebothreliableandpredictablefor

marketparticipants(Grossekettler,2010,p.324).

Theconstitutiveprinciplesarecomplementedbyfourregulativeprinciples(Peukert,2000,p.124):

(R1)Antitrust policyshouldbeconductedbyapublicagencywhichshouldideallydissolvemonop-

oliesor at least control theirmarketbehavior.Thisproposal led to the1957German law

againstbarrierstocompetition.

(R2) Income policywasmainlyassociatedwithaprogressiveincometax,bothfordistributional

andefficiencyreasons, the latterbecause itdampenstheproductionof luxurygoodsand

thusgivesroomformoreinvestment.

(R3)Correction of externalities ismainlydiscussedby Eucken in ecological terms, pointing for

example,tothedestructionofNorthAmericanforests.

(R4)Correction of abnormal labor supplymeansregulationsonthelengthoftheworkingdayand

otherprotectivemeasuresforworkers,inparticularforwomenandchildren.

Eucken’sconceptprovidedthebasisforGermany’seconomyafterWorldWarII,butitwassubstan-

tiallysupplementedbymoresocialelements.Inparticular,Müller-ArmackandErhardmodifiedthe

concepttoallowfor“marketconform”interventions,anactivebusinesscyclepolicy,andbyplacing

amuchstrongeremphasisonwelfarepolicyincludingsocialhousing,pensions,healthandfamily

aidpolicy(Müller-Armack,1946).Itwasbythenwidelyacknowledgedthatwelfarepolicyshouldgo

beyondsimpleincomeredistribution,including,forexample,substantiallaborprotection.

Thefurtherdevelopmentofthesocialmarketeconomywasmoreeclecticandpolicy-drivenrather

thanfollowingawell-definedconcept.Inparticularthedistributiveandcorporativeelementssoon

playedamuchlargerrolethanwasoriginallyintendedbyErhard(Wehler,2008,p.75and133).For

example,labormarketinstitutionsspecifictoGermany,likeworkerparticipationinbothoperational

managementandonmanagementboards,originatedfromthepowerfulroleofunions,whichwere

thusintegratedintotheneweconomicandsocialorder.Consequently,amixedsystemprevailed,

moreaccuratelydescribedas“RhenishCapitalism”thanasocialmarketeconomyItincorporated

variousstrandsofthought–suchasthoseoftheCatholicsocialschoolorthoseofSocialDemocrats

andexistinginstitutions.

Nevertheless,anddespitethelackofaformaltheoreticalfoundation,6thesocialmarketeconomy

provedextremelysuccessfulintheyearsfrom1948tothemid-1960s,therebylayingthefoundations


6 Unlikeothermembersoftheschool,Euckenwasanexceptionallycleareconomicthinkerwhoexplicitlyabhorredwhathecalled“purewordeconomists”,(“Begriffsnationalökonomen”,seeGrossekettler2010,p.296).

15

ofthe“Wirtschaftswunder”(Wehler,2008,p.74).Beginningintheearly1970s,thedegreeofregula-

tioninGermany’seconomytemporarilyincreasedwitharisingshareofpublicexpenditureand

state intervention,accompaniedbymuchweakereconomicperformance.However, in theearly

1980s,theliberalideawasreestablishedbysubstantialderegulationandliberalization,e.g.,inthe

telecommunications,energyand transport sectors.After reunification, substantialderegulation

ofthelabormarketwasimplementedaswell,includingtheso-called“Hartz”reformsreferredto

above,andwhichwerenamedfortheheadoftherelevantround-tablecommissionofthetime.7

Nevertheless, theGerman labormarketremainedaloof fromahireandfiresystem,andsocial

securityexpensesstilltotalapproximately25percentofGDP.Intheseandmanyotherways,the

socialmarketeconomyconceptisstillintactinGermany,includingmediumlevelsofbothincome

equalizationandpublicexpendituresharesbyinternationalcomparison(Figure2).


Figure 3: Total Public Social Expenditure as a Percentage of GDP

In percent

28.4 27.325.2

21.620.5 20.1

16.9

OECD-34 = 19.3

16.2

Source: OECD Social Expenditure Database.

2000 2007 OECD-34

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s0

5

10

15

20

25

30

Asnotedabove,manyothercountries,particularlytheNordicstates,haveatleastpartlydeveloped

characteristicssimilartotheconceptofasocialmarketeconomy,althoughmainlyderivedfrom

theirownhistoryandexperienceandnotexplicitlyborrowingfromtheordoliberalschool.Hence

it is reasonable to reformulate theconceptby taking intoaccount theirparticular institutional

designsandexperiencesaswell.Onekeytaskindoingthisistodetectandredesignthoseparts

oftheeconomic,legalandpoliticalinstitutionswhichhavegivenrisetoeconomicandpolitical

rent-seeking,therebycausingeconomicinefficiencyandgrowingsocialinequalityaswell.

7 SeeWurzel(2006)whoinvestigatedGermanlabourmarketreform.AtkinsonandMicklewright(1991)showthathighertransferstotheunemployedincreasethedurationofunemployment.AgeneralsurveyoflabourmarketinterventionisgivenbyHeckmanetal(1999).

16

MODERNIZING THE CONCEPT OF A SOCIAL MARKET ECONOMY

Inlightofcontemporaryeconomictheory,Eucken’soriginalcontributionstillturnsouttobepar-

ticularlyattractive.Itnotonlyanticipatesimportantideasliketheconceptoftimeinconsistency

andtheprincipal-agentproblem,butalsoformsaconsistentsetof interdependentinstitutions,

withoutanyofwhichtheentireconceptwouldbecomeinvalid.8Onlytheinterplayoftheentireset

ofprinciplesandtheinstitutionsderivedfromthemcomprisehismodelofanidealmarketecon-

omy.Moreover,asurprisinglymodernaspectofordoliberalismistheinterdisciplinaryapproach

ofbringingtogetherlaw,politicsandeconomics,althoughitneverledtoareallyinterdisciplinary

bodyofthought(GoldschmidtandWohlgemuth,2008,p.264).

SixtyyearshavepassedsinceEucken’sprincipleswerepublishedin1952.Theworldhaschanged

agreatdealsincethen,andsohaveindividualbehaviorandsocialvalues.Thustheoriginalver-

sionofthesocialmarketeconomyundoubtedlyrequiressubstantialmodernizationtomeetthe

challengesofourtime:Globalization,ecologicalexploitation,demographicchangeandevolving

socialvaluesandexpectationstonamebutafew.Therefore,onehastoreconsiderthefundamental

contentofasocialmarketeconomy,andtoverifywhetheritremainsarelevantandappropriate

concepttoday.Giventhecurrentturmoilonthefinancialmarketsandtheeurocrisis,thisurgently

neededreformulationisrelevantfortheEuropeaneconomyasawhole.

Although theoriginal conceptofa socialmarketeconomyalreadyemphasized the importance

ofnon-materialgoodssuchaspoliticalstability,individualfreedomandhumandignity,current

debates increasinglyrevolvearoundfosteringwell-beingandenablingbroadpoliticalparticipa-

tionaswellassocialmobilityandinclusion.Thisnewunderstandingofeconomicprosperityand

sustainabilitymustbetakenintoaccount.Generally,socialvalueshavechangedsubstantially,in

particularwithrespecttotheimportanceassignedtoeconomicgrowthandboththedefinitionand

relativeweightofsocialjustice.Socialjusticerequirespoliciesthatenableinclusionratherthan

compensating for exclusion (Schraad-Tischler, 2011, p.11). The modern social market economy

(MSME) Index therefore measures social mobility comprehensively, including early childhood

education,permeableandflexibleeducationstructuresaswellasfunctioninglabormarketsanda

taxandbenefitsystemthatbalancesredistributionwithincentivestowork.

InstitutionalapproachestoeconomicsarenotpurelyGerman.Manyordoliberalideascanbefound

inbothconstitutionaleconomicsandnewinstitutionaleconomics(NIE)(Klein,2000).Ordoliberal-

ismandNIEshareacommonality in that theybothgobeyondapredominantlymathematical

approachtoeconomicmodelsandinsteadtakeonanhistoricalandinstitutionalperspective.In

particular,bothofthemplaceemphasisonlong-rangeinstitutionalconditionsratherthanonthe

measurementofshort-termeconomicoutcomes.AnimportantdifferenceliesinthefactthatNIE


8 Theproblemoftimeinconsistencieswasfirst formulatedbyNobelPrizewinnersKydlandandPrescott(1977).Their insightandthesubsequentliteraturearesummarizedinKlein(2009).

17

concentratesonthepositivestudyofeconomicsystemsandseekstoimproveeconomicefficiency

inatechnicalsense,whileordoliberalismtakesanormativeapproach,inquiringintowhichrules

and institutions could ensure best a workable, stable and sustainable economic order (Shupe,

2012,p.2).Assuch, toensure individual freedom,Euckenandhisordoliberal followersmainly

aimedtocircumventpoweraccumulationandprivilege.Inthiswayordoliberalismsetsupanideal

typesystemofinstitutionsforlong-runeconomicsuccessandsustainability.

Theprinciplesofasocialmarketeconomy,howeverestablishedanddesigned,mustintheend

passtheempiricaltestofdeliveringontheirpromises.

Tobeginwith,foramoderninterpretation,itdoesnotmakemuchsensetomaintainthedistinction

betweenconstitutiveandregulativeprinciples.Contemporaryinstitutionaleconomicscoversboth

generalrulesandprocedures.Moreover,someoftheprinciplesinTable1arecloselyrelatedto

eachother,sotheirnumbercanbereduced.

Inparticular,wesuggestrearrangingtheprinciplesintofourcategoriesaccordingtoTable2:


Table 2: Categories and Principles of a Modern Social Market Economy

Categories Principles

Competitive and Efficient Markets

Open Markets

Effective Price System

Competition

Efficient Property Rights

Property Rights

Freedom of Contract

Liability

Economic and Ecological Sustainability

Financial Stability

Consistency of Policy

Efficient Environment Policy

Social Inclusion

Effective Labor Markets

Social Mobility

18

(1) Openmarkets,competitionandaneffectivepricesystemallrefertodecentralizedallocation

decisionsinacompetitivesystem.Thustheycanbesummarizedasthegeneralprincipleof

Competitive and Efficient Markets.UnlikeEucken’snarrowyardstickofperfectcompetition,the

conceptshouldnowrefertomoderncompetitiontheory.9

(2) Analogously,theprinciplesofefficientpropertyrights,freedomofcontract,andliabilitycan

beheadedbythegeneralprincipleofEfficient Property Rights.Heretheresultsofbothwelfare

economicsandmodern institutionaleconomics,concerningforexample theprincipal-agent

problem,aretakenintoconsideration.Theinternalizationofexternalitiescanalsopartlybe

subsumed under this heading since, in general, internalization works through generating

propertyrights inordertocreateapricefortheexternality.Thus,aspectssurroundingthe

protectionof intellectualpropertyrightsarealsoallocatedunder theprincipleof“property

rights”.

(3) Thereisalsoacloselinkbetweenconsistencyofpolicy,financialstability,andefficientenvi-

ronmentalprotection.10Alloftheseprinciplesrefertosustainabilityinthesenseoflong-term

orientedbehavior,hencetheyaresubsumedinthecategoryEconomic and Ecological Sustain-

ability.Thisproblemisalsodiscussedundertheheadingoftimeconsistencyincontemporary

economics.

(4) Finally,Eucken’s regulativeprinciplesof incomepolicyandcorrection for “abnormal labor

supply”arebothrelatedtothelargefieldofwelfarepolicy,includingsocialmobilityandthe

legalconstitutionofthelabormarket.Theseissuesarenolongerdiscussedintermsofmere

incomesupportmeasurestoday,butinthemuchbroadercontextofSocial Inclusion.

Of course, neither economic theory nor social values are undisputed issues. Any statement of

fundamentaleconomicprinciplesisnormative,toacertainextentatleast.Themoreimportant

issueis,however,thatsuchprinciplesareconsistentbothwitheachotherandwiththestateof

contemporaryeconomic theory. In the followingweargue that this is the casewith the set of

principleshereproposedasconstitutingamodernsocialmarketeconomy.

OPERATIONALIZATION

Afterdividingtheconceptofthemodernsocialmarketeconomyintofourcategorieswherebyeach

oneconsistsoftwoorthreeprinciplesthatcanbetracedbacktoEucken’soriginalwork,indicators

wereselectedthatmeasuretheexistenceandqualityoftheseprinciples.Oursetofindicatorspro-

videsinformationforeachaspectoftheseprinciplesandcategories.Thefirstcategorymeasures

towhichdegreemarketsareallowedtoworkfreelytothebenefitofthesociety.


9 See,forexample,Tirole(1988)andCarltonandPerloff(2005).10ThelatterwastackledbyEuckenundertheheadingofexternalities.

19

CATEGORY I: COMPETITIVE AND EFFICIENT MARKETS

Thecoreelementofthefirstcategoryofprinciples,calledCompetitive and Efficient Markets,is,as

thenamesuggests,competition.Foraneconomist,thismaybemoreorlessself-evident.11Leaving

apartspecificproblemslikeexternalitiesandasymmetricinformation,economistswidelyagree

onthegeneralapplicationoftheso-calledfirsttheoremofwelfareeconomics.Accordingtothis,

competition generally ensures a Paretian solution of the allocation problem, i.e., within given

endowments, thewelfareofonecannotbe improvedwithout reducing thewelfareof someone

else.12Althoughthetheoremisonlyderivedfrommainlystatic,abstracteconomicmodels,itis

alsosupported,inprinciple,bymoredynamicconceptsofcompetitiontheory.13Admittedly,there

aremanydifferentviewsofparticularproblemslikenaturalandmorphologicalmonopolies,the

efficiencyofoligopolies,andtherelevanceofmarketstructureversusmarketbehavior.Inessence,

however, there is widespread agreement that decentralized units with a minimum of market

powershouldmakeallocationdecisions,andthatpublicinterventionsshouldgenerallyfavormore

ratherthanlesscompetition.Hayekfamouslymadetheevenmorefundamentalpointthatthecore

problemofallocationistheaggregationofvastamountsofinformation,dispersedamongmillions

ofdecentralizedmarketparticipantsthatcanneverbeelicitedbyanypublicagency.

Ingeneral,onehastodefineasetofrulesthatwouldensurethatcompetitionprevailsoverany

formofconcentratedmarketpower,whetherprivateorpublic.Toachievethis,openmarkets,an

effectivepricesystemandalsoaneffectivelegislationagainstmonopolies,cartelsandabuseof

marketpowerarenecessary.Thelastelementalsodistinguishestheconceptfromsimplelaissez-

faireliberalism(Peukert,2000).

Aneffective price systemnotonlyrulesoutprivatemarketpowerandprice-agreements,butalso

pricecontrolsandrelatedinterventions,exceptinthepresenceofmarketfailuressuchasexter-

nalities.Generally,thisnotionrejectsminimumandmaximumpricesinordertopursuedistri-

butionalgoals.Thereason is twofold:First,such interventionswoulddestroythe informational

contentofpricesandhence,theefficiencyofallocation.Second,priceinterventionscanhardly

becarefullytargetedwithrespecttosocialproblems,becausetheyalsobenefitthosewhoarenot

reallyinneed.Consequently,thepreferableinstrumentforsocialtargetsisincomepolicyrather

thanpriceintervention.

Open markets,inparticularfreetradeandinternationalfactormobility,presentanothercomponent

ofcompetition.Inlightofeconomictheory,theformercanbeasubstituteforthelatter,although

animperfectone.Theproblemcausedbycompetitionfromabroadisthatitsrestrictioncarries

advantagesforthehomecountry,atleastforsomepressuregroupsthere.Ontheotherhand,from


11SeeMas-Colell(1995)andtheliteraturecitedtherein.12See,forexample,Mas-Colelletal.(1995),chapter10.13Thegapbetweentheoryandreality,especiallytheissueofimperfectinformation,isdiscussedbyStiglitz(2002).

20

aglobalandlongrunpointofview,openmarketsarethemuchbetteroptioninmostcases,as

internationaltradetheoryhasconvincinglyshown.However,becauseopenmarketshaveapublic

goodcharacter,theyoftenexhibitatendencytoself-destructionandthuscanonlybepreservedby

internationalagreementslikeGATTandtheWTO.

Concerning monopoly and cartel legislation, there are quite different approaches in practice,

dependingontheunderlyingconceptofcompetition.Forthesamereason,itisnoteasytomea-

surethedegreeofcompetitivenessinmostmarkets.Anaturalmonopoly,undersubstantialpres-

sure from substitute goods, may act more competitively than a firm within a stable oligopoly,

forexample.Moreover,pricesneednotbecompetitiveorevenlowwhentheyequalunitcosts,

becausethelattermaybeartificiallyinflated.Therefore,therelevantinformationconcerningcom-

petitionis,toalesserextent,themarketstructureormarketresultsthantheprevailingmarket

power,whichcanbemeasuredbyvariousconcepts.14


Table3showsthevariableswhichhavebeenchosenasindicatorsfortheprinciplesofCompetitive

and Efficient Marketsrespectively.Aswithallcategories,thefiguresarepartlytakenfromexisting

databasessuchasthoseoftheOECDandtheWorldBank,andpartlygeneratedbyanexpertpanel

whichwasassembledforthisproject.

14ForageneraloverviewofeconometricmethodstomeasuremarketpowerseeBakerandBresnahan(2008).

Table 3: Principles and Indicators of Competitive and Efficient Markets

Principles Indicators

Open Markets Controls on Capital Movement

Freedom of Migration

Barriers to Market Entry

Product Market Regulation (OECD)

Effective

Price System

Price Control (Fraser Institute)

Administrative vs. Market Prices (World Bank)

Subsidies and Other Transfers (% of expenses, OECD)

Competition Media Pluralism (Sustainable Governance Indicators)

Competition Oversight Authority (Global Competition Review)

Questionnaire External Sources

21

Thecategoryconsistsofthreeprinciples.Thefirst,Open Markets,capturestheopennessoffactor

markets and includes information on barriers to entering into various professions (e.g. exces-

sive formal requirements), or product markets (e.g. unwarranted bureaucratic requirements).

Moreover,wealso includeavariableontheextentofproductmarketregulation.SinceEucken

acknowledgedtheneedforprudentialstate interventionwhenmarketsdonotworkeffectively,

(e.g. in the presence of externalities), the measurement of the first principle relies heavily on

expertratings,whichdeterminewhetherlawsand/orregulatorypracticesdeviatefromefficient

policies. The second principle, Effective Price System, comprises three indicators that measure

whetherpricescanadjustfreelytoreflectscarcityandthusleadtoefficientallocationsorifthey

aredistorted,e.g.bysubsidiesorpricelimits.Thelastprinciple,Competition,containsinformation

onwhethertheprerequisitesforcompetitiontoworkforthebenefitofconsumersaremet.These

prerequisitesentailfirst,whetherconsumershaveaccesstoavarietyofindependentinformation

sourcesandsecond,whetherthecompetitionauthoritiesworkeffectivelyandhavethenecessary

levelofassertiveness.

Allindicatorshaveincommonthattheydonotseektomeasureoutcomes,butarefocusedonlong-

terminstitutionalarrangements.Forexample,wedonotmeasure the intensityofcompetition,

butaskforinstitutionslikeantitrustlegislationandtherespectiveauthoritiesinordertoprevent

monopoliesandcartels.Ofcourse,theindicatorsareneithercomprehensivenoranidealvariable

inanycase,butcanonlyserveasaparsprototo.

CATEGORY II: EFFICIENT PROPERTY RIGHTS

Thesecondcategory,Efficient Property Rights,isalsoattheveryheartoftheconceptofamodern

socialmarketeconomy.Inparticular,theyareessentialforbothefficiencyandliberty.Thefirst

principlerecognizes thatsecurepropertyrights forbothphysicaland intellectualpropertyare

amongthemostimportantdeterminantsforeconomicgrowth.15Traditionalordoliberalthinking

focusedhereonprivateproperty,whichwasnotderivedfromnaturalrightsbutmainlyestablished

becauseofthedivisionofpowerandthepositiveincentivesgeneratedthereby(Peukert,2000,

p.123).Inmoderneconomics,abroaderscopeischosen,differentiatingbetweenvariousrights

andobligationswhichcanberelatedtoprivatepropertyoranystakeholdercharacterrespectively.

Inparticular, externalities andmoralhazard shouldbeprevented therebybecause theywould

interferewithbothefficientallocationandsocialfreedom.Ontheotherhand,thenaturalincen-

tivesforinvestment,maintenance,andcarefuluseshouldnotbeundulystrangledbyexcessive,

legislation,becausethiswouldcreatebothanoverbearingbureaucracyandapermanentquarrel

aboutrightsandobligationsinsociety.16


15Seee.g.Acemogluetal.(2005).AverycomprehensiveintroductionintotherelationshipbetweenknowledgeaccumulationandgrowthcanbefoundinAghionandHowitt(2008).

16Inthe1930s,afamousdebatetookplace,mainlybetweenLudwigvonMisesontheonesideandOskarLangeandAbbaP.Lernerontheother,concerningtheoptionofcompetitivesocialism.BoththeoreticalargumentsandempiricalevidenceintheformerYugoslaviafinallydemonstratedthatthecombinationofdecentralizedallocationdecisionsandcommonproperty,(withcentralizedinvestmentandpublicpricecontrol)doesnotreallywork.

22

Table 4 shows the variables which have been chosen as indicators for the three principles of

EfficientProperty Rightsrespectively.Again,severalindicatorsaregeneratedbytheexpertpanel,

becauserespectiveinformationcouldnotbegatheredfromexistingdatabases.Inparticular,this

applies toall indicatorsofLiability andalso to thefirst two indicators forFreedom of Contract.

Concerningefficientpropertyrights,investorprotectionisofcoursenottheonlyrelevantaspect,

butgoodindicators,whicharebothavailableforallcountriesandvariableswithastructuralrather

thanoutcomeorientation,werehardtofind.

Ingeneral,thecorrectionofexternalities–regardlessofwhethernegativeorpositive–isnecessary

to fulfill thefirst theoremofwelfareeconomics.17Well-knownnegativeexternalitiesareenviron-

mentalpollutionandthefreeuseoflimitednaturalresources,whicharecoveredbyourcategoryon

sustainability(seebelow).However,theinfringementofpropertyrightsisalsoacaseofanexternal-

itywithgrowingrelevance,inparticularconcerningpatentsandotherintellectualgoods.Positive

externalitiesmayariseforexamplefromeducationandR&Dintheformofknowledgespilloversto

therestoftheeconomy,whichisfrequentlytakenasanargumentforsubsidizingtheseactivities.


17TheclassicreferenceonexternalitiesisCoase(1937).SeealsoLaffont(2008).

Table 4: Principles and Indicators of Efficient Property Rights


Property Rights Investor Protection (World Bank)

Patent Protection (Park Index of Patent Rights)

Intellectual Property Rights (World Economic Forum)

Freedom of Contract Occupational Choice

Market Transparency and Consumer Protection

Judicial Review (Sustainable Governance Indicators)

Liability Private Insolvency

Ratio Medium-sized Companies to Total Companies

Manager Liability


23

Anotherimportantelementofefficientpropertyrightsislegalcertainty,whichshouldbeindepen-

dentlyreviewedbythecourts.Withoutinvestorprotection(includingintellectualpropertyrights

protection)andtheruleoflaw,evenproperlydefinedpropertyrightscannotworkbecauseofthe

lackofenforceability.Thisalsoappliesinthecaseofcorruption,becausethelatterimpliesaviola-

tionofexistingpropertyrightsbydefinition.Legalcertaintyisalsoapreconditionforeconomic

confidence,inparticularconcerningforeigndirectinvestmentandsavings.Thefirsttwoindicators

assignedtothesecondprincipleFreedom of Contractfocusonwhetherstateprovisionsconstrain-

ingcontractualchoiceareprudential,inparticularonexcessiverestrictionstooccupationalchoice

andtheexistenceofinstitutionsthatpreventconsumersfrombeingexploitedormisled.Moreover,

thesecondprinciplecontainsinformationonwhethergovernmentsaremonitoredbyanindepen-

dentjudiciary.

Sinceefficientallocationsrequirethateconomicactorsparticipateintheconsequencesoftheir

decisions,wefocusonvariousdimensionsofLiabilityinthethirdprinciple.Whilethefirstand

thethirdindicatorsdirectlyrelatetotheliabilityofentrepreneursandmanagers,wealsoinclude

informationonfirmsizedistributionsincethemanagementsofmedium-sizedenterprisestend

totakeahigherlevelofpersonalresponsibilityfortheirfirm’ssuccesscomparedtolargefirms

whereownershipisoftenseparatedfrommanagement.

Asastrikingexample for the importanceof liability, the recentfinancial crisisarosenot least

becausetheliberalizationoffinancialmarketshadnotbeenbackedbyarespectivetighteningof

liabilityrules,inparticularformanagersandconsultants.Admittedly,itisnotatalleasytodesign

asetofrulesthatbalancetheneedforliabilityagainstthewillingnesstotakerisk,whichisalso

essentialforamarketeconomy.18Presumably,thehugeinvestmentswhichareneededinamod-

ernindustrialeconomywouldneverhavebeenmadebysmallandmediumenterpriseswithout

thelimitationofliability.Ontheotherhand,manymisguidedinvestmentsandspectacularcrashes

could alsohavebeenavoidedwith stricter liability rules.Modern economicshas expoundeda

broadrangeofliteratureonthisissue,bothwithinthefieldof(game)-theoryandintermsofthe

collectionofempiricalevidence.Amongothers,thisresearchhasresultedinbothpracticalrules

forgoodgovernanceandthedesignofprincipal-agentrelations.19Fromamoderneconomicpoint

ofview,thequestionisnolongerif,butunderwhichconditionstoallowfordecision-makingby

peoplewhodonotdirectlybeartherespectiverisksandcosts.Oneshouldnotethatthisproblem

isatleastasmuchofanissueinthepublicsectorasitisinprivatefirms.


18Averycomprehensiveoverviewofprincipal-agentproblemswithinfirmsisprovidedbyPrendergast(1999).19TheliteratureoncorporategovernanceisextensivelycoveredinShleiferandVishny(1997).

24

CATEGORY III: ECONOMIC AND ECOLOGICAL SUSTAINABILITY

Thethirdcategoryfocusesonsustainabilityinthefinancial,politicalandecologicalspheres.


Thefirstprinciple,Financial Stability,requiresacentralbankthataimstokeepinflationrateslow

withoutbeingdependentonthegovernmentorunderpoliticalpressure.Second,weincludedvari-

ablesmeasuringtheavailabilityofinformationaboutadebtor’ssolvencyandrepaymenthistory,

whichisimportanttomitigateinefficienciesresultingfromasymmetricinformationincreditmar-

kets.Furthermore,thefirstprinciplecontainsinformationontheprevalenceofstabilityenhancing

structuresinthefinancialsectorandtheeconomyasawhole.Inparticular,weconsiderwhether

thefinancialsectorisdominatedbyinstitutionswhichare“toobigtofail”and,asanimportant

indicatorofaneconomy’svulnerabilitytofinancialturmoil,banks’capitaltoassetratiosandthe

equityratiooffirms.

Table 5: Principles and Indicators of Economic and Ecological Sustainability


Financial

Stability

Central Bank Independence

Depth of Credit Information Index (World Bank)

Public and Private Credit Registry Coverage (World Bank)

Prevention of Too-Big-to-Fail

Bank Capital to Assets Ratio (World Bank)

Equity Ratio of Companies

Consistency

of Economic Policy

Control of Financial Consolidation (OECD)

Extent of Staff Training (World Economic Forum)

Pension Systems Linked with Life Expectancy (OECD)

Social Security Spending (OECD)

R & D Spending (OECD)

Efficient Enviromental

Protection

Market Economy Instruments

Environmental Policy (Sustainable Governance Indicators)

Revenue from Green Taxes (OECD)


25

Thesecondprinciple,Consistency of Policy,measureswhetheracountrycanmeet its longrun

financingneeds.ThevariablesControlofFinancialConsolidationandPensionSystemLinkedwith

LifeExpectancyaccountforinstitutionalprovisionsthatpreventexcessivestateexpenditures.The

indicatorSocialSecuritySpendinginturnprovidesinformationaboutasizablepartofgovernment

expenditure.Lastly,theindicatorsExtentofStaffTrainingandR&DSpendingproxyforinvestment

inhumanandphysicalcapitalwhichisanimportantdeterminantofacountry’slongrungrowth

andthus,toitscapacitytoraiserevenue.20

Continuityandreliabilityofeconomicpolicy isaprecondition forconfidenceofboth investors

andforeigntradingpartners.Withoutconfidence,therewillbelessinvestment,lessgainsfrom

tradeandhence,lesswelfareandgrowththanwouldbepossibleotherwise.Toacertaindegree,

thereisanoverlapwithourEfficient Property Rightscategory,becausethecorrectionofexternali-

tiesisakeyelementthereaswellandinvestorprotectioncanalsobeseenasacoreelementof

economicreliability.However,thelatterwouldimplymuchmore.Firstandforemost,consistency

of policy should give consumers and investors a sound and reliable basis for their decisions,

includingsoundpublicfinancesandproperprovisionsforthechallengesofdemographicchange.

Thisisnoteasytoachieve,becauseitisofteninagovernment’sinteresttochangeincentivesex

postfactowhenbenefitshavealreadybeenreaped.Thecosts,intermsoflossofreputationand

confidence,canthenberolledovertofuturegenerationsofpoliticians.Finallytheproblemsof

time-inconsistentpolicieslikethisaretheresultofanintergenerationalexternalitythatcanonly

beovercomebylong-termrulesormeta-rules,whichasimplemajoritycannoteasilyalter.

The lastprincipleofEfficient Economic Protection comprises threevariablesdevoted toecological

sustainability.Inparticular,wefocusontheexistenceofwell-designedpolicyinstrumentsthataim

tointernalizeexternaleffectsrelatedtotheenvironmentandbalanceecologicalandeconomiccon-

cerns.Whileinpoliticsthecommonanswertotheseproblemsiscivilandregulatorylaw,economists

generallyprefermarketinstrumentsinordertointernalizetheexternalities.Thereasonisthatthe

optimallevelofconsumptionofresourcesisgenerallyabovezero,butdependsontheopportunity

costsofpreventionorsubstitutionrespectively.However,theseopportunitycostscannotbeknown

byanypoliticalinstitutionbutcouldbebetterdetectedbymarketmechanisms.21Thusthenatural

solutionwouldbeinstallingappropriateinstrumentslikeCO2emissioncertificatesorgreentaxesin

ordertomakemarketplayerstakeintoaccountthetruecostsoftheirdecisions.22


20Seee.g.theextensivediscussionof(endogenous)growthmodelsinAcemoglu(2009).21ThisproblemisdiscussedinthebasicpaperofBaumolandOates(1971).22EndresandFinus(2002)illustrateintheirpaper,thatquotasmaybesuperiortotaxagreements.

26

Althoughwell-foundedinthetheoryofwelfare,marketinstrumentsinenvironmentalpolicyare

oftenopposedinpolitics.Thereasonsincludeboththedifficultyofmeasuring,inparticular,poten-

tialandfuturelong-termexternalitycostsaswellasdistributivearguments,astheinternalization

ofexternalcostswouldimplyhigherpricesfortherespectivegoods.Asaresult,directinterven-

tionslikeprohibitionsandregulationsareinrealityfrequentlypreferredovermarketinstruments.

Thecriticismofthistendencyisthreefold:First,itisathreattoindividualfreedom.Second,this

policycanberegardedasunfairbecauseittendstodiscriminatebetweenactivitieswhichinvolve

thesameamountofexternalities.Third,marketinstruments,alongwithdirectdistributionalmea-

sures,couldachievethesamedegreeofenvironmentalprotectionatloweropportunitycostsand

voluntarydegreesofredistribution.

Anotherkeyelementofeconomicsustainability isfinancialstability.Traditionally, this issueis

mainlyrelatedtoanindependentcentralbankandthepreservationofstablemoney(Bergeretal

2001,Botzenhardt,2001;Cukierman,2008).However,asthefinancialcrisishasrevealed,there

ismuchmoretopayattentionto(deHaan,2008;Mishkin,2008).Forexample,anunregulated

bankingsectorcanbeaseveredangerfortheeconomyasawhole,aswasalreadyrecognizedby

AdamSmith.Moreover,itseemsnaturalthatarelativelyhighlevelofequityofbothindustrialand

financialfirmsismoresustainablewithrespecttofinancialstabilitythanexcessivedebt.

All of the indicators selected tomeasureEconomic and Ecological Sustainability seek tomirror

institutionalprovisionsfortherealizationoftherespectiveprinciplesratherthanmereoutcomes.

Forexample,concerningenvironmentalprotection,wedonotinvestigatethequalityoftheenvi-

ronmentreachedbuttheinstrumentsthatarechoseninordertopreserveit.Aswithmanyother

principles,theindicatorswerepartlygeneratedbytheexpertpanel.Concerningthiscategory,this

appliestothreeindicatorsforFinancial Stability(namelyCentralBankIndependence,Prevention

ofToo-Big-to-FailandEquityRatioofCompanies),andalsoforMarketEconomyInstrumentsinthe

principleEfficient Environmental Protection.


27

CATEGORY IV: SOCIAL INCLUSION

Thefinalcategory,Social Inclusion,measurestowhatextentcountriesconformtothesocialobjec-

tivespositedinourconceptofamodernsocialmarketeconomy.Thefirstprinciple,Social Mobil-

ity,capturestowhichdegreethetaxandsocialinsurancesystemredistributestothoseinneed

while still maintaining incentives to work. Moreover, we include two indicators related to the

permeabilityoftheeducationsystem23andthelegalframeworkagainstdiscriminatorypractices

toprovideequalopportunitiesforsuccesswithinasociety.Thesecondprinciple,Effective Labor

Markets,containsseveralvariablesthatassesstheeffectivenessoflabormarketinstitutionsand

interventionsthataimtobalancetheinterestsofemployersandemployeesandprovideadditional

qualificationstotheunemployed.


23Sinceearlyinterventionsareknowntobenecessaryfortheeducationalsuccessofchildrenfromdisadvantagedbackgrounds,wecon-siderthevariable“PublicSpendingonChildcareandEarlyEducation”tobecloselyrelatedtosocialmobility.

Table 6: Principles and Indicators of Social Inclusion


Effective Labor

Markets

Active Labor Market Policy per Umemployed (OECD)

Employment Protection Legislation (OECD)

Prevention of Duality

Employer-Employee Parity

Effective Labor Market Programs

Social Mobility Social Inclusion (Sustainable Governance Indicators)

Non-Discrimination (Sustainable Governance Indicators)

Public Spending on Childcare and Early Education (OECD)

Education Structures

Compulsory Unemployment Insurance (OECD)

Guaranteed Minimum Social Security

Income Taxation and Incentives to Work


InTable6therespectivevariablesforthetwoprinciplesofSocial Inclusionareshown.Concerning

thiscategory,wehadtorelyrelativelystronglyontheexpertpanel,becausesocialinstitutionsare

particularlyhardtomeasurebymerelyexploitingexistingdata.Therefore,theindicatorsGuaran-

teedMinimumSocialSecurity,IncomeTaxandIncentivestoWorkandalsoEducationStructures

withintheprincipleofSocialMobilitystemfromthepanel.Thesameappliestoallindicatorsof

effectivelabormarketswiththeexceptionofthefirsttwoindicators.

28

Amongalltheaspectsofasocialmarketeconomy,thesocialissueis,onecanpresume,theone

whichhaschangedthemostsincethedaysofEucken.Beingmoreorlessaconcessiontohard-

shipsatthetime,socialinclusionandparticipationarenowdefinedmuchmorebroadly,includ-

ingculturalparticipationandsubstantiallegalentitlements,insteadofmereexistentialrelief.In

away, this tendency isself-enforcing,becausethemorepeoplegainasubstantialpartof their

incomefromnon-marketsources,thestrongertheirpotentialasapressuregroupbecomes.This

may be one reason why Erhard’s prediction that the importance of the social question would

declinewithincreasingwealthturnedouttobefalse.Anotherreasonisthefactthatsecurityin

generalandsocialsecurityinparticularhaveturnedouttobesuperiorgoods,becomingmoreand

morerelevantwithincreasingwelfare,becausethereissimplymoretolose.

Moreover,itisalsotruethatpurealleviationofeconomichardshipsprovesinsufficientforreduc-

inginequalityandachievingequalopportunitiesinsociety.Fromaliberalpointofview,Social

Mobilityisthekeyelementofajustsociety,leavingroomforunequalresultsbutnotforunequal

chances.Inparticular,socialmobilityrequiresthatallchildrenhaveafairchancetodeveloptheir

abilities(AlmondandCurrie,2011),independentlyfromthesocialstatusandethnicbackground

oftheirfamily.Althoughtheearlyordoliberalsdidnotparticularlystressthispoint,theywould

undoubtedlyagreetoittoday,notleastbecausebettereducationgenerallygoeshandinhandwith

positiveexternalitiesinfavorofmoregrowthandhigherwelfarefortheeconomyasawhole.24

A much trickier point is the level of inequality which a modern society is willing to tolerate

(Krueger,2004).Neithereconomictheorynorempiricalresearchcanprovideaclearrecommen-

dationonthisissue.Fromaninstitutionalpointofview,themorecrucialquestionconcernsthe

appropriateinstrumentsfordistributionalgoals.Economistsgenerallypreferindirectmeasures,in

particularthosethatimprovetheabilityofrecipientstoimprovetheirownsituationandovercome

thenecessityofrelyingonthestateforsubsistence.25Apartfromeducation,importantexamples

arepoliciesthatincentivizeworkamongwelfarerecipients,suchastheEITCintheUS,theGer-

man“Kombilohn”orotherworkfaremeasuresinsteadofunconditionalbenefits.

ConcerningEffective Labor Markets,nosimpleformulaexists.Inprinciple,ordoliberaleconomists

areskepticalaboutwagecartelsandallthemoreaboutlegallybindingminimumwages,because

inbothcasesthecompetitiveequilibriumwageissuspended.Ontheotherhand,evenEucken

recognized thepossibilityofexceptions to this rule, for instance ifananomalous laborsupply

wouldresultinanunstableequilibriumorunacceptablylowwagesfromasocialpointofview.


24SeeLangeandTopel(2006)andtheliteraturecitedtherein.25AlsoEuckenexplicitlymentionedself-helpandthesubsidiaryprincipleascomplements tohismainprinciples (Grossekettler,2010,

p.324).

29

In modern labor market analysis, many more reasons are discussed for market interventions,

includingmonopsonisticlabordemand,discrimination,informationalasymmetriesandefficiency

wages.Thereisalsoawidespreadpoliticalconsensusthatunionsshouldbeallowedtomonopolize

wagebargainingonthelaborsupplyside,andthatstrikesoughttobeallowedtoenforcetheir

claims.Moreover,workersviaunionrepresentativesparticipatetoagreatextentinbotheconomic

andpoliticaldecisionsinmanycountries,uptoco-determinationonequalterms,asforexample

onGermansupervisoryboards.Evenwiththeconsiderableeconomiccoststhatsuchregulations

entailintermsoflimitedliabilityandbureaucracy,theymaywellcontributetosocialpeace.

Again,theconceptofamodernsocialmarketeconomycallsforabalancedinstitutionaldesign.

Forexample,givenunionprivileges,itisimportantthatacountervailingpowerexistsonthelabor

demandsideandthatacertainbargainingcultureensuresfairandamicablyachievedagreements.

Concerninglabormarketpolicy,theactivationoftheunemployediscertainlypreferabletopurely

passivemeasureslikeearlyretirementorgenerousbenefits.Analogously,laborprotectionlegisla-

tionshouldbefairandgivenoincentivesforabuseorsaturation.

Country Selection

Ouranalysiscoverseightcountries;Canada,France,Germany,theNetherlands,Spain,Sweden,

theUnitedStatesandtheUnitedKingdom.Wechosethesecountriesinordertointroduceenough

variancetotestourconcept.Manyofthesecountriesconsiderthemselvessocialmarketecono-

miesandothersdonot.Wehypothesizedthatwewouldfindsignificantvariancebetweenthese

countries.Amongthosethatdisplaycharacteristicsofasocialmarketeconomy,wealsoexpected

tofindvariance,albeittoalesserextent.

CONCLUSION

Acommon featureof theprinciplesdiscussedabove is their institutional character.They thus

mirrorthestrongemphasiswhichislaidongeneralrulesinamodernsocialmarketeconomy,

bothforthemarketsandforthepublicsector.Theultimatereasonforthispreferencecanalsobe

interpretedintermsofgametheory:Withoutbindingrules,time-inconsistentdecisionsandlackof

reliabilitywouldleadtomyopicbehavior,whichinturnwoulddamagebothefficiencyandwelfare

inthelongrun.

Asecondcommonfeatureoftheprinciplesisthepriorityofaself-regulatingsystemoverdirect

publicintervention.Theideathatthelatterisgenerallylessefficientand,evenmoreimportantly,

morepronetotheemergenceandmisuseofpower,isstronglysupportedbymoderninstitutional

economics,includingtheoriesofbureaucracyandmodelsfromtheareaofpoliticaleconomy.26In


26Foraneconomicperspectiveonbureaucracy,seeDixit(2002).

30


away,everypoliticalmarketinterventionconvertsprivateintopublicgoods,toacertaindegree

atleast.Thisnotonlyweakensmarketincentives,butisalsolikelytoresultinpoliticalquarrels

where,intheend,themaximizationofvoteswillprevailoverthemaximizationofcommonwel-

fare.Inparticular,minoritiessuffertheriskofbeingcompletelyignoredorevenexploited,while

inthemarketprocesstheycanpursuetheirinterestsinthesamewayaseveryoneelse,withinthe

limitsoftheirendowmentatleast.Inthisway,apoliticalelementinnatelyexistsintheconceptof

asocialmarketeconomy,whichultimatelycannotbeseparatedfromeconomicreasoning.

Athirdimportantpoint,whichwasalreadystressedbyEucken,isthemutualinterdependenceof

theprinciplesofasocialmarketeconomy.Theymustbeseenasawhole,andcannotbebroken

upinordertoselectonlythoseelementswhichseemconvenient.Forexample,thereisaunityof

decision-makingpowerandliability,andalsocompetitionwouldhardlyworkwithoutanefficient

pricingsystemandopenmarkets.Moreover,themarketmechanismcannotworkproperlyinorder

to reduceunemployment ifwagesarefixedat toohigh levelsor ifwelfarepolicyweakens the

incentivesoftheunemployedtofindanewjob.Analogously,competitionbetweenfirmsfailsto

guarantee efficiency if, within the decision-making bodies of firms, authority and liability are

separated.Lastbutnotleast,afreesocietyrequiresbothacertaindegreeofeconomicliberalism

andacertaindegreeofsocialinclusion.Notonlywouldwelfareandacceptanceotherwisesuffer

severely,butsocialmobilityasafosteringfactorofsocialinclusionactuallyreinforceseconomic

performanceinthelongrun.Euckenhimselfcalledthisthe“interdependencyofconstitution.”27

Recenthistory,namelythedemiseofthecommunisteconomies,provedhimright.

27SeealsoOswalt-Eucken(1994).

31

Index Results – Initial Findings

INDEX RESULTS – INITIAL FINDINGS

CortnieShupe,ChristinaBusch

EXECUTIVE SUMMARY

Thegoalofthisexplorativestudywastocreateameasurableconceptfortheinstitutionsofamod-

ernsocialmarketeconomy(MSME)throughaheuristicprocess.Aspartofthisprocess,ittested

asamplegroupof8economiestodeterminetowhatdegreetheyinstitutionallyresembleMSMEs.

Accordingtoordoliberalthought,aMSMEexistsifandonlyifallofthe11institutionalprinciples

areupheld.Thekeyfindingsofthisexplorativestudy,includinganevaluationof:Canada,France,

Germany, the Netherlands, Spain, Sweden, the United Kingdom and the United States, offer

insightsintotheinstitutionalstrengthsandweaknesseseachcountryexhibitsinthe11principles

ofaMSME.Measurableindicatorsforeachprinciplemakethisanalysisconcreteandtranslatable

intopolicymeasurescommensuratewithaMSME.Ofcourse,onlysomeofthecountriessurveyed

haveexpressedthegoalofbeingasocialmarketeconomy.Others,suchastheUnitedKingdom

andUnitedStateswereincludedinordertoensurevarianceforthepurposeoftestingourconcept

ofaMSME.

Swedenleadstheranking,showingconsistentlystronginstitutionsinall11principlesofaMSME.

Spain,on theotherhand,consistentlyscored low,oftenasaconsequenceofweak institutions

andmechanismsforenforcementratherthanlackof formalrulesandprocedures.Assuch, its

institutions fall short of representing a MSME. Due to the importance of the interdependence

of theprinciples, evenGermany,which ranks second, showsaneed for improvement in some

institutionalareasbeforeitcanfullybeconsideredaMSME.Mostcountriesdemonstratedagreat

deal of variance across principles, which suggests that in order to truly reflect modern social

marketeconomies,institutionalreformwouldberequiredinthoseareasinwhichscoresarelow.

InstitutionalclusterscouldbeseenbetweenCanada,theUKandtheUS.Perhapsmoreinteresting,

however,isthefindingthatlittleclusteringoccurredaroundthecountriesoftheEconomicand

MonetaryUnion(EMU).

OPEN MARKETS

Theinstitutionsguaranteeingopenmarketsappearrelativelystronginallcountries,evidencedby

aboveaveragescoresacrosstheboardforthisprinciple.However,significantdifferencesbetween

thehighest-scoring country, Sweden, and the lowest-scoring country, France, canbe observed.

Swedenhasveryopenlabor,capitalandproductmarketswhileFranceprotectsitsdomesticmar-

kets toahigherdegree thanothercountries. It is theonlycountry inoursamplewithhigher

productmarketregulationsthantheOECDaverageanditcontrolscapitalmovementmoreoften

32

thanmostof theothercountries in thegroupbyprotecting“strategic industries” fromforeign

ownership.TheUShassimilarrestrictionsinthedefenseandenergyindustries.

LessimportantinEucken’stimethantodayinaglobalizedworld,openlabormarketsintheform

offreedomofmigrationproveessentialforaMSME.Germanystandsoutinthisregardasone

of the few countries thathave failed to design amodern immigration law centered around its

economicselfinterestandprovidesfewprovisionstofostertheimmigrationofskilledworkers.

Sweden,ontheotherhand,targetshigh-skilllaborimmigrationwithdifferentiatedpolicies.

EFFECTIVE PRICE SYSTEM

InthiscentralprincipleofaMSME,verydifferentlevelsofpricecontrols,administrativeprices

andsubsidiescanbeseen,inter alia,amongthecountriesoftheEMU.Becauseallofthecountries

inthesampleemploysometypeofpricecontrols,noneoftheeconomiesscoredparticularlywell

fortheirinstitutionsinthisarea.Franceperformswelloverall,buttogetherwithSpain,itshares

thelastplaceinrespecttopricecontrols,whichwereassessedasbeingthehighestinthe8coun-

tries.Franceboosteditsoverallscoreforaneffectivepricesystembysubsidizingandtransferring

muchlessthanGermany,theNetherlandsandSpain.Manyoftheeconomiesreceivedarelatively

lowscoreforoneoftheindicators.However,Spainconsistentlyscoredlowforallthreeindicators

thatmeasurethisprinciple.Consideringallthreeareas,theUK’sinstitutionsperformthehighest.

COMPETITION

Germany,theUnitedStatesandtheUnitedKingdomreceivedverypositiveevaluationsfortheir

institutions regarding competition.A strong competition oversight authority serves as a pivotal

institution for fosteringcompetitionwithinaneconomy.TheUnitedKingdomandUnitedStates

receivedthehighestpossibleassessmentfortheirrespectivecompetitionoversightauthorityand

FranceandGermanyscoredhighaswell.Germany’slawsandrulesforcompetitivestructuresin

themediastandoutasfosteringstructuraldiversity,whichensurespublicaccesstoavarietyof

substantivedebateandinformation.AlackoflawsinFranceandtheUK,incontrast,thatwould

ensurecompetitivestructures,hasledtooligopolisticownershipinprintedpressandtelevision,

whichtosomeextentlimitaccesstotheobjectiveinformationrequiredforfunctioningcompetition.

PROPERTY RIGHTS

Canada,theUnitedStatesandtheUnitedKingdomshareverystronginvestorprotectionrights.

Thedegreeofinvestorprotectioninthecountriessampledvariesgreatly,withalow-scoringclus-

teraroundthecountriesoftheEMUfortheirminorityshareholderprotections,evaluatedasweak.

Institutionstakenintoaccountonthisscoreincludesecuritiesregulations,companylaws,civil

procedurecodesandcourtrulesregardingevidence.Withrespecttopatentprotection,allofthe8

countriesreceivedhighscores.


33

FREEDOM OF CONTRACT

Sweden’sinstitutionsintheareaofoccupationalchoice,markettransparencyandconsumerpro-

tectionandjudicialreviewreceivethemaximumpossibleassessment.Althoughstillreceivinga

relativelyhighscore,Germanywasmarkeddownforitsbarrierstooccupationalchoiceassociated

withitsHandwerksordnung.OftencriticizedinthecontextofEUintegration, thesehandicrafts

regulationscanbeviewedasprotectivemeasuresforinsiders,astheyprohibitnewbusinesses

fromsettingupinsmalltrades.Intermsofconsumerprotection,mostcountriesprotectconsum-

ersbyahostoflegalprovisionsagainstmisleadingmarketingandpriceintransparencies.While

formalinstitutionsexistintheUSandSpain,theUSreporthighlightsproblemsofenforcement

duetolackoffinancingandstaff.TheevaluationforSpain,ontheotherhand,describesanover-

abundanceoforganizationsandsomemisuseofpower.

LIABILITY

Debtservicingperiodsandmechanismsfordebtcollectionbothaffecttheborrowingbehaviorof

individualsintermsofrisk-taking.UncoordinatedprivateinsolvencyrulesamongEUcountries

canhaveunwantedconsequences.Shorterdebt-servicingperiodsinGreatBritain,forexample,

inducedmany insolventGermanresidents tomove there inorder toavoid thestricterGerman

insolvencylaw.InSpain,alackofdebtcollectionmechanismsmayhavehadadverseeffectsonthe

constructionboom,asmortgagesbecametheonlysurewaytoenforcedebtcollection.

Medium-sizedenterprisesoftenlinkmanagementcloselytoownership,whichtendstogohandin

handwithliability.Germanyreceivedthehighestmarksforitslongtraditionofpromotingastrong

Mittelstand through various mutually reinforcing institutions. Slow SME development despite

Frenchpoliciesinthisareademonstratesthenecessityofalong-termhorizonandconsistencyof

policytosuccessfullyimplementnewinstitutions.Spainreceivedoneofitshighestscoresinthis

area,owedtoitsrathersuccessfuldecentralizationofpoliciestopromoteSME.

Inamoredirectmeasurementofmanagerliability,Swedishlawhasanarrayofprovisionsthat

earnedthecountrythehighestrankingforinstitutionsthatencourageresponsiblemanagement,

holdingindividualsaccountablefortheiractions.AcrosstheEU,incentivestopromotelong-term

rather than short-term profit orientation varied greatly. The US stood out as an economy that

focusesonshort-termprofitorientation,hastheleastamountofmanagerliabilityandreinforces

thisorientationthroughinstitutionsinotherareasrelatedtomanagerliability.


34

FINANCIAL STABILITY

Accordingtoordoliberaltheory,financialstabilityrequiresthatthecentralbankfocusexclusively

onpricestabilityandmaintainpolicy,financialandpersonalindependence.TheBankofCanada

andtheRiksbankenofSwedenaretheonlytwoinstitutionsthatfullymetthesecriteria.Although

theECBdidfairbetterthantheBankofEnglandandtheFed,itspolicies,inparticularduringthe

recentcrisis,havenotdifferedgreatlyfromthoseoftheFed:itengagedinquantitativeeasingand

somecriticsquestionitspoliticalindependenceafterthedecisiontobeginpurchasinggovernment

bondsin2010.

Evaluations of the too-big-to fail problem revealed that competitive institutionswereunable to

prevent thisproblem.On thecontrary,global competitiondrovemanybanksectors tobecome

moreconcentratedandsubsequentlytocauseinstabilityinthecaseofinsolvency.Moreover,the

studyfoundthatUSbanksarebyfarthemostcapitalizedandequityratiosofcompaniesarenot

particularly low inanyof the countries studied.More research isneededon the speedof and

institutionalpreparednessforcompliancewithBaselIII.

CONSISTENCY OF POLICY

ConsistencyofPolicyrequiresinvestmentincapitalinventoriesforthefuture,includinghuman

capital.Allofthecountriesreceivedsimilarratingsfortheextentoftheirstafftraining.Sweden

investsthegreatestpercentofGDPinresearchanddevelopment,whileSpaininveststheleast.

Twoimportantareasofdivergence, inparticularamongthecountriesof theEMUrelatetothe

controloffinancialconsolidationandlinkingpensionsystemswithlifeexpectancy.Germanyis

theonlycountryof the8evaluated thathasestablishedadebtbrake in its constitution.Also,

theNetherlandsandSpainaretheonlytwocountriesthathavenotyetreformedtheirpension

systemstoaddressdemographicchallengestosustainablefinancing.

EFFICIENT ENVIRONMENTAL PROTECTION

Noneofthecountriesinthesampleobtainedanoptimalscoreformarketinstrumentsthateffec-

tivelyinternalizeexternalities.Swedenreceivedagoodscoreduetoanarrayoftaxesthatraise

thepriceofcertaingoodsclosertotheiractualcost.Italsoinvestsrevenuefromgreentaxeslike

the congestion tax to finance improvements in public transportation and infrastructure. While

Germanyleviesanenergytax, itchannelsrevenuetofinancethesocialsecuritysystemrather

thanfocusingonreinvestmentinenvironmentally-friendlyinfrastructure.Despitecommonrules

forenvironmentalpolicyamongEUcountries,complianceandenforcementdiffer.Germanyand

Spainsubsidizepollution-intensiveindustriestoalargerextentthanothersandgastaxesgreatly

divergewithinthesameEUframework.


35

EFFECTIVE LABOR MARKETS

Aframeworkforeffectivelabormarketsprovidesthefoundationforactiveparticipationinsocial

life,bothduringworkingyearsandretirement.Spainscoredverylowonthisprinciple.Thereport

describeshowtheweaknessordysfunctionofsomeinstitutions,actuallyreinforcepoorperfor-

manceinotherareas.SwedenandtheNetherlandsscoreconsistentlyhighfortheirinstitutions

fosteringaneffectivelabormarket.Germany’sactivelabormarketpolicies(ALMPs)achievethe

bestratingforitssuccessinactivatingthelong-termunemployedandmakingfinancingdecisions

basedoncost-effectivenessanalysis.However,despiteGermany’scurrenteconomicperformance,

astructuralanalysisrevealsweaknessesintheformofasymmetriesthatfosteraduallabormar-

ket.Againwithinthisprinciple,significantvarianceexistsamongEMUcountriesinparticularin

regardtoemploymentprotectionandALMPs.

SOCIAL MOBILITY

Lessprevailing inEucken’s time, societal expectations for social mobility today shape current

debatesaboutsocialjustice.Swedenobtainedthehighestoverallscorebecauseofitsinstitutional

infrastructure and policy focus on enabling mobility through equal opportunities rather than

merelyofferingfinancialcompensationforsocialexclusion.Swedenfurthermoresurpassesthe

othercountriesexaminedinpromotingregionalequalityintheeducationsystem.WhileGermany

scoreshighonmostindicatorsforsocialmobility,itlostpointsforitslackofinvestmentininterna-

tionalcomparisoninchildcareandearlychildhoodeducationaswellasrelativelynon-permeable

educationstructures.Likewise,Franceand theUK lostpoints for thesocialselectivityof their

educationsystems.Similar toGermanyand theUK, theUSstruggleswith regionaldisparities

andlackspoliciestoencourageequalopportunitiesoflow-incomeareas.Spain’shighereducation

systemservesasacounterexampletoGermany,FranceandtheUK:entranceintouniversityhas

sofewbarriersthanthevalueofuniversityeducationinSpainiseroding.


36


Figure 4: Compound Index Results

Country comparison by principle.

Source: Index Calculations.

Canada France Germany Netherlands Spain Sweden United Kingdom United States

10

9

8

7

6

5

4

3

2

1

1

2

3

4

5

6

7

8

9

10

1

2

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7

8

910

Open Markets


Property Rights

Competition

Freedom of Contract

Liability

Financial StabilityConsistency of Policy

Efficient Environment Protection


Social Mobility

37

CATEGORY I: COMPETITIVE AND EFFICIENT MARKETS

Aggregatedscores for theprinciplesofOpenMarkets,EffectivePriceSystemandCompetition

comprisethecompositescoreforthecategoryofCompetitiveandEfficientMarketAllocation.

Figure 6: Competitive and Efficient Markets

Category Score

Source: Index Calulations.

Open Market Effective Price System Competition Average

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s0

2

4

6

8

10


4

5

6

7

8

Figure 5: Ranking: Compound Index Results


7.96

7.427.08 6.92 6.84 6.81

6.51

5.53

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s

12

34

56

78

38

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s

OECD Average = 1.35

0.961.39 1.27

0.91 0.961.24

0.76 0.84

most restrictive

least restrictive

Figure 7: Product Market Regulation

Source: OECD, Product Market Regulation 2008.

0

1

2

3

4

5

6


OPEN MARKETS

Openproduct,laborandfinancialmarketsareallsubsumedundertheprincipleofopenmarkets.

Whiledifferencesdoexist,theaverageratingforthisprinciplereflectsratheropenmarketsinall

oftheseareas.

InareaswhichtheOECDdeemscompetitionviable,itratesmembercountriesontheextentto

whichpoliciespromotecompetition.Withascalefrom0-6,fromleastrestrictivetomostrestric-

tive,France,GermanyandSwedenregulateproductmarketsinmoreareasandtoahigherdegree

thantheothercountriesevaluated,butstilloveralldonotshowhighdegreesofregulation.With

theexceptionofFrance,allcountriesinthesamplerankbelow,i.e.arelessrestrictivethanthe

OECDaverage.

39

Controls on Capital Movement

Freemovementofcapital isoneofthefourfundamentalfreedomsofEuropeanintegration.EU

lawsratherthannationallegislationdefinecontrolsoncapitalmovementinEUmemberstates.

Thisapplies tosixcountries in the index–France,Germany,TheNetherlands,Spain,Sweden

andtheUnitedKingdom.TheonlyexemptiontotheEU’sexclusivecompetenceonforeigndirect

investment(FDI)areprovisionsregardingthesupervisionofnationaltaxlaws.

Byandlarge,theEUregimeofcapitalcontrolsformembersoftheEconomicandMonetaryUnion

isliberal.Exemptionsarewell-definedandaimatstabilizingtheunion.Theyrelatetoeconomic

sanctions,prudentialmeasures,taxationorsecurity.Article75oftheTreatyontheFunctioning

oftheEuropeanUnionforinstanceprovidesmeasurestocombatterrorism,e.g.byfreezingfunds

andfinancialassets.Eurozonenon-membersmayintroducecontrolsifacrisisoccursorifbalance

ofpaymentsimbalancesjeopardizetheinternalmarket.

Figure 8: Controls on Capital Movement

Source: Questionnaire.

1 2 3 4 5 6 7 8 9 10

10

9

9

9

9

9

8

8

Sweden

Canada

Germany

Netherlands

Spain

United Kingdom

France

United States


40

CapitalflowsinandoutofFrancearegenerallyfree,butFrenchlegislationprovidesforacompara-

tivelyhighnumberofrestrictionstoforeigninvestmentonthegroundsofshieldingFrenchcompa-

niesfromforeigntakeovers.A2005lawforcesanyforeignbuyerofaFrenchlistedcompanytoalso

acquireallofitssubsidiaries,thusrestrictingtakeoversofconglomeratessuchasRenault.Moreover,

elevenindustrysectorsarelistedas“strategic”,mandatinggovernmentpermissionforanytakeover.

SpainisanexampleofanEUcountrythatmakescomparativelylittleuseofthepossibilitiesto

curbforeigninvestmentforstrategicorsecurityreasons,asevidencedbytheuncontestedsaleof

Endesa,thecountry’slargestelectricutilitycompany,toItaly’sEnelin2007.

TheNetherlandsowetheirliberalattitudetowardcross-borderfinancialflowstotheirlongtradi-

tionof investmentabroad.Taxesoncapitalarescarceanddesignedsoas tonotdeter foreign

capital.TheNetherlandsarehometoseveralmultinationalcorporations’headquarters,owingin

parttothehighnumberofdoubletaxtreatiesthattheNetherlandshaveenteredintowithother

countries.Numeroustaxdeductionsrendertheeffectivecorporatetaxratebelowtheofficial25.5

percentandareaslowas1percentontheDutchAntilles.

TheUShashistoricallyhadfewercapitalcontrolsthanWesternEuropeancountriesandfurther

liberalizedcapitalmovementafterthecollapseoftheBrettonWoodssystem.OutwardFDIgrew

ninefoldbetween1982and2006. InwardFDI facesmorerestrictions,mostlyon investment in

defence, transportation,energyandbanking.TheseregulationsaimtopreserveUSsecurityor

strategicinterests,yettheyjeopardizesomeUSsectorsbypoliticizingforeigninvestments.Two

recentclashesofforeigninvestmentwithnationalsecurityconcernsstandout:DubaiPortsWorld’s

efforttotakeoveroperationsofsixUSportsin2006andChinaNationalOffshoreOilCompany’s

attemptedpurchaseoftheoilfirmUnocalin2005.Bothpotentialbuyersbowedoutaftersevere

bi-partisanCongressionalpressure.


Forbotheconomicandhumanitarianreasons,migrationshouldbeasfreeaspossiblewithinthe

limitsofhostcountries’security.Migrationcansignificantlyacceleraterecoveryaftereconomic

shocks,whenlaidoffworkersarefreetomigratetoothercountrieswheretheirskillsandknowl-

edgeareindemand.Forhostcountries,labormigrantshelpfillgapsinthenationalworkforce.In

thelongrun,migrationcanserveasasignalandenablerforstructuralindustrialchange.


41

Figure 10: Freedom of Migration


1 2 3 4 5 6 7 8 9 10

9

8

7

7

7

7

7

6

Sweden

Canada

France

Netherlands

Spain

United Kingdom

United States

Germany

Figure 9: Net Migration

In milions; Graph supplementary to index

Source: World Bank, World Development Indicators, extracted Sept 12, 2012.

2010

2005

2000

1995

1990

1985

1980

-2

0

2

4

6

8

10



42

OneindicationthatfreedomofmigrationintheUSishamperedisthefactthatdemandforwork

permitsvastlyoutstripssupply.ThenumberofH1-Bvisa–themainworkvisaforthoseseeking

temporary residence – is capped at an annual 65,000, while the number of Green Cards (for

permanent residence) is capped at 140,000 per year. Visa application fees are high and keep

newlyestablishedcompaniesfromhiringforeigners,therebylimitingtheirabilitytohirethemost

qualifiedapplicantsatcompetitivewages.Immigrationforlow-skilledworkersisevenharderand

regularlytakesmorethansevenyearstoprocess.Integrationprogramsfornewlyarrivedworkers

areadministeredonthestaterather thanonthe federal levelandvarywidely.Overall, theUS

ranksfairlyhighamongsimilarnationsregardingtheintegrationofforeignworkers.

FreedomofmigrationinneighbouringCanadaishigherthanintheUS,asevidencedbyoneofthe

largestforeign-bornpopulationsharesworldwide.Thenumberofimmigrantsstandsatroughly

250,000peryear.Canada’simmigrationpolicyisbasedonatransparentpointsystemthatfavors

workerswithskillsdeemednecessarybytheCanadiangovernment.Whilethepointsystemis

designed to ensure that immigrants quickly integrate into the country’s economy, immigrants

exhibithigherunemploymentratesandlowerwagesthannativeworkersbecauseofalackofrec-

ognitionofforeigncredentialsandprofessionalexperience.Thegovernmenthasthusintroduced

newcredentialrecognitionprogramsandsimplifiedimmigrationforworkerstrainedintradesthat

areinhighdemandinCanada.

France, Germany, the Netherlands, Spain, Sweden and the UK all boast an extremely liberal

regimeformigrantsfromEUmemberstates.EUcitizensarefreetolive,work,studyandretirein

anyEUmemberstate.YetcomparedwiththeUSandCanada,therulesaremuchmorerestrictive

regardingmigrantsfromnon-EUcountries.TheshareofpeopleresidingwithintheEUwhowere

bornoutsideoftheunioncurrentlystandsat6.8percent,whiletheshareofpeopleresidinginan

EUmemberstatewhowereborninanothermemberstateisonly3.2percent.

InGermany,fewprovisionsexistthatfostertheimmigrationofskilledworkers,andthecountry

isoneofthefewwithoutamodernimmigrationlawcentredarounditseconomicself-interest.A

muchanticipatedscheme toattracthighly-qualifiedmigrantshasnotshown thedesiredeffect

owingtoitshighminimumincomerequirement.EvenlowerthanmigrationratesareGermany’s

naturalizationnumbers.Thecountry’snationalitylawisgroundedinIusSanguinis,attributing

citizenshipbydescentratherthanbirthplace.ThiscontrastsforexamplewiththeUnitedStates,

wherecitizenshipisgrantedonthegroundsofIusSoli.Moreover,Germanyisoneofthecountries

withthestrictestlawsondualcitizenship.

The Netherlands have traditionally been open towards migrants. Post-war immigration waves

broughtmigrants fromIndonesia,Turkey,Moroccoandelsewhere.Nowadaysmost immigrants

comefromAfrica,theMiddleEastandfromEasternEurope,astheNetherlandshavebeenless

restrictivetowardsthenewEUmembercountriesthanothers.YetatthesametimetheNether-

landsistheonlyEUmemberopposedtoRomaniaandBulgariajoiningtheSchengenaccordon

visa-freeworkandtravelacrosstheunion.


43

Frenchregulationregardingmigrationfromnon-EUcountries tries to limitandsteer itso that

labordemandsofFrenchfirmsaremet.BilateralmigrationagreementsexistwithSenegal,Tuni-

sia,Beninandafewothercountries. Inthepastyears,Frenchregulationof labor immigration

hasbeenrestrictive inresponse topublic fearsofwagedumpingandhostileattitudes towards

immigration,particularlyofRoma.ThenewgovernmentunderPresidentHollandeisexpectedto

relaxtheserules.

BritainhasseenvastinflowsofmigrantssincetheendoftheSecondWorldWar.Theunemploy-

ment rate among them is higher on average than for the British population, and incomes are

lower.Thegovernmentinreactiontightenedimmigrationlawsandfirmlycontrolsimmigrationof

non-EUcitizens.Yettherearealsoversatileintegrationmeasuresaimedforinstanceatpromoting

multiculturaleducationinpublicschools.

Immigrationfromnon-EUcountriesintoSpainisrestricted,butenforcementhasbeensoftdur-

ingthepastdecadeofeconomicgrowth.Evenillegalimmigrantsweregrantedaccesstowelfare

programs.ThemainoccupationsformigrantsintoSpainarehomecarefortheelderlyandother

low-paidjobsintheservices,agricultureandconstructionindustry.Whilemigrationpolicywas

mostly lenient, employment regulations were strict. This led to a boom in illegal employment

andprecariousworkconditionsformigrants.Theburstofthehousingbubblein2007/2008hit

migrantshard,aslargesharesworkedinconstructionandrealestate.Thegovernmentincentiv-

izedtheirreturnhome,e.g.bypayingfortravel.MigrationintoSpainfellprecipitouslyafter2008,

andmanylow-skilledmigrantworkersleft.

TheSwedishgovernmentagency responsible formigrationpolicyprotects the right toasylum

andpromotesneed-basedlaborimmigration.Immigrantparticipationinthelabormarketislow.

Municipalities must help immigrants enter the labor market, but unemployment among low-

skilledimmigrantsisstillrampant.

Barriers to Market Access

Marketaccess,i.e.theremovaloftradebarriers,ensuresthatcompetitionbetweenfirmscantake

placeona levelplayingfield.Among themostdetrimentalandwidespreadbarriers tomarket

accessarehighcoststostartingandoperatingabusiness,minimumcapitalrequirements,quotas

andlicensesforcertainindustriesandothergovernmentalcompetition-distortingmeasuresthat

artificiallyraiseprices.Statemonopoliesonpublicutilitiesareanotherexample,thoughacom-

pleteliberalizationofsuchnetwork-basedindustriescanproveequallyharmfulifnoregulationis

inplacetocurbinherentmonopolistictraits.


44

Canadahasconsistentlyrankedatornearthetopintermsofeaseofbusinessoperationsinthe

WorldBank’sDoing Business Report.Therearerelativelyfewbarrierstostartingandoperating

abusiness,with themost important barrier being agriculturalmarketingboards that regulate

access toproductionquotas.Oneethnicgroup facingsignificantbarriers tomarketaccessare

CanadianFirstNationspeopleastheyoftendonotowntheirlands,complicatinganytransaction

involvingreserveland.

BarrierstomarketentryintheUSarealmostaslowasinCanada,withtheWorldBank’sDoing

Business Report ranking theUS4th in theworld fordoingbusiness ingeneral,and8th for the

easeofstartinganewbusiness.Regulatoryrequirementsfortheformationofnewbusinessesare

few, especially for smallbusinesses.TheSmall Business Administration supports them through

microlending,educationalprogramsandamandate that theyreceiveat least23percentofall

governmentcontracts.

RaisingcapitaliseasierformostfirmsintheUSthaninothercountries.Thisincludessmallstart-

upfirmsthatinmanycountriesfacecapitalshortages.Laborstandardsarelowenoughtonotkeep

smallbusinessesfromthriving.TheSarbanes-Oxleyactof2002,aimedatpreventingcorporate

scandals,hasincreasedthecostoffirmstogopublic.Anewbillwasproposedtomodifytheact,

simplifyingraisingcapitalforsmallfirmsthrough“crowd-funding”.

Figure 11: Barriers to Market Access


1 2 3 4 5 6 7 8 9 10

9

9

9

8

8

7

7

7

Netherlands

Sweden

United States

Canada

United Kingdom

France

Germany

Spain


45

TheGermanpost-wareconomicorderplacesmuchemphasisonthefreedomtosetupabusiness.

TheGermanantitrustagencyispowerfulanddoesnotshyawayfromfightingoligopoliesandcar-

tels.PressurefromtheEU’sliberalizationinitiativeshasfurtherdismantledmarketentrybarriers,

forinstanceintelecommunicationsandinsurance.Nevertheless,somesectorsarestillmarkedby

oligopolisticstructures,forinstanceintheenergymarket,postalservicesandbustransport–all

ofthemnetwork-basedindustries.StartingabusinessinGermanyisnoteasy.TheWorldBank’s

Doing Business ReportranksGermanyatposition98outof183,closetoMongoliaandEthiopia.

Theaveragetimerequiredforstartingabusinessistoolong,regulatoryproceduresarecumber-

someandcapitalrequirementsarehigh.

Likemostothercountries,Swedenhasderegulatedtelecommunicationsandpostalservicesduring

thepastdecades,coincidentalwithEUmembership.Inaddition,ithasliberalizedthepharmacy

marketandtheschoolsector.Alcoholvendingpolicyisstillstrict,withagovernment-regulated

firmtheonlyoneallowedtosellalcohol.FormalbarrierstodoingbusinessinSwedenarecompa-

rablylow,withtheWorldBankrankingthecountryas14thoutof183countries,yetthecountry

onlyranks46thinthesub-categoryofstartingabusiness.

IntheNetherlands,hardlyanymonopoliesexistanymore,withmanyformerstatemonopolieson

utilities,transportandotherservicesdismantledduringthepastdecade.Mostbusinesslicensing

requirementshavebeenabolished,includingforhandicraftandretailsectorsthatarestillheavily

regulatedinGermany,AustriaandSwitzerland.FoundingabusinessintheNetherlandsischeap

(about40Eurosforasingle-personbusiness,around840EurosforanLLCwithmorethan250

employees)andcomparablyeasy.

InSpain,telecomandenergycompaniesthatwereprivatizedinthe1990sstillenjoysubstantial

marketpower,evenwhenaccountingfortheirinherentinclinationtomarketconcentrationgiven

thenetworkeffectsinthesesectors.Industriessuchasretailingandgasolinedistributionfeature

entrybarriersthroughlicensesandorganizationalconstraintssuchasopeninghours.Recognition

of foreignqualifications iscumbersome,especially forpositions in theengineeringandhealth

sector.Hightaxesandpooraccesstocreditforsmallfirmsaddfurtherbarriersandhavebeen

exacerbatedbythefinancialcrisis.

InBritain,thederegulationinitiativesofthe1980stransferredownershipofpublicutilitiesand

otherservicestotheprivatesector,withthegoalofincreasingefficiencyandimprovingservice.

Yet insomesectors, suchas in the railways, thecost to taxpayersactually rose insteadof fell.

Numerousagenciesnowadaysregulatethesepreviouslystate-runservices,withtheaimofavoid-

ingthere-emergenceofmonopolies,e.g.throughproductstandards.


46

EFFECTIVE PRICE SYSTEM

TheFraserInstituteassessedthepricecontrols inFranceandSpainasthehighestamongthe

countrieswithinoursample.Noneofthecountriesscoredremarkablywellonthisindicator,given

that theyall employsome typeofpricecontrols.When it comes to the ratioof administrative

pricestomarketprices,however,Francereceivesthehighestscore.Spainconsistentlyscoresthe

lowestofthe8countriesonthisindicatoraswell.

Figure 12: Effective Price System

Source: Index Calculations, see appendix for individual sources.

Canad

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y

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8.678.17 8.01

7.33 7.31

5.67 5.59

4.42

Subsidiesandother transferpaymentsmadetocompaniesaswellasprivateandpublicenter-

prisesand individualsalsodistortprices.GermanyandSpainsubsidizeandtransfer themost,

whichnegativelyaffectstheirrespectivescoresforaneffectivepricesystem.However,Germany’s

low level of price controls and high ratio of market to administrative prices boosts its overall

assessmentwithinthisprinciplewhileSpainscoresconsistentlylow.


47

COMPETITION

Twoinstitutionsthatfostercompetitionincludeastrongcompetitionoversightauthorityandmedia

pluralism.Theglobalcompetitivereportanalysesandevaluatesover100competitionauthorities.

Thisinternationaljournalofcompetitionandoversightauthoritytakesintoaccountthesizeand

structureoftheinstitutionaswellastheemployeestructure,existenceofsector-specialistsand

thenumberofeconomistswithinthestaff.

TheUnitedKingdomandUnitedStatesreceivethemaximumassessmentfortheirrespectivecom-

petitionoversightauthorities.SpainandSwedenscorethelowestoutofourcountrysample.

Figure 13: Competition


Media Pluralism Power of Competition Oversight Authority Average

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10

Scores for thestructureofmediaownershipstem fromtheSustainableGovernance Indicators.

Countryexpertsappraisetheextenttowhichownershipstructuresensureapluralismofopinion

andavoidmonopolyofinformation.Germanyreceivedthemaximumscoreonthisindicator.Both

its Interstate Treaty on Broadcasting and Telemedia (Rundfunkstaatsvertrag, RfStV) and strong

federalcartelofficefosteraverydiversemedialandscape,withhighqualitypublicandprivate,

localandnationalstations for televisionandradio.Thisstructuraldiversityandcompetitionof

opinionensurespublicaccesstoadiversityofsubstantivedebateandinformationforallGerman

consumersandvoters.


48

Outof the8countries inoursample,Francescoredthe lowest,a5outofapossible10for its

oligopolisticownershipstructureoftheprintpress.Whilejournalistsmanagetoworkrelatively

independentlywithinthegivenframework,itprovesincreasinglydifficulttodoso.Thesector’s

financial fragility, brought on by competition from internet media, the print press relies more

andmoreonfundingfinanciallystrongindustrialgroups.Thesegroupsownalargenumberof

themediasourcesinFrance.Theclosetiesbetweenbusinessandpoliticalelitesinthecountry

rendersthisownershipstructureproblematicforguaranteeingapluralityofinformeddebatein

France.

TheUKlikewisescoredrelativelylowontheindicatorofmediapluralismduetoasimilarlevel

of ownership concentration, with a few corporations controlling the vast majority of large UK

newspapers.However,thecountry’sverydiverselocalmediastructureisresponsibleforascore

abovethatforFrance.

CATEGORY II: EFFICIENT PROPERTY RIGHTS

PROPERTY RIGHTS

Perhapsnotsurprisingly,Canada,theUnitedStatesandtheUnitedKingdomshareverystrong

investorprotectionrights,rangingfrom8.3to8.0outofthepossible10points.Thesecountries

alsohavealongtraditionofequityratherthandebtfinancing.Thisindicatorshowsagreatdeal

ofvarianceamongthe8countries,withtheNetherlandsobtainingthelowestscoreof4.7,Spain,

Germanya5.0andFrance5.3, the lattergroup reflecting relatively lowscores for strengthof

minorityshareholderprotections.Institutionstakenintoaccountonthisscoreincludesecurities

regulations,companylaws,civilprocedurecodesandcourtrulesregardingevidence.


49

Patentprotectioninstitutionsplayanimportantroleinsafeguardingpropertyrightsbyconsider-

ing thepositiveexternalities that ensue through researchanddevelopmentandensuring that

incentivesystemsencouragethisbehavior.Countryranksforpatentprotectionstrengthconsider:

coverage,membership in international treaties, restrictionsonpatent rights, enforcement, and

duration of protection. Patent protection institutions in the 8 economies examined are strong

acrosstheboard.

FREEDOM OF CONTRACT

Occupational Choice

Occupationalchoice isamainstayofsocialmarketeconomies.Peopleshouldbe freetochoose

theirprofessionaccordingtotheirtalentsandinterests.Nooneshouldbedeniedaccesstoatrade

orprofessiononthegroundsofhisnationalorigin,age,sexorotherpersonalcharacteristics.A

certaindegreeofregulationandsomerestrictionsonprofessionalpracticearejustified,butthey

mustbenon-discriminatoryandgroundedinobjectivecriteriasuchassafetyconcernsinmedical

professions.

Figure 14: Property Rights


Investor Protection Patent Protection Intellectual Property Rights Average

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50

Germanyisnotoriousforrestrictingaccesstooccupationsthatinmostothercountriesknowfree

entry.Barrierstoentryareparticularlyhighincrafts,mechanicalartandsmalltrade.TheHand-

werksordnung,orhandicraftsregulation,stipulatesthatabusinesscanonlybesetupbysomeone

whohasseveralyearsofrelevantworkexperience,hascompletedcomprehensivetrainingand

passedexaminations.Healthandsafetyconcerns justifysomeof theseregulations,butoverall

theycanbeviewedasrent-generatingprotectivemeasuresforinsiders.EUintegrationhasand

continuestoputpressureonGermany’sstrictmarketentryrules.Yetitshouldbenotedthatstrict

regulationssuchastheHandwerksordnunghaveplayedacrucialroleinqualityassuranceofGer-

mantrades.TheystimulatedtheriseofthefamousGermanMittelstand–oftenhighly-specialized

SMEsthataremarketleadersintheirnicheandthatfuelledGermany’senduringpost-warexport

boom.

Swedenmakesmanyeffortstoensurefreeoccupationalchoicethroughoutlife.Accesstoeduca-

tionandthustoprofessionaltrainingisnearuniversal.Furthermore,immigrantswhoseprofes-

sionalcredentialsfromabroadarenotrecognizedinSwedencanattendadulteducationprograms

atlittleornocosttoenablethemtoenterthelabormarket.

RegulationofprofessionsinCanadaishandledbytheprovinces.Whenprovincesdonotmutu-

allyrecognizetheirqualifications,thiscancausebarrierstointerprovinciallabor-mobility.French

legislationbansanyformofdiscrimination inrecruiting,yet inpractice,discriminationonthe

Figure 15: Occupational Choice


1 2 3 4 5 6 7 8 9 10

10

9

9

9

9

9

9

8

Sweden

Canada

France

Netherlands

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51

groundsofage,appearance,handicapsetc.iswidespread.A2006lawaimedtorectifythisvia

theuseofanonymousCVs,butitwasneverimplemented.Francefareswellintermsoflowering

discriminationagainstwomen,withseveralschemesinplacetohelpworkingmothers.

Themainobstacle to freeoccupational choice in theUK isnot formalbut informal.Structural

changeinthelabormarkethassignificantlyincreasedthedemandforthehighly-educatedand

highly-skilled,makingitharderformanualandlow-skilledworkerstofindwork.Accesstomost

professionsinSpainisfree,withafewexceptionsinthepharmaceuticalandlegalsphere.Inthe

US,someprofessionssuchasinlawandmedicinearemoreheavilyregulatedthaninotherOECD

countries,withtrainingdurationfordoctorsrangingbetween11and14years.

Market Transparency and Consumer Protection

Transparencywithregardtoproducts,services,pricesandavailabilityisnecessaryforamarket

tobeefficient.Transparentmarketsensurecompetitivepricesandhighqualityasconsumersare

freetochoosewheretospendtheirmoney.Consumerprotectionensurestherightsofconsumers

andthefreeflowofinformation,especiallyintheareasofsafetyandhealth.Acertaindegreeof

consumerprotectionisnecessarytoshieldconsumersfromharmbyproductswhosequalityisnot

readilyobservableandwhereinformationasymmetriesexist.

Figure 16: Market Transparency and Consumer Protection


1 2 3 4 5 6 7 8 9 10

10

9

9

9

8

8

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7

Sweden

France

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Netherlands

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52

Germanconsumersareprotectedbyahostoflegalprovisionsagainstmisleadingmarketingand

priceintransparencies.Mostregulationspertaintoconsumers’righttoinformation,suchasthe

rulethatretailersmustindicategrossprices,i.e.includeallapplicabletaxesonthepricetag,and

mustincludethebasepriceperunittosimplifypricecomparison.Regulatingauthoritiessuchas

theFederalMinistryofConsumerProtectionarequicktoenactnewruleswhentheneedarises,

leadingforexampletoprovisionsthatcallerscannotbechargedforthetimetheyspendwaiting

incustomercarephonelines.

The legal systemof consumerprotection inFrance is vast and consumerprotectionNGOsare

plentiful.The1978Code de la consommationsetstheframeworkfordefiningconsumerinforma-

tion rights as well as the rules for the presentation of goods, prices, conditions and terms of

delivery.Thisgenerallawhasbeensupplementedbysector-specificlaws,forexamplemailorder

andinternetcommerce,andisbuttressedbypublicadministrationinstitutionsandavibrantNGO

sector.DifferentfromthefateofcompaniesintheUSorSpain,extremelycostlylawsuitsarerare.

Contrarytotheprinciple-basedUSlegalsystem,France’sisrule-basedandthereforedoesnotsee

manyclassactionprocedures.

Spainishometoalargenumberofconsumerprotectionagencies.Somanyinfact,andarmed

withsuchfinancialand juridicalprivileges, that therehavebeenanumberof incidents in the

pastthatmakethenumerousmarkettransparencyandconsumerprotectionschemesseemques-

tionableandpartiallycounterproductive.Throughpublicsubsidiesandproceduraladvantagesin

courtconsumerorganizationshaveallegedlybeenabletobringunfoundedliabilitysuitsagainst

corporations.OwingtotheDavid-vs.-Goliathimagethesecorporationssufferedfromreputational

damageeveniftheywonthecase.Inanironicreversalofpurposethepoliciesthatwereaimedat

benefittingconsumersthenreducedcompetition.

CanadaservesasSpain’scounter-exampleintermsofthestrengthofconsumerassociations,asno

publicfundingisgrantedtoconsumerprotectionagencies,withtheexceptionofQuebec.Legisla-

tionvariesstarklyacrosstheprovinces,leadingtodifferingdegreesofprotection.

MarkettransparencyandconsumerprotectionintheNetherlandsarewell-providedforingeneral

throughpublicandprivateregulatoryinstruments.Productadvertisingisacaseinpoint–hardly

anygovernment regulation isexerted,and judgmentonadvertisingcontent isoutsourced toa

privatecommitteemadeupofproducers,sellers,consumersandmediarepresentatives.While

theydonotcommandpublicauthority,theyhaveapowerfulinstrumentathandforcasesofinap-

propriateadvertising–themediarepresentedinthebodywillsimplyrefusetopublishtheads

inquestion.

TheUShasafairlygoodsystemofconsumerinformation,yetunderstaffinginfederalagencies

leadstodeficiencies,markedlyinthefinancialsector.Asectorwithatraditionoflessoversight

thanothers,ithascometotheforefrontofpublicattentionafterthe2007/08realestateandthen


53

financialcrisis,whenmanyprivateinvestorsclaimedtheyhadbeenmisledintheirinvestments

bybanksandfinancialconsultants.Tostrengthenconsumerprotectioninfinancialproductssuch

as mortgages, credit cards and derivatives, the Obama administration created the Consumer

FinancialProtectionBureauin2009.

Judicial Review

Theprincipleof freedomofcontract isreinforcedbyaprudential legalsystemandruleof law.

Severalcountriesscoreveryhighonthisindicator,inparticularGermany,Sweden,UnitedStates,

FranceandCanadafortheproceduralfairnessoftheirlegalsystem.

TheorganizationofGermany’scourtsystemstandsoutasonethatproceduralfairnessthrough

specialization.Itscourtsystemisparticularlydiversified,allowingforanefficientdivisionoftasks

amonghighlyspecializedcourts.BeyondtheFederalConstitutionalCourt,fivesupremefederal

courtsexist:theCourtofJustice,theFederalAdministrativeCourt,theFederalFinanceCourt,the

FederalLaborCourt,andtheFederalSocialCourt.BasicLawguaranteesthejudicialindependence.

Figure 17: Judical Review

Source: Sustainable Governance Indicators.

1 2 3 4 5 6 7 8 9 10

10

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10

9

9

8

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7

Germany

Sweden

United States

Canada

France

Netherlands

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Spain


54

LIABILITY

Figure 18: Liability

Source: Index Calculations, see appendix for individual scores.

Private Insolvency Rules Ratio Medium- sized Companies to Total Companies Manager Liability Average

Canad

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10

Private Insolvency Rules

Lawsthatregulateinsolvencymuststrikeabalancebetweentwocompetingobjectives.Ontheone

hand,theyshoulddeterirresponsibleandoverlyriskybehavior.Ontheotherhand,however,they

shouldprovidesomeinsuranceagainsttheriskoffailurethatisassociatedwithanyinvestment

project.Thisquestionassessedthedegreeofbalanceineachofthecountries.

Mostcountriesinthesamplereceivedhighscoresforefficientrulesandenforcementofdebtcol-

lectionaswellasreasonabledebtservicinglengthsthatpromoteresponsibleborrowingbehavior.

InSweden,whichscoredhighonthisindicator,evaluatorsdescribedtherulesfordeclaringand

evaluatingbankruptcyasclear,unbiasedandbalanced.The2006DebtRestructuringActallows

debtrestructuringwithclearproceduresandobligationsinreasonablecases.Onaverage,aper-

sonwhorestructuresdebtduetoinsolvencyisrequiredtoliveatasubsistencelevelfor5years

whilecontinuingtoservicethedebtwithanyincomeearnedabovethislevel.Afterthisperiod,

thedebtorisfreedfromanyremainingdebt.Debtcollectionmechanismsworkeffectively,which

reinforcesconfidenceintherulesfortakingandgivingcredit.


55

AsimilarsystemexistsinGermany,whichhasreformeditslawseveraltimessince1999.Before

thisdate,aninsolventindividualwasobligatedtoliveatasubsistencelevelwhileservicinghisdebt,

evenifthisperiodlasteduntiltheendofhislifetime.Thereformsof1999changedthisperiodto7

years.Thecurrentlawreducedtheperiodto6yearsandafurtherreductionundercertaincircum-

stancesto3yearsisplannedfor2013.ThesechangesbroughtGermaninsolvencylawmoreinline

withconstitutionalrightsinterpretedtoincludeeconomicopportunity.Moreover,debatespreceding

thesechangesalsocenteredaroundincreasingtheeffectivenessofdebtcollection.Ontheonehand,

shorterdebtservicingperiodsinotherEUcountriessuchasGreatBritain–wherebalancesheets

canbeclearedbetween12and18months–inducedmanyinsolventGermanresidentstomoveto

othercountriesinordertoavoidthestricterGermaninsolvencylaw.Ontheotherhand,law-makers

alsoexpectthatashorterservicingperiodwillincreaseincentivesforinsolventindividualstowork

and help repay their debt. Whether the debt servicing period becomes reduced to 5 or 3 years

dependsonseveralconditions,includinghowmuchofthedebthepaysoffduringthisperiod.

Thecountryreportstouchonmanyinstitutionsandmechanismsthataffectthewayprivatein-

solvencyruleswork.Whilethelengthoftimeafterbankruptcyduringwhichapersonmustcon-

tinuetoservicethedebtisinstructiveaboutthedegreetowhichaneconomyattemptstobalance

profitandliability,itconstitutesonlyoneaspectoftheprivateliabilityframework.Nooptimum


Sources: Insolvencies: Creditreform (EU) Office of the Superintendent of Bankruptcies Canada (Canada) American Bankruptcy Institute (USA), *USA 2006 Data from 2005, Population: Eurostat (EU) United States Census Bureau.

2006

2007

2008

2009

2010

0

1

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9

Canada France Germany Netherlands Spain Sweden United Kingdom United States*

Figure 19: Incidence of Private Insolvencies

Private Insolvency Rates, per 1000 adult population; Graph supplementary to index

56

exists,aseacheconomywillhaveadifferentoptimum,dependingonitsrulesandenforcement

proceduresinotherareasthatimpactinsolvencyrules.Beyonddebtservicingperiods,institutions

fordebtcollectionalsomatter,astheSpanishcasedemonstrates.

Spainscoredpoorlyonthisindicatorduetoasystemicallylenientframeworkforinsolvency,which

reachesfromgrantingloanssolelyagainstfingerprintcollateraltoitsdebtcollectionmechanisms.

Thisabsencehasinducedcreditorstoincreasinglydemandmortgagesascollateralbecauseofthe

effectiveinstitutionsinplaceforrealestate,includingalandregistryandclear,functioningrules

forenforcingthecollectionofmortgagedebt.However,eventheexistingrulesintherealestate

sectorwereloosened,asthemorelenientbanksgrantedexceptionstolow-incomeborrowers.This

distortionthatoccurredthroughthelackofalternative,effectivemeansofdebtcollectionmight

havethereforecontributedtotherealestatebubble.

WhileveryfewcasesofhouseholdinsolvencyarereportedinSpain,theactualnumbersarelikely

higher,consideringtheweakmechanismsforenforcementanddebtcollection.

Ratio Medium-sized Companies to Total Companies

Medium-sizedfirmsarebelievedtobemoreflexibleandinnovativewithmanagementoftenbeing

personallyresponsibleforfirmsuccessleadingtoresponsibledecision-making.However,medium

sizedfirmsoftenlackthefinancialmeanstoexpandintoforeignmarketsandtobeinternationally

competitive.Thus,givennationalandindustrycharacteristics,therehastobeabalancebetween

smallandmedium-sizedcompaniesandlarge-scaleenterprises.Smallandmediumsizedenterprises

makeuptherastmajorityofbusinessesinallcountries(seeFigure20).However,theirsuccessand

viabilitygreatlydiffer.Countryevaluatorsfocusednotonlyonthebalance,butalsoonpoliciesand

institutionsthatpromoteorhinderobtaininganoptimallevelforeacheconomy.

GermanyreallystandsoutwithitslongtraditionofpromotingastrongMittelstand.AstheGer-

manyreporthighlights,SMEsaccountfor99percentofallGermanenterprisesanddependingon

themethodofmeasurementbetween60and70percentofemploymentinthecountry.Mostare

service-orientedandrelativelysmallintermsofrevenue.ThesestatisticsfallwithintheEUaver-

age.WhatdistinguishestheGermanMittelstandaccordingtothecountryevaluatorsistheircom-

petitiveness,sustainablecorporatestrategiesincludingsolidfinancialpositions,goodindustrial

relationsandreputationforqualitywithinGermansocietyaswellasonaninternationalscale.

GermanSMEstraditionallyfinancealargeportionoftheirinvestmentsthroughtheirownprofits

andreserves.In2010,thisproportionamountedtoalmosthalfoftheirtotalinvestmentsmade.

Notonlyduetothisprudentialcapitalratio,butalsobecauseGermanSMEstraditionallymaintain

long-termclosetieswiththeirlocalbanks,theMittelstandprovessuccessfulinsecuringthereli-

ablefinancingneededforlong-terminvestment.Thisinstitutionalcoordinationnotonlybenefits

SMEsinGermany,butprovidesthebanksthatfundthemwithinsightsintotheinformationthey

requiretoproperlyassessthefirm’sprofitability.


57

Spainreceivedoneofitshighestscoresonthisindicator.Incentiveswithinthelegalframeworkin

Spainhavecreatedanadvantageforsmall-sizedfirms:Enterpriseswithlessthan50employees

arenotsubjecttolawsregulatingworkerrepresentationandthusenjoymoreflexibility,inparticu-

larwhenonetakesintoaccounttheanimosityofsocialpartnershipinthecountryandthehigh

laborcostsitcauses.Inadditiontothisnationalprovision,theSpanishgovernmenthascutback

onitsnationalindustrialpoliciesanddevolvedittotheregionalgovernments.Thereportevaluates

thisdecentralizationashavingapositiveeffecton thedevelopmentof instruments topromote

localandregionalbusinessesatalevelthatismostfamiliarwiththeirneedsandcharacteristics.

Thesepromotinginstrumentsinclude,amongothers:subsidies,developmentagencies,training

programs,researchandbusinesscenters.

Itisworthhighlightingtheimbalanceofsmall-,medium-andlarge-sizedcompaniesintheFrench

economyandmeasurestakentorectify it.The lackofastrongMittelstandinFrancehasdeep

roots,withatraditionofafewverylargeandpowerfulfirmsontheonehandandverysmall,local

enterprisesontheother.Asacornerstoneofanewindustrialpolicy,thepromotionofSMEregional

clusters(poles de compétitivité)similartotheGermanCompetenceNetworks,fosterinnovationand

synergiesthroughstrategicpartnershipsbetweenmanufacturers,researchlabsandtrainingcen-

ters,bringingthemtogethertoworktogetherinthesamelocation.Foreachofthefirsttwostages

Figure 20: SME Prevalence

Graph supplementary to index

Source: OECD: Financing SME 2012 (Canada, US) EU Commission, SBA Factsheets 2010/2011 (EU), Year of Reference for US: 2009, USA, CAN: Firms with less than 500 employees, EU: Firms with less than 250 employees.

Share of SME in all Firms Share of Employment in SME in Total Employment

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58

from2006-2008andfrom2009-2011,thegovernmentinvested1.5billionEuro.Asanexcellence

cluster,award-winnerssimultaneouslybecomedistinguishedwithaqualityseal.Eightypercent

oftheaward-winningclustersduringthefirstphaseoftheprograminvolvedpartnershipswith

SMEs.Aspartofthisindustrialstrategytobetterdevelopthecompetitivenessofmedium-sized

enterprises,thenewstrategymergedtheFrenchInnovationAgencyandtheSMEdevelopment

bankmergedintotheOSEOgroup,whichprovidesSMEswithmoreconcentratedfinancing.

Despitethesemajorpolicyeffortstobuildupamoresubstantialsectorofprosperousmedium-sized

firms,FrenchSMEscontinuetobeplaguedbylowlevelsofprofitabilityaswellasinsufficientfinanc-

ingandinvestmentrates.However,theemergenceofastrongMittelstandrequiresconsistencyof

policyandalong-termhorizon.Theimplementationofnewinstitutionstakestime.Inlinewiththe

structuralapproachtomeasuringthesocialmarketeconomy,theseFrenchreformsreceivedaposi-

tiveevaluation,eventhoughtheshort-termperformancedoesnotyetreflectthesechanges.

Countryreportsdescribedanarrayofpoliciesthateitherfosteredorhinderedthedevelopmentof

SMEs.Dependingonthediversechallengesfacedinotherareasofindustrialpolicyaswellasthe

initiallevelofSMEdevelopment,countriessoughtdivergingstrategiesthatdirectlyorindirectly

affect SMEs. Canada encourages SMEs directly by charging them a lower tax rate than other

companies.Facedwithaneedtoincreasetransparencyinthecorporatesectorafteraseriesof

accountingscandals(Enron,WorldComandTycotonameafew)intheUnitedStates,law-makers

enactedtheSarbanes-OxleyActinordertohelpprotecttherightsofinvestors.Asanunintended

consequence,however,thelawincreasedregulatoryhurdlesforSMEs.Thesepolicies,however,

mustbeseenwithinthecontextofavarietyofothers,whichallplayaroleinSMEdevelopment.

Manager Liability

Swedishlawhasanarrayofprovisionsthatearnedthecountrythehighestrankingforinstitu-

tions that promote responsible management, holding individuals accountable for their actions

and decisions they make on behalf of the firm. Enacted in 2005, the Companies Act makes a

founder,managerorboardmemberofacompanypersonallyresponsiblefordamagestothefirm

andstakeholdersonaccountofnegligence,carelessnessorintent.Inordertocounterbalancethe

lackofrisk-takingthatsuchalawmightinduce,itiscommonfortheseindividualstotakeoutor

beofferedinsuranceforpotentialdamages.However,insurancedoesnotcoverdamagesdueto

intentional,criminalbehaviorsuchasbalancesheetmanipulationorcorruption.

Inlightofthemostrecentfinancialcrisis,anincreasedawarenessofthedesireacrossmanycoun-

triestoeliminateorreduceremunerationschemesthatpromoteshort-termprofitorientationcan

beseen.Widespreadpublicdiscussioninfavorofincreasingpersonalliabilityamongcorporate

CEOsensuedinallcountriesthatattheonsetofthecrisishadeitherweaklegislationorenforce-

mentofpersonalliabilityintheprivatesector.However,differencesexistinthespeedwithwhich

changestolaws,regulationsandotherinstrumentshaveactuallyoccurred.


59

Francestandsoutasacountrythathasbeentacklingwhatwasseenpreviouslyasanimbalanced

relationship between economic profit and liability for losses. In particular, both the conserva-

tiveandsocialistgovernmentshavetakenregulatingstepstomoreconsistentlylinkmanagement

performancewithremuneration.Directlyfollowingthe2009crisis,PresidentSarkozydecreeda

prohibitionofrewardingmanagerswithgenerousseverancepayincaseswheretheycausedtheir

companyseverelosses.AftertheinaugurationofPresidentHollandein2012,theSocialistgovern-

mentwentevenfurther,cappingtheCEO-workerpayratioat20:1,arguingthatperformancecould

notjustifylargerdifferencesinsalary.

Lowscores inboth theUnitedKingdomand theUnitedStatespartially reflect thewidespread

usage of incentive systems that promote short-term profit orientation without negative conse-

quences in thecaseofpoorperformance.Seriousperverse incentivescontinuedalsoafter the

crisis despite public debate. Although the prevention mechanisms for irresponsible manager

behavior in thesetwocountriesare limited,firmownersandothersharmedbysomebusiness

actioncantakerecoursetoliabilitylawafterexperiencinglosses.Becausetheburdenofproving

causalityintheNetherlandsisparticularlyhighandliabilitylawscomparativelyunderdeveloped,

thisoptionmostoftendoesnotexistforsimilarcasesintheNetherlands.

TheUnitedStatesformsaratherextremecaseamongtheeightcountriesevaluatedintermsof

thelackofregulationofmanagementintheprivatesectoringeneralandofthecorporatesector

inparticular.WhiletheUSgovernmentdidreacttothepoorperformanceofcorporategovernance

withtheDodd-FrankActfollowingthefinancialturmoilof2008-2009,itstillhasnotgonenearly

asfarasothercountries’regulationsintermsofthecontrolequityholdershaveoverthesalary

andbonusstructure in themanagementof thefirms inwhich theyownshares.Moreover, the

importanceoftheinteractionbetweencorporategovernanceregulationsandthestructureofthe

economybecomeparticularlyapparentinthecaseoftheUnitedStates.Theunprecedentedgrowth

inthepowerofcorporationsandofcorporatemanagersisreflectedintheworld’slargestratioof

CEOcompensationtotheaverageworkersalaryandthetrendtoward“ownerlesscorporations”in

whichthetimeanaverageshareisheldintheUShasdecreasedfrom4yearsto2monthsinthe

UnitedStatesbetween1945and2008.Expertsarguethatthiseverquickerchangingofhandscan

havetwoimportantsubsequentconsequences.Thefirstconsequenceisthattheveryfastturnover

givesshareholderslessandlessofanincentivetoinfluencethedisciplinewithinmanagement.

Thesecondisthatitoftenleadstoaneverhigherconcentrationofcorporatewealthinthehands

ofafewowners.


60

CATEGORY III: ECONOMIC AND ECOLOGICAL SUSTAINABILITY

FINANCIAL STABILITY

Figure 21: Financial Stability


0

2

4

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8

10

7.256.71 6.71 6.64

6.30 5.985.73 5.59

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State

s

Central Bank Independence and Goals

Onlyacentralbankindependentofthegovernmentcanensurelastingmonetarystability.“Inde-

pendence”inthissenseencompassesseveraltraits:1.Policyindependence(freechoiceofinstru-

mentsandgoals);2.Financialindependence;3.Personalindependence,i.e.centralbankchairmen

andboardsarenotsolelychosenbythecurrentgovernment.Centralbankswhoseindependence

is not ensured are prone to pressure and influence by the government. In times of economic

depression,itcanbetemptingtolowerinterestratesorcommercialbanks’reserverequirements

to boost lending and stimulate the economy.Yet in the long run this typically leads tohigher

inflation.Theprimegoalofacentralbankshouldbepricestability.Additionalgoalssuchasfull

employmentcanbepursued.Thequestionintheindexregardedbothcentralbankindependence

andgoals.

BothSwedenandCanadareceivedthehighestpossiblescoreforthisindicatorfortheirhighlevels

ofindependenceandconcentrationononegoal:pricestability.


61

InthecaseofSweden,amemberoftheEuropeanUnion,butnotoftheEMU,therelevantcentral

bank is thenationalRiksbanken,not theEuropeanCentralBank. It obtained independence in

1999andisthesolebodydecidingonmonetarypolicy.Itsgoalsaretomaintainpricestabilityand

toensureasafeandefficientpaymentssystem.Thetargetinflationrateis2percent.Thisfocuson

monetarystabilityemergedasanewdirectioninthe1980s.Beforethispoint,theRiksbankseta

policyofstrategiccurrencydevaluationinordertoincreaseitsindustrialcompetitiveness.

TheBankofCanadarankshighonall indicesofcentralbankindependence,betheybasedon

policyindependence,financialindependenceorpersonalindependence,e.g.ofboardmembers.

TheBankofCanada’sforemostgoalispricestabilitywhichitpursuesthroughanexplicitinflation

targetingobjective,currentlysetatanaverageCPIinflationof2percent.

For the US, the Federal Reserve ranks even higher than the Canadian Central Bank on most

indicesofcentralbankindependence.EventhoughtheFedenjoysahighdegreeofindependence,

itisnotentirelyshieldedfrompoliticalinfluence.Itschairmanandvicechairmanareappointed

bypoliticalactors–theUSPresidentandtheSenate.Theirinfluencehoweveriscurbedbythe

long14-yeartenureofthemembersoftheFed’sBoardofGovernors.TheUSowesitslowscoreon

thisindicatortothefactthatitdoesnotconcentrateexclusivelyonpricestability,butalsostrives

towardthegoaloffullemployment.

TherelevantcentralbankforallEMUmembersistheEuropeanCentralBank.TheECB’sinde-

pendenceandpricestabilityobjectivearestatedintheEUTreaty.YettheEuropeandebtcrisis

hasdamagedinvestors’andcitizens’confidenceinpricestability.Followingdaysofopenpolitical

pressuretodoso,theECBbeganpurchasinggovernmentbonds.WhethertheECBmadethisdeci-

sionbasedonpoliticalpressureremainsdebated.Moreover,theuseofvariousformsofmonetary

easingduringfurtherraisedcriticismsaboutthesingulargoaloftheECB.

WhileallEuromembersrelinquishedtheirnationalmonetaryauthoritytotheECB,somenational

centralbankstrytokeeptheirownprofile.Sometimesit isunclearwhethertheyactasrepre-

sentativesofsystemicinterestsorofparticularbanks.BecausealloftheeconomiesintheEMU

neverthelessshareonemonetarypolicyandthecollectiveriskthatitcreates,scoresarethesame

forall countries.However, thecountry reportsdooffer insights intodivergingpositionsof the

nationalcentralbankswithinthisframework.


62

TheECBandtheFederalReserveexhibitdifferentobjectives–theFedmustpayequalattention

topricestabilityandgrowth,theEUexclusivelyfocusesonpricestability.Yettheirpoliciesdo

notdiffergreatly.TheECB’sinherentproblemisthatitmustcopewithextremelyheterogeneous

economies.As there isnoone-size-fits-allmonetarypolicy, theECBalmosthas to fall shortof

achievingpricestabilitythroughinterestratemanipulation.Majorstructuralreformmightbethe

onlywaytoensuretheECB’sindependenceinthelongrun.TheindependenceoftheEuropean

CentralBankremainscontroversialinFrance,yetthecountryhasenjoyedtwodecadesofvery

moderateinflationrates.

In Spain, the European Central Bank’s monetary policy was mismatched with the country’s

economicconditions– real interest rateswere too low (evennegative)when theeconomywas

growing,andtoohighwhenitcontracted.Thisexacerbatedthefinancialbubblethatledtothe

bankingcrisis.Theinstitutionsresponsibletosupervisetheconditionsofthebankbailout(the

ECB,EuropeanCommission,EuropeanBankingAuthorityandtheIMF)havedemandedamore

independentroleoftheSpanishCentralbank,i.e.alessprominentpositionintheimplementation

andsupervisionofthebailout.

Germany’sBundesbanktriestopreservetheheritageofthemonetarilystableeraoftheDeutsche

MarkandreactednegativelytotheECB’squantitativeeasingpoliciesduringthefinancialcrisis.

Itclaimsthatbyyieldingtopoliticalpressure,theECBdamageditsreputationasanindependent

bodyandencouragedmoralhazardonthepartofprivatebanks.

Figure 22: Central Bank Independence


1 2 3 4 5 6 7 8 9 10

10

10

7

7

7

7

6

5

Canada

Sweden

France

Germany

Netherlands

Spain

United Kingdom

United States


63

TheBankofEngland’sprimeobjectiveistomaintaininflationatalowlevel,theexactnumber

to be determined by the government. The bank then implements the target and supports the

government’seconomicpolicy,provided inflation isnear its target.TheBoEhas formallybeen

independentof thegovernment in termsofmonetarypolicysince1997,yet this independence

hasbeentestedrecentlywhenthebanksupportedthegovernment’sexpansivepoliciesthrough

quantitativeeasing.

Credit information

Figure 23: Credit Information

As a percentage of adult population.

Depth of Credit Information Index Public and Private Credit Registry

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s0

2

4

6

8

10

Source: World Bank, Doing Business 2011.

Prevention of Too-Big-to-Fail

Competitioninthefinancialsectorensureshigher-qualityservicesandlowerprices,i.e.interest

rates.Giventhecentralrolethatinterestratesplayinthewell-beingofaneconomy,thecompeti-

tivestructureofacountry’sfinancialsectorbearssignificanttrickle-downeffectsonitsentirely

economy,bothrealandnominal.Moreover,ahighnumberofsmallersuppliersinthefinancialsec-

tortypicallyleadstomorestabilitythanasmallnumberoflargeonesthatmightposeasystemic

riskwhenover-leveragedorotherwiseintrouble.


64

Figure 24: Bank Asset Concentration

Five largest, percent; Graph supplementary to index

Source: World Bank Financial Development Indicators, extracted Sept. 12, 2012.

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

20

40

60

80

100


Figure 25: Prevention of Too-Big-to-Fail


1 2 3 4 5 6 7 8 9 10

9

8

7

7

7

6

6

5

Canada

Germany

France

Sweden

United Kingdom

Netherlands

United States

Spain


65

Before the financial crisis, the Spanish financial sector was highly competitive, with banking

groupscompetingwithnumeroussmallersavingsbanks.Creditvolumeswerehighandinterest

rateslow.ThenthefinancialcrisishitSpain,andseveralsavingsbanksencounteredsolvencycri-

ses.Thelargerbankinggroupswereabletoobtainliquiditybytradingtheirassetsandliabilities

forcashwiththeECB.Butinordertostrengthenthefragilesavingsbanks,aRoyalDecreeLaw

wasenactedthatforcedseveralofthesavingsbanksintomergersamongthemselvesorwithone

ofthetwolargebankinggroups,reducingtheirnumberfrom46to13.

Thistrendisexpectedtocontinue,leadingtofurtherconcentrationintheSpanishfinancialsector.

Itillustrateshowtheproblemofinstitutionsthatare“toobigtofail”isoftentheresultofcompeti-

tionpressureinthebankingsectorratherthanalackthereof.ItcanbearguedthatSpaindoes

havea“toobigtofail”problem,yetthatitisnotsomuchattherootofSpain’sfinancialwoesas

theflaggingsavingsbanks.Alongwiththeforcedmergersandbailoutgoesashiftintheactivi-

tiesofsavingsbanks–initiallygearedtowardssmallbusinessesandotherlow-volumelending,

theymustnowactas“foundations”,possiblyfurtheraddingtoconcentrationinthesectorand

potentiallyaggravatingthewell-beingofSMEs.

MuchliketheSpanishbankingsector,theDutchoneishighlyconcentrated.Thecountry’sopen

financialmarketaswellasglobalcompetitiontotheNetherland’slargebanksarehelpful,butthe

domesticmarketisdominatedbyonlythreemainplayers.Thelownumberofbanksposesathreat

tofinancialstability,asbankcustomers’assetsareguaranteedbytheDutchgovernment.Banks

suchasINGhavegrownsolargeduringthepastyearsthatabankrunmightruintheDutchstate.

TheGermanbankinglandscapeismadeupofseveralpillars–publicsectorbanks(largelyowned

bylocalgovernments),privatebanks,special-purposebanks(e.g.mortgagebanks)andcoopera-

tivebanks,indescendingorderofimportance.Thisvariedstructuretogetherwithahighnumber

ofinstitutionsprovidesamplecompetition.Buthighleverageandlowprofitabilityleavethefinan-

cialsystemvulnerabletoshocks,aswasdisplayedduringthefinancialcrisiswhenpublic-sector

bankssufferedhighlossesfromtoxicassets.CooperativebanksandlocalSparkassencontinued

tosupplycreditandthussparedGermancompaniesaseverecreditcrunch.

TheBritishfinancial system ismarket-based, and thefinancial sector’s contribution toGDP is

large.Tworecenteventsthoughillustratethatlargerbanksaremoreprotectedfromcompetition

thansmallerones:Firstly,thequasi-nationalizationofRoyalBankofScotlandtosaveitfrominsol-

vency,and,secondly,theLiborscandalofthesummerof2012.Broaderreformstoavoid“toobigto

fail”hazardsinsteadofpatchysolutionsaimedatisolatedinstitutionsareyettobeimplemented.

France’slargestthreebanksaccountfor50percentoftotalbankassets,lessthaninCanada,Ger-

manyortheUK,andthecountry’sbankingsectorcanbecharacterizedashighlycompetitive.This

isinspiteofanoligopolisticstructurewheresixbankinggroupshold80percentofoutstanding

loansand90percentofdeposits.


66

Duringthepastyears,competitionintheSwedishfinancialsectorhasincreasedasbanks,insur-

ancecompaniesandretailoutletsstartedofferingsimilarfinancialproductssuchaslifeinsurance.

Yetthebankingsectorisstilldominatedbyfourbanksrepresentingabout80percentoftotalbank

assets.Thepictureissimilarinthelifeinsurancemarketwherethefourlargestfirmscommand

73percentofthemarket.Hence,eachmajoractorinSwedishbankingandinsuranceis“toobig

tofail”,andthebeliefthatthegovernmentwouldbailoutbanks–asithasdonebefore–creates

moralhazard.

Canada’slargestthreebanksaccountfor58percentoftotalbankassets,butdespitethisasset

concentrationtheCanadianfinancialsectorcanbecharacterizedasfairlycompetitive,onparwith

GermanyandFrance.TheCanadiandomesticmarketisrelativelysmall,andbasicservicesare

oftenmoreexpensive thanelsewhere,butsmaller foreign-ownedbanksandcreditunions fuel

competition.Canadianbanksarefinanciallystable,mainlyduetocapitalrequirementsthatare

higherthanstipulatedbytheBaselIIaccord.Thecompetitivesituationintheinsurancemarket

issimilar.

CompetitionintheUSAmericanfinancialsystemislesspronouncedthanitusedtobeandthe

pastyearshasgivenrisetoconcernsoverinstitutionsthatare„toobigtofail“.Thisdevelopment

was fuelledby theTroubledAssetReliefProgram thatprovidedhigh sums tokeepdistressed

banksafloatduringthefinancialcrisis.Italsoledlargerinstitutionstonowbeingabletoborrow

atlowercoststhansmallerones.YetbankconcentrationintheUSisstilllowerthanintheUK,

CanadaandFrance.Tocountertherisingconcentration,currentpolicyproposalsincludeusing

theDodd-FrankActtowinddownlargefinancialinstitutionspresentingasystemicriskwithout

causingmoralhazard.

Bank Capital to Assets Ratio

Thisindicatormeasurestheratio(inpercent)ofbankcapitalandreservestoallnon-financialand

financialassetsinaneconomy.Ofthe8countriesinthesample,theUnitedStateshasthemost

capitalizedbankingsector,withFrance,theNetherlands,CanadaandGermanyonthelowerend

ofthescale.


67


Inlightoftheglobalfinancialcrisis,manyfinancialstabilityreportshavefocusedonthedevelopment

ofequityratiosofnotonlybanks,butothercompaniesaswell.Stillothershavelookedintoinstitutional

influencesforenterprisestoleverageassetsprimarilyusingeithershort-orlong-termdebt,achoice

whichinturnaffectsgrowth.Inaninternationalcomparisonof39countriesfrom1991-2006,Canada,

theUnitedStates,theUnitedKingdom,Sweden,GermanyandtheNetherlandsshowabove-average

equityratios,whileSpainandFrancehadaverageequityratiosamongthecompaniessurveyed.28

Thecountryreportsmadeanefforttodiscussthedevelopmentofequityratiosalsoduringand

afterthecrisis.WhilecapitalizationofFrenchcompaniesremainedlowthroughoutthelate1990s,

it increasedby10percentagepointsby2010, toanaverageof37percent. In fact, theFrench

report,citingaBanque de Francebulletin,emphasizedthatthereductionofdebtandincreasein

capitalizationpriortotheglobalfinancialandeconomiccrisissignificantlyhelpedFrenchcompa-

niesweatherthecrisis.Similarly,theGermanyreporthighlightsthepivotalroleofstrengthening

balancesheetsfromanalreadycomparativelyhighlevelbeforetheonsetofthecrisisinlimiting

theamountof insolvenciesat theonsetof thecrisis.Therather lownumberof insolvenciesof

Germancompaniesisinstructive,consideringtherelativelysharpdeclineinGDP.

Figure 26: Bank Capital to Assets Ratio

Percentage

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s0

2

4

6

8

10

12

Source: World Bank, World Development Indicators, 2011.

11.3

6.25.4

5.0 4.6 4.6 4.5 4.4

28Fan,TitmanandTwite2012.


68

Beforethecrisis,equityratiosforUScompanieswereonaverageabovethoseoftheirEuropean

counterparts,brieflydecreasedduringthecrisisandthenincreasedbackuptoEuropeanlevels.

CONSISTENCY OF POLICY

Germanyscoreshighontheprincipleofconsistencyofpolicy,largelyduetothefactthatitisthe

onlycountryofthe8examinedthathasestablishedadebt-brakeinitsconstitution.Introducedin

2011,thisreformwilllimitthestructuraldeficitofthefederalgovernmentto.35percentofGDP.It

alsorequiresthefederalstatestobalancetheirbudgetswithregardtostructuraldeficitbeginning

in2020.29

Agingpopulationsacross theOECD,coupledwith increasingsocietalexpectationsanddemands

onpensionsystemspresentanenormouschallenge forpublicfinances.Bestpractices incoping

withdemographicchangevaryacrosscountries,butsustainablepoliciesshouldshareacommon

goaloflinkingthepensionsystemwithlifeexpectancy.WiththeexceptionoftheNetherlandsand

Spain,alloftheexaminedcountrieshavereformedtheirpensionsystemstoaddressdemographic

challengestosustainablefinancing.30Consequently,thesetwocountrieslostpointsforthisabsence.

29OECD:“RestoringPublicFinances”:http://www.oecd.org/dataoecd/51/58/47558957.pdf30Foranoverviewofthedifferentpoliciesimplementedlinkinglifeexpectancywiththepensionsystem,seetheOECDpublication“Pen-

sionsataGlance”.

Summary of Index Results

Figure 27: Equity Ratio of Companies


1 2 3 4 5 6 7 8 9 10

9

9

8

7

7

7

7

6

Canada

Sweden

Germany

France

Netherlands

United Kingdom

United States

Spain

69

DemographicchangelikewiseexertspressureontheOECDeconomiestoretainandbuildhuman

capitalamongexistingworkers.Economiesinwhichcompaniesinvestincontinuingeducation

andtraininghelptopreventthedeteriorationofcapitalstockwillbebetterequippedtosustain

growthandgoodjobsovertime.Whilenoneofthecountriesreceivedclosetotheoptimalscore

andcouldallimprovetheinstitutionalframeworkthatfosterssuchinvestment,Swedenreceived

thebestevaluationforthisindicatorandSpainthelowest.

Theportionofemployeeincomethatworkerspaytowardincometaxandsocialsecuritycontributions

servesasanindicatorofhowstateschoosetostructuretheburdenoffinancingtheirbenefitssystems.

Figure 28: Consistency of Policy

Index


Control of Financial Consolidation Extent of Staff Training Pension Systems Linked with Life Expectancy Social Security Spending R&D Spending (percentage of GDP) Average score for principle.

0

2

4

6

8

10

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s

EFFICIENT ENVIRONMENTAL PROTECTION

Economiesthatmanagetoestablishrulesandincentivestointernalizesomeoftheexternalities

associatedwithproductionandconsumptioncontributetosustainability.Whilemarketeconomy

instrumentsarepreferred toregulationandstate interventionwhenfeasible, rulesand institu-

tionsestablishedandenforcedbythestateplayanimportantroleinthecaseofmarketfailure.

Amongthesurveyedcountries,Swedenscoreshighestonthisindicatorduetoitsuseofmarket

economyinstruments,effectiveenvironmentalpolicyandrelativelyhighproportionofrevenues

fromenvironmentaltaxes.TheNetherlandscompensatesforlowerscoresinmarketinstruments


70

Figure 29: Efficient Environment Protection


0

2

4

6

8

10

7.336.87

6.566.14

4.92 4.704.14

3.67

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s

andenvironmenttalpolicieswith itsveryhighproportionofrevenuefromgreentaxes.Onthe

otherendofthespectrum,theUnitedStatesandCanadascorelowintheseareas.



Nocountryscoredparticularlyhighforitsmarketinstrumentsappliedtointernalizethecostsof

externalities.Mostcountryreportsfocusedonthenegativeexternalities,aspolicy-makersinmost

oftheexaminedcountriestendtoallocatemoreattentiontopunishingnegativeexternalitiesthan

rewardingpositiveones.OneexamplementionedintheGermanyreportpertainstothelackof

taxcreditsforresearchanddevelopment.TaxcreditsforR&Dhavetheadvantagethattheydistort

marketslessthanwhenthestatechooseschampionsandsubsidizesthem.

Intermsofinstrumentstocorrectnegativeexternalities,themajorityincludedintheevaluations

relatestothefieldofenvironmentalpolicy.TheEUEmissionsTradingSystemearnedEuropean

countrieshigherscoresthantheUnitedStatesandCanadaforitsextensiveness.However,many

individualpoliciesweretakenintoaccountinordertoarriveatanoverallassessmentofmarket

instruments.DuetoEuropeanUnionlaw,therulesforenvironmentalpolicyofthemembercoun-

triesareverysimilar.However,complianceandenforcementvaries,resultinginslightlydiffering

scores.Levelsofsubsidiestopollution-intensiveindustriesasisthecaseinGermanyandSpainas

wellasdifferinglevelsofgastaxes(seeFigure30)presentfurtherexamplesofpolicyareasthat

greatlydivergewithinthesameEUlegalframework.

71

Figure 30: Gasoline Taxes

Premium unleaded 95 RON gasoline, total tax per litre; Graph supplementary to index

Source: IEA Energy Prices & Taxes, 2nd Quarter 2012.

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

/1

2012

/20

0.2

0.4

0.6

0.8

1.0

1.2


Figure 31: Revenue from Green Taxes

As a percentage of total tax revenue

Source: OECD, Tax Database, 2010.

0

2

4

6

8

10

12

10.13

7.44

6.14 6.104.92

5.454.21

3.39

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s


72

Sweden received the highest score of an 8. The country uses an array of taxes that raise the

price of certain goods closer to their actual cost. While its overall transportation costs remain

relatively low, far fromwhat theiractual costwouldbewith the inclusionofexternalities, the

countrydoeschargetobaccoandalcoholtaxesaswellasacongestiontax.IncontrasttoGermany,

whichreceivedascoreofa7,Swedenappliestherevenuefromgreentaxeslikethecongestion

taxtofinanceimprovementsinpublictransportationandinfrastructure.InGermany,manyhave

criticizedthatpolicy-makerschannelrevenuefromitsenergytaxtofinancethesocialsecurity

systemratherthantowardenvironmentallyfriendlyinvestments.Also,motorwaytollsforprivate

passengervehicles,absentinGermany,wouldprovemoreconsistentbychargingthosewhouse

theroadsandcausetrafficandpollution,topayfortheseexternalities.Thecurrentpolicyusestax

financingfromthegeneralpopulation.

WhileGermanystandsoutinitsearlyawarenessofenvironmentalissuesonthepolicyagenda,

itsmarketmechanismsreceivedonlyanaverageassessment.Oneimportantcriticismhighlighted

the market-distorting effect of expensive solar energy subsidies, which moreover discriminate

betweendifferenttypesofrenewableenergy.

BothCanadaandtheUnitedStatesdemonstrateverydifferentpoliciesandlevelsofpolicyeffort

towardinternalizationofexternalitiesdependingontheprovinceorstate.BritishColumbia(BC)

surpassesthenationalCanadianpolicyeffortbyhavingimplementeditsowncarbontax.Atthe

sametime,inter-provincialcorrectionofexternalitiesislacking,asexemplifiedbytheoilsands

“NorthernGateway”projectfromAlbertatoBC:whiletheformerwouldcollectroyaltiesforthe

project,theenvironmentalriskliestoalargeextentinBC.Similartotheprovincialinstitutions

forcorrectingexternalitiesinCanada,CaliforniaandNewYorkstandoutintheUnitedStatesfor

theirmarket-basedinternalizationlawsatthestatelevel.Becauseoftheunderdevelopmentoflaws

andincentivesforinternalizingexternalitiesatthenationallevel,theUnitedStatesscoredlowon

thisindicator.

Environmental Policy

SwedenandGermanyreceivedhighscoresforthequalityoftheirenvironmentalpolicies.Both

countrieshavemadesubstantialpolicyeffortstoreduceCO2emissionsandhaveinvestedheavily

inthedevelopmentofrenewableenergy.Canada,theNetherlandsandSpaintieforlastplaceon

thisindicator.Canada’soilsandsprojectinAlbertaremainsofmajorconcern,still lackingsuf-

ficientenvironmentalpoliciestoadequatelymitigateriskanddamagetotheenvironment.While

theNetherlandsinvestsincleantechnologies,itreceivedalowscoreforitslackofpolicyorienta-

tiontowardrenewableenergiesandconservation.Spain,incontrast,hasimplementedpoliciesand

settargetstoreachthecountry’sandEU’srenewableenergyobjectives,butscoredlowduetothe

lowefficacyofthesepolicies.


73

CATEGORY IV: SOCIAL INCLUSION

SwedenandtheNetherlandsscoredthehighestonthiscategory,reflectingconsistentlystrong

institutionsforeffectivelabormarketsandsocialinclusion.France,theUKandtheUSperform

poorlyinthiscategoryfordifferentreasonselaboratedoninthefollowingsections.Spainreceived

thelowestscoreinthesocialinclusioncategoryaboveallbecauseofitsweakinstitutionalframe-

workintheareaofeffectivelabormarkets.

EFFECTIVE LABOR MARKETS

Preventing Duality

Aduallabormarketcharacterizesasymmetriesbetweenaprimaryandasecondarylabormar-

ket.Intheformer,workersenjoyhighemploymentprotection,long-termcontractsandrelatively

generousremunerationandbenefits.Thelattertendstowardlowjobsecurity,temporarycontracts

and lowwages.Dual labormarketsareoftenassociatedwithan“insider-outsider”cleavage, in

which incumbentworkersreceiveahighersalaryorprotection incomparisontonewworkers.

Privilegingsomegroupsofworkerstoahighdegreetendstoraisetheoverallunemploymentrate

anddecreaseeconomicefficiency.


Figure 32: Social Inclusion


0

2

4

6

8

10

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

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United

State

s

Effective Labor Markets Social Mobility Average

74

Somesignsofaduallabormarketincludetheexistenceofmanyandvaryingformsofcontracts

orexcessivelyhighbarriers toemployeedismissal.Thisquestionassessedtheextent towhich

the legal frameworkpreventsunjustifieddifferences in compensation andallows for sufficient

flexibilityforthelabormarket.Scoresrangebetween5and9,withCanadareceivingthehighest

scoreforpoliciesthatpreventunjustifieddifferencesincompensationandworkingconditionsand

promotetheefficientfunctioningofthelabormarket.

Ontheotherendofthespectrum,Spainscoredthelowestamongtheexaminedeconomiesdueto

itshighlydualisticlabormarket.Ontheonehand,workerswithpermanentcontractsenjoyvery

highjobsecurity,littlecompetitionfromoutsidersandhavebeensuccessfulindemandinghigher

wages.Higherwages for insiders,however, causehigher structuralunemployment.Temporary

workersontheotherhand,haveaverylowlevelofprotection.Duetothehighfixedcostsassoci-

atedwithlaborinSpain,firmsoftenchoosetohireonlyonatemporarybasisandlessoftenthan

otherwisewouldbethecase.Theyouthtraditionallysufferthemostfromrigidlabormarketsand

inSpainyouthunemploymentreachedover50percentin2012(seeFigure34).

Figure 33: Prevention of Duality


1 2 3 4 5 6 7 8 9 10

9

8

8

8

8

7

6

5

Canada

Netherlands

Sweden

United Kingdom

United States

Germany

France

Spain


75

Inaddition to itseffectsonunemployment,Spain’sdual labormarketmay feed intoabroader

cycleofproductivityloss.Ontheonehand,inflexible, long-termcontractsmakeitunattractive

foremployerstoinvestintheskillimprovementoftheirworkers.Highwagespaidtoprotected

workers reflect their strong bargaining power rather than an efficiency wage, as they do not

facecompetitionfromoutsiders.Ontheotherhand,thealternativetorigid,long-termcontracts,

namelyflexible,fixed-termcontractsthatgenerallyofferlowwages,allowmanyotherwisenon-

competitivebusinessestocompeteonthebasisofcheaplaborratherthanhigh-qualityproducts.

Continuedovertime,thisdualitycanreinforceabusinessmodelthroughouttheeconomythat

reliesonlowwage, lowskillworkforcompetition.TheauthorsoftheSpanishreporttherefore

arguethatderegulationalonewouldnotsufficetofixthespiralofwhattheydeema“perpetuation

of low-skills, low-productivityand low-wageequilibrium”.Rather, improvingbothsocial justice

andefficiencyinthelabormarketwouldadditionallyrequirealong-termstrategicshifttoward

highvalueproductionandtheinvestmentinskillbuildingthatitwouldnecessitate.

BothSpainandFrancehaveamongtheexaminedcountriesthehighestlevelofemploymentpro-

tection,asmeasuredbytheOECD.FranceandtheNetherlandsreceiveonlyslightlyhigherratings

forthedualityofthelabormarket.TheNetherlandshasreactedtoincreaseddualityinthelast

severalyearswiththecreationofcommercialtemporaryemploymentagenciessuchasRandstad,

whichhavesuccessfullyexpandedintoothercountrieswithsimilarlabormarketstructures.

Figure 34: Youth Unemployment

Unemployment rate, aged 15-24, all persons; Graph supplementary to index

Source: OECD Labour Market Statistics, extracted Sept. 12, 2012

2008

2009

2010

2011

2012

/10

10

20

30

40

50

60



76

Liberalmarket economies scoredhigh on this indicator.Canada, theUnitedKingdomand the

UnitedStatesavoidasymmetriesinthelabormarketthroughliberallabormarketpoliciesacross

theboard.However,somedifferencesdoexist, forexample in regard to theprotection levelof

publicsectorcontractsandpoliciesthatdeterminetherulesandregulationsforimmigrantwork-

ers.IntheUnitedStates,duallaborconditionscanbeobservedforboththeformalrulesaswell

asinformalpracticestowardalargegroupoflegalandillegalimmigrantworkersincomparisonto

therestoftheworkforce.

Sweden’slabormarketlawsdoallowforsomeduality,asbothpermanentandtemporarycontracts

exist. In recentyears, legal reformshaveeased theconditionsattached to temporarycontracts

withoutmajorchangestotherulesthatapplytopermanentcontracts.Thelastseveralyearshave

alsoseenanincreaseintheuseoftemporarycontracts.

Judgingonlybyshort-termperformanceindicatorsofunemploymentorgrowth,onemightexpect

thelabormarketsinGermanyandSpaintoexhibitdramaticallydifferentlegalframeworks,regula-

tionsandpractices.However,takingastructuralapproachaccentsbothsurprisingsimilaritiesand

importantdifferencesthatproveinstructiveinidentifyingspecificpolicydifferencesthatcould

befurtherstudiedasexplanatoryfactorsforsuchdivergingperformance.Labormarketreforms

duringthelastdecadeinbothcountriesfocusedonliberalizingemploymentcontractsinthelow

wagesectorandfortemporarycontractswhileretaininghighlevelsofemploymentprotectionleg-

islationforpermanentworkers.InGermany,theHartzReformsandtherecentlaw,theGesetz zur

Neuausrichtung der arbeitsmarktpolitischen Instrumenteintroducedmoreasymmetryintothelabor

marketandthusconditionsforaduallabormarket.However,theGermanyreportpointsoutthat

successfuleconomicperformanceanditspositiveeffectontheemploymentsituationinGermany

hasattenuatedthetypesofeffectsseeninSpaininyouthandotherunemployment.


77

Despite themanystructuralsimilaritiesandcommonalities in thereformagendas inGermany

andSpain,itisimportanttonotethatthelevelofprotectioninSpainremainsmuchhigherthanin

Germany,asevidencedbyscoresforemploymentprotectionlegislation.Thisjuxtapositionlends

credence to the assertion in the Spain report that further deregulation of the low-wage sector

mightbe the false instrument todecreaseunemployment.Rather,more research isneededon

thepossibleeffectsofandpoliticalbarrierstofacilitatingmoreflexibledismissalconditionsfor

permanentworkers.

Quality of Social Partnership31

Socialpartnershiptraditionallyimpliestherelationshipbetweenunionsandemployers’organiza-

tions.Here,thisquestionisbroadlydefinedinordertoallowforbothcentralizedaswellasdecen-

tralizedformsofcooperation.Apositiverelationshipbetweenthesocialpartnersrequiresarela-

tivelylevelplayingfield,whichmaybepromotedthroughunitedgoalsamongstunions.Theabsence

ofmajorfrictionsintheprocessofconflictresolutionbetweenemployerandemployeegroupsand

strongpracticeofdialoguealsotendtoreflectapositiverelationshipbetweensocialpartners.

Figure 35: Incidence of Temporary Employment

Temporary employees are wage and salary workers whose job has a pre-determined termination date as opposed to permanent employees whose job is of unlimited duration. National definitions broadly conform to this generic definition, but may vary depending on national circumstances.

Source: OECD Employment Outlook 2012, Table F.


1995

2000

2009

2010

2011

0

5

10

15

20

25

30

35



31DuetomissingvaluesfortheUnitedKingdomandUnitedStates,thisindicatorwasnotincludedintheindexcalculations.

78

Across thecountriesexamined,a trendcanbeseen towardmorediverse interestgroupsboth

among employer and employee associations as economies move away from industrial produc-

tionandtowardserviceindustries.Adecreasingproportionoftheworkforceinmostcountriesis

unionizedandunionsonanationallevelhavelostinfluenceincomparisontoafewdecadesago

(seeFigure36).Infact,intheUnitedKingdomandUnitedStates,unionshavelostsomuchpower

intheprivatesectorthattheywerecharacterizedasplayinganirrelevantroleinindustrialrela-

tions.IntheUnitedKingdom,industrialrelationsweredescribedas“fundamentallyadversarial”

andnon-constructive.Sinceaseriesoflegislativereformsinthe1980sstrippedunionsoftheir

bargainingpower,nomeaningfulinstitutionsexistintheBritishprivatesectorthatcouldengage

ineconomy-orsector-widenegotiationsbetweenemployerandemployeegroups.

Both employer and employee associations across the examined countries have shifted more

bargainingpowertothefirmlevel,withworkerscouncilsnegotiatingonbehalfofemployeesin

individualfirms32intheprivatesector.Inmajorityofthecountriesstudied,unioncoverageinthe

publicsectorgreatlyoutweighedcoverageintheprivatesector.

Swedenscoredthehighestinregardtothequalityofsocialpartnership.Collectiveagreementsin

theprivateandpublicsectorcoverapproximately92percentofallemployees.Theseagreements

32Formoreondecentralizedbargaining,seethefollowingsectiononemployer-employeeparity.


Figure 36: Trade Union Density

Ratio of wage and salary earners that are trade union members, divided by the total number of wage and salary earners.

Source: OECD Labour Force Statistics, extracted March 19, 2012.

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0

20

40

60

80

100


79

notonlyguaranteesecurityforemployees,butalsopredictabilityforfirms,asstrikesandlockouts

areprohibitedthroughoutthedurationofanagreement.Tradeunionshavebecomemorediversi-

fiedinthepastseveralyears,aswhite-collarjobshavebeengrowingandtraditionallyindustrial

jobsdecreasingsothatdominantunionshavelosttheirformernearmonopolyontherepresenta-

tionofworkers’interests.ThelownumberofstrikesinSwedencomparedtotheOECDaverage

indicatesarelativelybalancedsocialpartnership.

In each case, the most encompassing definition was used.

Source: ILO Labour Statistics Database, extracted Sept. 12, 2012.

2003

2005

2007

2001

2002

2004

2006

2008

0

1

2

3

4

5


Figure 37: Strikes and Lockouts

Strikes and Lockouts, days not worked, in millions; Graph supplementary to index

Similar toSweden,Germanyalso losesvery fewdays inOECDcomparison to strikes (seeFig-

ure37)andalsoscoredhighonthisindicator.Unionsandemployers’associationsdemonstrated

theirconstructiverelationshipduringtheonsetofthefinancialandeconomiccrisiswhenthey

reachedagreementonworkingtime,overtimeandlong-termwagemoderationinordertoprevent

joblosses.Duringtheeconomicdownturnin2009,socialpartnersnegotiatedtheuseofwork-

time accounts (Arbeitszeitkonten) and work-sharing programs, known as Kurzarbeit, in 64,000

establishmentsaroundthecountryinordertosavewhattheILOestimatedtobeapproximately

3.2millionjobsdespiteadeclineinGDPfrom2008to2009of6.8percent.33Atthesametime,

thecoverageofcollectiveagreementsinGermanycontinuestodecline.Afurtherconcernwith

thesustainabilityofthesocialpartnershipinGermanystemsfromthedisproportionatepowerof

somesmallyetverywell-organizedunionsthatcancausedevastatingeconomicdamagestotheir

employers.Thereportliststhetransportationsectorasoneexample.

33Andreas Crimmann, Frank Wießner, Lutz Bellmann. „The German work-sharing scheme: An instrument for the crisis”, Conditionsof Work and Employment Programme. International Labor Organization, 2010, p.53. Accessed August 28, 2012: http://www.ilo.int/wcmsp5/groups/public/---ed_protect/---protrav/---travail/documents/publication/wcms_145335.pdf.


80

AlthoughFrancelacksalong-standingtraditionofpositivecooperationbetweenemployers’and

workers’groupsandthestatehasbeenforcedtobreakstalematesituationsonnumerousocca-

sions, reforms between 2007 and 2009 have sought to encourage more constructive behavior

throughnewrules for therepresentationofsocialpartners inpoliticaldebates.Someprogress

towardbettercoordinationhasbeenmade,butexpertsexpectchangetobeslow.Co-determination


Figure 38: Wage Development

Source: http://stats.oecd.org/BrandedView.aspx?oecd_bv_id=mei-data-en&doi=data-00044-en.

Growth in percentage; Graph supplementary to index

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

95

100

105

110

115

120

125


Source: Source: OECD Employment Outlook 2012. Eurostat, extracted Sept. 17, 2012.

2000

2006

2010

5

10

15

20

25

30


Figure 39: Working Poor

Indicence of Low Pay (percent). The incidence of low pay refers to the share of workers earning less than two-thirds of median earnings; Graph supplementary to index

81


atthefirmleveldoesnotexistinFranceintheformofworkers’councilsorsimilararrangements,

whichmaypreventanarguablymoreefficient,decentralizedbargainingprocess.

SocialpartnershipinSpainwasratedasnon-representativeintermsofbothemployeeandemploy-

ers’ associationsand thusdetrimental to thewelfareof societyas awhole.Evaluators criticized

thatthelargestfirmsandunionsexertadisproportionateamountof influenceonthebargaining

Figure 40: Quality of Social Partnership

Source: Questionnaires, missing values for UK and US, due to evaluations of social partnership as irrelevant.

1 2 3 4 5 6 7 8 9 10

10

9

7

7

5

4

Sweden

Germany

Canada

Netherlands

France

Spain

United Kingdom

United States

process in the labormarket, disadvantaging smallerfirmsandworkers’ groups.Contrary to the

situationinSwedenandGermany,wherenegotiationsinparticularatadecentralized,firmlevel,

generatedawin-winsituationforemployeesandemployersduringthemostrecenteconomiccrisis,

decentralizedbargainingdidnottakeplacesystematicallyinSpain,inpartbecausethismandate

wasreservedforthelarge,nationalbargainingpartnersuntilthe2012labormarketreforms.Due

tothesereforms,firmsmaynowstrikedecentralizedagreementswiththeirworkersthatsupersede

nationalagreements.However,theeffectsofthesereformsinpracticeareyettobedetermined.


Institutionsthatbalancetheinterestsofemployersandemployeesareessentialtopreventexploi-

tationandensureanefficientfunctioningofthelabormarket.Whilefunctionalcooperationamong

socialpartnersatthenationalandsectorallevelcanaidinachievingthisbalance,cooperationat

thedecentralized,firmlevelalsoplaysanimportantrole.

82

Onlysomeofthecountrieshaveestablishedmechanismsforcooperationatthefirmlevelsuchas

workerscouncilsandinstitutionalizedformsofparticipationinthedecision-makingprocessor

co-determination.InGermany,theCo-determinationActof1976facilitatesthismicro-levelcoop-

eration. Beyond cooperation, this act establishes a framework for worker participation in firm

supervisoryandmanagementboardsaswellasworkerscouncils.Institutionsatallthreeofthese

levelsgreatlycontributetoprivatesectortransparency.Atthesametime,theyensureproperty

rightsthroughabalancewithinthebodiesthatfavorsowners.

TheUnitedStatesreceivedalowscoreforemployer-employeeparityduetoarelativelylowlevel

ofworkers’rights,aconsistentrankingamongOECDcountriesforthemostliberaldismissalpoli-

ciesandlowestlevelofworkerprotectionaswellasthelackofforumsthroughwhichwidespread

participationorco-determinationcouldtakeplace.Asasignofanunbalancedpowerconstellation,

theUS report cites the stagnating real income level ofworkers in theUnitedStates since the

1990sdespitebusinessprofitmarginsreachinga65-yearhigh.Whileothercountrieswithamore

balancedemployer-employeeparityhavebargainedforwagemoderation,workers–incontrastto

thesituationintheUnitedStates–receivedjobprotectioninreturn.

TheUSreporthighlightswhyemployer-employeeparityprovesimportantbeyondsocialconsid-

erations.Absentworkers’ rights andavenues of participation, executivepolicydecisions often

Figure 41: Employment Protection Legislation

Source: OECD, Employment Protection Legislation, 2008, transformed to index scale.

0

2

4

6

8

109.08

7.77

4.69

3.462.92

1.85 1.621.00

Canad

aFra

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German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s

optimum


83


Figure 42: Effective Labor Market Programs Spending per Unemployed

Source: OECD 2010 (UK: 2009).

In US-Dollars

0

5000

10000

15000

20000 19197.30

8770.10 8758.178244.52

3169.75 2672.78 2381.781226.9

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s

remainintransparent.Acultureandlegalframeworkthatfosteremployeeparticipationinfirm-

leveldecisionsmight therefore leadto improvedcorporategovernanceandeconomicdecisions

thatbenefitthefirmasawhole.

AlthoughexpertsassessedtheroleofunionsinCanadaasdecreasinglyinfluentialandrelatively

unimportant in shaping laborpolicy, the countryexperts rated the institutional environment for

ensuringabalancebetweenlaborandcapitalfriendlypoliciesasadequate.TheDepartmentofLabor

onthefederalandprovinciallevel,however,heavilyintervenesinlaborrelationstoachievethisbal-

ance.Inoptimallyfunctioningindustrialrelationsinlinewiththeordoliberalphilosophy,thestate

fostersparitythroughalegalframework,butshouldnotneedtointerveneinproceduralrelations.


Effectivelabormarketprogramsprovideskillsthatreducelongtermunemploymentandhelpto

bringthecapabilitiesoftheworkforceinlinewiththecapabilitiesrequiredbyfirms.Tobecost

effective, thoseprogramsshouldbeopenonlytothosewhoselabormarketprospectscouldbe

improved.Theamountofspendingonactivelabormarketpolicies(ALMPs),controlledforunem-

ploymentlevels,doesnotnecessarilyindicatethequalityoftheprogramsenacted,butdoesindi-

catetheextenttowhichpolicymakersprioritizeactivelabormarketpolicies.Forthisreason,the

IMSMEsupplementedthisspendingindicatorbyanevaluationoftheefficacyoftheseprograms.

84

InSpain, thegovernmentprimarilydevolved the implementationofALMP to employers’ asso-

ciations and unions and equipped them with subsidies for this purpose. However, while this

decentralizedapproachmightseemeffectiveintheory,alackofmonitoringandenforcementof

howthefundswereactuallyspentledtoseriousinconsistencies.TheSpainreportlistsproblems

withcorruptionandre-channelingof thefundsforpurposesotherthantheagreedupontrain-

ingprovisions,whichhaveprovendetrimentaltothecost-effectivenessoftheSpanishprograms.

DespitemoderatespendingonALMPinrelationtoitsGDP,Spainreceivedthelowestscoreforthe

effectivenessofitspolicies.

Becausethegroupofcountriesgenerallydescribedasliberalmarketeconomiesaimstowardmore

generalizedskillsetsandlabormobilityratherthanhighlydifferentiated,specificskills,itisnot

surprisingthattheyinvestlessinretrainingandjobcounselingprogramsthandomorecoordi-

natedeconomies.TheUKspendslittleonretrainingandotheractivelabormarketprogramsand

theefficacyoftheprogramsitdoesfundwerecharacterizedas“poorlyorganized”andfailingto

targetweakergroupsoftheunemployedthathowevercouldhavebeenreintegratedintothejob

market.Forthesereasons,theUKreceivedoneofthelowestscoresonthisindicator.

Alsocommensuratewithitsliberalmodel,theUnitedStatesspendslittleonALMPsandoffers

retraining,jobsearchandrelocationsubsidieslesssystematicallythanmanyEuropeancountries.

However,thesepoliciesdoexistonalowerlevel.Also,theUSreportstressedtheimportanceof


Figure 43: Effective Labor Market Programs


1 2 3 4 5 6 7 8 9 10

9

8

8

8

6

6

4

3

Germany

Canada

Netherlands

Sweden

France

United States

United Kingdom

Spain

85

thewidespreadon-the-jobtrainingintheUnitedStates,whichmayhelptheworkforceremain

flexible,mobileanddynamic.WhereasALMPinvestmentcoincidestosomeextentwiththeexpec-

tationthatworkersfirstacquirecertainskillsandthenajob,UScompaniesoftenexhibitawilling-

nesstofirsthireworkersandthentrainthemonthejobasneeded.Additionally,anabundant

supplyofprivateretrainingprogramsofferedatprivatecollegesandfirmsexistataprivatecostto

thetrainee.Therefore,despitelowspendingonALMP,theUSreceivedahigherscorethansome

countrieswithhigherspending.

Germanyreceived thehighestscore for theeffectivenessof its labormarketprograms, largely

duetotheHartzReformsfrom2003-4.TheHartzReformsamountedtocomprehensiveanddeep

reformsthataimed,interalia,toreintegratelong-termunemployedintothelabormarketthrough

acombinationofjobcreationandtrainingmeasuresaswellasreformstotheunemploymentand

welfareregimesthatincentivizedemployment.Whilenotallofthemeasuresprovedsuccessful

andcriticismsabound,thesereformssucceededinactivatinglargeportionsoftheunemployed

population.GermanyalsoreceivedthehighestscoreduetoitsimpactevaluationsofitsALMPs

thatconformtohighacademicevaluationstandardsandinformthegovernmentandlaboroffices

as they adjust their future financial investments accordingly. A cost-effectiveness assessment

enabledthegovernmenttocutbackonspendingandmoreefficientlyinvestininstrumentsthat

offerahighprobabilityofsuccess.


Figure 44: Level of unemployment benefits by duration of the unemployment spell, year 2011

Net replacement rates at different points during an unemployment spell, percentage; Graph supplementary to index

After tax and including unemployment benefits and family benefits. No qualification for cash housing assistance or social assistance. Family situation: four different stylised family types (single and one-earner couples, with and without children) and two earnings levels (67% and 100% of average full-time wages).

Source: http://www.oecd-ilibrary.org/employment/oecd-employment-outlook-2011_empl_outlook-2011-en, P. 40.

Year

1Ye

ar 2

Year

3Ye

ar 4

Year

55-Y

ear

Averag

e0

10

20

30

40

50

60

70

80


OECDAverage

OECDAverage

86

Locallyadministeredandindividuallytailored,ALMPinSwedenentailsthreephases.Inafirst

phase,locallabormarketboardsofmunicipalitiesofferjobsearch,coachingandotherpreparatory

services.Followingtheseactivities,thejobmatchingandtrainingfollows.Inafinalstage,partici-

pantsreceivetheopportunitytobuildexperienceandqualificationsandacquirereferencesfrom

acooperatingemployer.Othermeasuresincludewelfareincentivestoworkandalsotocontinue

skillbuilding.TheinfrastructureinSwedenisfavorabletothistypeofALMPinparticular,asits

life-longeducationschemesarewelldeveloped.Sweden,likeGermany,evaluatestheeffectiveness

ofitsALMPs.

Confrontedwithgrowingunemployment,Francebeganactivepoliciestobringmorecitizensinto

theworkforceinthe1970s.However,ratherthantakingboldmeasurestoactivatethelaborsup-

ply,policiessoughttoincreaselabordemandbyreducingtherequiredsocialcontributionfrom

employers.Notwithstandingapositiveeffectonemployment,laborcostsremainhigh.Addition-

ally,policy-makersreducedtheworkweekto35hoursin2000.WhilethePlan d’Aide au Retour à

l’Emploi(PAREprogram),implementedin2001,aidedthereintegrationoftheunemployedintothe

labormarketthroughcounselingandmatchingassistance,Francehasbeenhesitanttocombine

employmentassistancewithflexibilitymeasuresandwelfaretoworkreforms.

SOCIAL MOBILITY

Fundamental protections from absolute poverty and discrimination are basic prerequisites for

socialmobility.Theydonotsufficetoguaranteeequalstartingchancesinlife,butwithoutaassur-

anceofaminimalleveloffinancialsecurityandfunctioninginstitutionsthatguaranteeequality

ofrights,socialmobility isnotpossible.Onthese three indicators, resultsweremixed.France

receivedthehighestpossiblepointsforitsprovisionofaminimalsocialsecuritythatsucceeds

inspanningasocialnetthatcatchesthevastmajorityofneedcases.Itsnon-discriminationand

socialinclusioninstitutions,ontheotherhand,showseriousweaknessesanddonotpreventsys-

temicdiscriminationofminoritygroupsandthoseoflowsocio-economicbackgrounds.Sweden,in

contrast,exceedsinallthreeareasofnon-discriminationandsocialinclusionaswellasproviding

a guaranteed minimum social security. As such, Sweden again receives the highest marks on

these indicators because of its focus on enabling mobility through equal opportunities rather

thanmerelyofferingfinancialcompensationforsocialexclusion.Ajuxtapositionofthesethree

indicatorswiththatof“IncomeTaxationandIncentivestoWork”confirmsthisbalanceinSweden

betweenprovidingfinancialsecurityontheonehandandenablingworkerstoprovidefortheir

ownsocialinclusionontheother,byestablishingincentivestoworkandequalchancestotake

advantageoftheseopportunities.


87

Early Childhood Education Spending

Earlychildhooddevelopmentisincreasinglyseenastheprimarybuildingblockforfurthereduca-

tionalattainmentandsubsequentlyforsocialmobilitylaterinlife.34Moreover,effectivepolicies

thatgobeyondfamilyallowancestoensuresufficientqualityinfrastructureforchildcareandearly

childhoodeducationalsoincreaseopportunitiesforsocialmobilityamongparents,inparticular

amongwomen.Intheabsenceofdataontheavailabilityandqualityofearlychildhoodinfrastruc-

ture,thisindicatorscoresstatespendingonearlychildhoodeducationandcare.

OECDstudiesconcludethatmostmemberstatesunderfundearlychildhoodeducationandpoli-

ciestosupportfamilies.35Sweden,theUKandFranceproveexceptionstothisruleandtherefore

scoredhighonthisindicator.Themajorityofthecountriesinthesamplespendacomparatively

smallamountoftheirGDPontheseprograms.Canada,GermanyandtheUnitedStatesfindthem-

selvesonthelowerendofthespectrum.Interestingly,manyofthesesamecountriesinvestheav-

ily in post-secondary school education. Promoting social mobility through equal opportunities,

however,wouldrequireashiftintheweightofthesetwopriorities.

34Foraninternationalcomparisonofthequalityofpolicyeffortsincentralareasthatpromoteearlychildhoodeducation,seetheOECDseries„StartingStrong:EarlyChildhoodEducationandCare”.

35Ibid.


Figure 45: Public Spending on Childcare and Early Education

Spending on tertiary education not included in index calculation.

Source: OECD Family Database 2007; OECD Education at a Glance 2012.

0

0.5

1.0

1.5

2.0

Public Spending on Childcare and Early Education Public expenditure on tertiary education as a percentage of GDP

1.11.11.0

1.8

1.3 1.3

1.6

2.0

1.1

0.8

1.3

0.7

0.50.40.4

0.2

Canad

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88


Figure 46: Permeability of Education Structures


1 2 3 4 5 6 7 8 9 10

9

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Sweden

Canada

United States

Germany

Netherlands

Spain

France

United Kingdom


Followingearlychildhoodeducation,thefirstyearsofcompulsoryeducationprovepivotalinshap-

ingthefurthereducationandcareerpathalongwhichstudentsprogress.Swedenrankshighon

theindicatorofpermeableeducationstructures.ItsEducationActof2010tookaboldstepininter-

nationalcomparisontowardguaranteeingequalaccesstoanequivalentregardlessofgeographic

locationorsocioeconomicbackground.Thestatefurthermorecoversallschoolmaterials,meals,

healthcareandtransport toandfromschoolduringthefirst9compulsoryyearsofeducation.

Thesepolicies focusedon increasingequalopportunitiesgowellbeyondcommon instruments

usedacrosstheOECD.Swedenalsoowesitshighscoretoitswell-developedinfrastructureand

practices in the field of life-long learning. In cooperation with the institutions responsible for

activelabormarketpolicies,life-longlearningprogramsoftenfeeddirectlyintothelabormarket,

enablingpossibilitiestoswitchcareerpaths.Despitethesepolicyefforts,Swedendoesstruggleto

achieveintergenerationalmobilityinparticularamongimmigrantpopulations.

Canada’ success in the area of intergenerational mobility is often attributed to its widespread

accesstopost-secondaryeducation.Universitiesandcollegeschargeonaveragelowtuitionand

aneasilyaccessiblefinancialassistanceinfrastructuremakeshighereducationfeasibleformost

of the population. Similar to Sweden’s difficulty to include its immigrant population, Canada

strugglestocreateequalopportunitiesforFirstNationcommunities.IncomparisontoSweden,

however,policiestoincludethisminoritypopulationarenotasencompassing.

89

Germanyreceivesagreatdealofcriticismforthestratificationandsocialselectivityofitseducation

system,whichtheOECDassessesasexacerbatingsocio-economiccleavages.Educationalattain-

mentinGermanyhighlycorrelateswithsocio-economicstatusandeducationlevelsofone’spar-

ents.Itsfederalsystemfurthermoreallowsforgrossregionaldisparities,whichthelawandpolicies

inSwedenforexampleseektomitigate.Regardinginformalinstitutions,coordinationmechanisms

between the states are lacking, which would otherwise allow them to improve mutual learning

frombestpractices.Whilethisindicatorfocusesonthedegreetowhicheducationstructuresare

flexibleandpermeable,fosteringequalopportunities,theadvantagestotheGermaneconomyof

educationalsegmentationdeservemention.Excellentinstitutionsforvocationaltrainingproduces

highlyspecializedandwell-trainedworkersforthelabormarketwhogenerallyrequirelesson-the-

jobtrainingthaninothercountries.Becausevocationaltrainingandlabormarketrequirements

matchwell,thissystemoffersgoodworkingopportunitiesforthoseprivytothem.

EducationstructuresinboththeUKandFrancewereratedashighlysociallyselective.Despitean

excellentprimaryschoolinfrastructure,theexpensivecostsofsecondaryschoolresultinstratify-

ingthepopulationatayoungage.Thoseprivytoprivateschoolsoftengoontoattendoneofthe

GrandEcoleswhileothersattendlessselectiveandlessprestigiousuniversitieswherethequality

isseenasnotonparwiththebestinternationalstandards.BeyondthesocialselectivityofFrench

universities,thevocationsector,incontrasttothatinGermanyisunderdevelopedanddoesnot

thereforeofferaviablealternativefortrainingleadingtohigh-payingcareeroptions.Somereforms

haveoccurred inorder tobetter fundand incentivizedual trainingandeducationprograms in

cooperationwithfirms.

SpainservesasacounterexampletoFranceandtheUKintermsoftheselectivityandaccessibility

ofitsuniversitysystem.TheSpanishuniversitysystemhasexperiencedrapidexpansionduringthe

lastdecadesandtodayboastsoneofthehighestattendanceratesinEurope.Lowtuitioncharges

promotethistrend.Lowstandardsandtheabsenceofperformance-basedfundingforuniversities

haveerodedtheroleofauniversityeducationinfosteringsocialmobility.Universityeducationno

longersufficesasaguaranteeforagoodjob,lesssothanintheothercountriesassessed.Vocation

training does not enjoy the prestige that it does in Germany and is perceived as an alternative

onlyforthosewhocouldnotmakeitatuniversity.Givenveryhighlevelsofyouthunemployment

inSpain, the institutionsofpost-secondaryeducationshouldbeseenverycritically.Theeaseof

enteringuniversitylikelyhidesayouthunemploymentratethatisevenhigherthantheofficialrate.

TheUnitedStates,similartoGermanyandtheUK,struggleswithregionaldisparitiesanddoes

notensureequalopportunitiesespeciallyinlow-incomeinner-cityareasthatoftenhavelessfund-

ingthanwealthierareas.Thequalitydeteriorationofpublichighschooleducationoverthelast

decadesrendersthepublic-privateschooldichotomymoreproblematicthaninearliertimesinhis-

tory.Moreover,theprohibitivelyhighcostsofuniversitytuitionfurtherlimitequalopportunities,

despiteawell-developedfinancialaidsystem.However,duetotheneedsoftheliberaleconomyin

theUSforgeneralskills,moreoptionsexistforchangingcareerpathslaterinlifethanisthecase


90

inhighly-specialized,morecoordinatedeconomieslikeGermany,forexample.Agreaterwilling-

nessofemployerstotrainonthejobandaculturalopennessfordiversecareerpathsreinforces

thismobilitylaterinlife.


Socialinclusionrequiresthatthosewhoarenotabletomeettheirownneedsaresubsidizedby

societyatalevelthatpreventsabsolutepoverty.Thisindicatorassessedtheextenttowhichsocial

securitybenefitsinthehealthcarebenefitsystem,pensions,unemploymentinsurance,invalidity

insuranceandfamilyallowancesmeetadequateminimumlevels.Manyofthecountryreportsfur-

thermoreelaboratedonthecrucialroleofthefinancingschemechosentoprovidesocialbenefits.

Francefinancesitssocialsecuritysystemwithamixoftaxesandemployer-employeecontribu-

tions.Benefitsareamongthehighestworldwide,reflectedinapublicsocialspendingshareof

30percentofGDP.Traditionallycontributions-based,thefundingstructureofthesocialsecurity

systemincreasedtheproportionoftaxfundingwiththeContribution sociale generalise(CSG)in

1991.France’shighscorereflectscomprehensivesocialbenefitsinthefiveareasinvestigatedand

inparticularwithrespecttotheprovisionofchildcareinfrastructureandfamilybenefitsaswellas

ahighlypraisedandencompassinghealthcaresystem.

Sweden’ssocialbenefitssystem isoneof themostdecommodified,witha tax-basedfinancing

schemethathas thegoalofdecreasing income inequalities.Aspartof thecountry’sgenerous

benefitssystemoverallinthe5areasofhealthcare,pensions,unemploymentinsurance,invalid-

ityinsuranceandfamilyprograms,policyeffortsintheareaofchildcareservicesandgenerous

maternityandpaternityleaveprogramsstandoutandearnSwedenahighscoreonthisindicator.

Thesepoliciesaimtodecreasechildhoodpovertynotonlythroughfamilyallowances,butmore

importantlybyfacilitatingthereintegrationofparentsintotheworkforce,whichbringsfamilies

intohigherincomebracketsinthelong-term.

SimilartoFrance,Germanyhastraditionallyreliedonsocialsecuritycontributionsforfinancing

itswelfarestateand likewisehas increased theproportionof taxfinancing in recentyears. In

order to maintain the long-term financial viability of the welfare system and activate a larger

partoftheworkforce,theHartzReformssignificantlydecreasedthegenerosityofsocialbenefits

of somegroupsof long-termunemployed.Despite thesechanges,Germany’swelfarestatestill

guarantees a high level of financial security and a subsistence level to all citizens. The social

benefitssystemhasinfactsupplementeditsincomemaintenancemeasuresthataretraditionally

insurance-basedandtargetedtowardstatusmaintenancewithneeds-basedprovisionsincasesof

aninsufficientcontributionhistory.Pensions,unemploymentinsurance,sicknesspayandother

toolsallprimarilytargetincomemaintenanceincaseofneed.ThisgoalcontraststhatinSweden,

whichalsotargetsequality.ChildcareinfrastructureisunderdevelopedinGermany,constraining

femaleparticipationintheworkforce.


91

Spaindidnotfareaswellonthisindicatorduetoitspoliciesthatneglecttoincludesomelarge

groupsofthepopulationinitsprovisionofaguaranteedminimumlevelofsecurity.Thecoresocial

safetynetprovidesnearuniversalcoverageintermsofpensionsandunemploymentinsurance.

However,womenwhotraditionallyhavebeenoutofthelaborforceforlongstretchesoftensuffer

frominadequatepensionsduringoldage.Unemploymentinsuranceisprovidedforacompara-

tivelylongtimeandonrelativelylenientterms,leadingtoasluggishlabormarket.Othersocial

benefitssuchaschildcareinfrastructureandfamilysupportareunderdevelopedandthoughtto

contributetoSpain’slowbirthrate.

TheUnitedStates,togetherwiththeUnitedKingdom,receivedthelowestscoreonthisindicator.

Whileprogramstoalleviatepovertydoexist,includingtheEarnedIncomeTaxCredit(EITC),unem-

ploymentinsurance,SocialSecurityandMedicare/Medicaid,theydonotcovermanygroupsandfail

toestablishaminimumsecuritylevelfortheentirepopulation(seeFigure47).Unemploymentben-

efitsarelowerthanintheothercountriesinvestigatedanddurationofwagereplacementisgener-

allyshorter,whichreflectsthegoalofworkeractivationinlabormarketpolicyandthepromotionof

generalratherthanspecificlabormarketskills.Pensionassistance,ontheotherhand,reachesover

50millionpeople.Nevertheless,becausebothSocialSecurityandMedicare/Medicaidarefinanced

through a regressive tax in accordance with the Federal Insurance Contributions Act, contribu-

tionsburdenlow-incomehouseholdsthatarenotexempt.Afurthercriticismoftheinstitutionsfor

fundingsocialwelfareprogramsliesintheoverrelianceontheEITCastheprimaryinstrumentfor

fightingpoverty.BeyondtheEITC,fewactivesocialprogramsexistintheUStofightpoverty.


Figure 47: Child Poverty Rate

Child Poverty Rate, cut off point 50 percent of median equivalized household income; Graph supplementary to index

Source: Eurostat (EU), US Census Bureau (US).

2004

2005

2006

2007

2008

2009

2010

5

10

15

20

25


92


Whileagovernment-guaranteedminimumincome level isnecessary toavoidabsolutepoverty,

welfaresystems that lack important incentivemechanismscanalso reduce laborparticipation,

whichaggravatesrelativepovertyinthelongrun.Additionally,taxationsystemscancreateincen-

tivesthatencourageordiscouragetheentirepotentialworkforcetoparticipateinthelabormarket.

Generally, income taxation and welfare policies that encourage labor market participation are

evaluatedpositively,asemploymentservesasthebasisforsocialinclusionduringbothworking

andretirementstagesoflife.

NotonlyWalterEucken,butalsomostOECDcountriestodayadvocateataxationschemewhich

is (directly or indirectly) progressive. In contrast to a regressive or proportional tax system, a

progressivetaxputsagreaterburdenonhighincomes,bothinabsoluteandinproportionalterms.

Thecountriesscoringthehighestonthisindicator,Sweden,theUKandtheUS,allhavesomeform

ofnegativeincometax,whichmakeslabormarketparticipationforlow-incomeworkersfinancially

moreattractive.IntheUS,theEITCsubsidyforlow-wageworkslowlyphasesoutasworkersearn

more so that incentives to increaseone’s labor supply remain intact.Also, the retirementage

of67forreceivingfullbenefitsencouragesolderworkerstocontinuetoworkandpayintothe

system.TheUShasaprogressiveincometaxsystem,althoughtaxloopholeshavebenefittedmany

high-incomeUScitizensoverthepastyears.Redistributionfromthewealthytothepoorisscarce.


Figure 48: Guaranteed Minimum Social Security


1 2 3 4 5 6 7 8 9 10

10

9

8

8

8

6

5

5

France

Sweden

Canada

Germany

Netherlands

Spain

United Kingdom

United States

93

SimilartotheEITCintheUS,theUKimplementedtheWorkingTaxCredit(WTC)inthe2000s

forthelow-wagesector.TheWTCreachesover5millionlow-wageworkers.Byimplementingan

employment-friendlyminimumwage,theUKincreasedtheattractivenessof low-wageworkby

renderingitlessprecarious.LiketheUS,theretirementageof67forfullbenefitsaddsanincen-

tiveforolderworkerstocontinuetoworkratherthanretireearly.WhiletheUSandUKdowell

inincentivizingtheirworkforcetoincreaselaborsupply,theydolesswellinreducingpoverty,

as reflected in their scores for the previous indicator “Guaranteed Minimum Social Security”.

Sweden,incontrast,appearstostrikeabetterbalance.

Swedennotonlyscoredhighonitsinstrumentsforpovertyreductionandminimalsocialsecurity,

but also on this indicator thatmeasures incentive structures. In combination, Swedendemon-

stratesabalancebetweenprovidinganecessarylevelofsecurityontheonehandandencouraging

activecontributiontosocietyandtothefundingofthesocialsystemontheother.Swedishtaxpay-

erspaymostoftheirincometaxonthemunicipalandregionallevel.Whiletheprogressivityof

theSwedishtaxsystemhasdecreasedsince2006duetotheloweringoftaxratesforthehighest

incomebrackets,theoveralldegreeofprogressivityremainshighincomparisontootherOECD

countries.Infact,thehighestmarginaltaxratesinSwedenamountto56-57percent,wellabove

theOECDaverage.Despitethishighmarginaltaxrateforthehighestearners,Swedenscoredhigh

onthisindicatorduetoconditionalitiesbuiltintotheunemploymentbenefitsystem,inparticular

forthelong-termunemployed,earnedincometaxdeductionsthroughthejobbskatteavdragnega-

tiveincometaxandanelaboratechildcareinfrastructureandfamilypoliciesthathelptoincrease

notonlyincentives,buttheabilitytowork.WhiletheofficialretirementageinSwedenremains

65, the average actual retirement age is 66 due in part to policies that positively incentivize

continuedworkwithreducedhours.

SimilartothecaseofSweden,thedegreeofprogressivityintheGermanincometaxsystemhas

decreasedduringthepastyearsduetotheincreasedimportanceofindirecttaxes,failedadjust-

mentforinflationandthereductionintopincometaxrates.Thecountrysawasweepingreform

whenin2005theformerlyseparatesocialsecurityandunemploymentassistanceschemeswere

mergedtoimproveincentivesfortheunemployedtoseekandacceptjobs.Germanyhasoneof

thehighesttaxandsocialsecurityburdensonlaborincome(seeFigure49).Ontopofincometax,

workersmustpaysocialsecuritycontributions,bothofwhichtogetheraccountfor39.9percentof

aworker’sgrosswageearnings–muchhigherthantheOECDaverage.Boththetaxbracketcreep

andhightaxandsocialsecuritycontributionsforthemiddleclasscreateadisincentivetoincrease

earningsthroughtaxablelabor.CommensuratewithmanyotherOECDcountries,Germanyalso

raisedtheretirementageforfullbenefitsto67.


94

TheDutchtaxsystemisprogressive,butlesssothancommonlyassumed.In2011,lessthana

thirdoftaxrevenuecamefromdirecttaxes,withamuchlargersharecomingfromsocialsecurity

premiumsordirecttaxessuchastheVAT.Therearefourtaxbracketsforincometaxes,ranging

from33to52percent.Thetoprateisappliedtoallincomesabove55.694Euro.Healthinsurance

premiumsdonotdependonincomebutareaflatamountequalforall.Incentivesforlow-income

workarelacking,asthemarginalwedgefortheunemployedtakingupworkinmanycaseslies

above100percent.ItcanbemorefavorableintheNetherlandstoremainunemployedratherthan

enter into low-wageworkbecausewelfarebenefitssurpass lowwages.While inactiveportions

ofthepopulationarenotaccountedforinheadlineunemploymentnumbersinanyeconomy,the

incentivestructuresintheNetherlandslendthemselvestoalowlabormarketparticipationrate.

Similar to taxation in theUnitedStates,Canada’s income tax system is fairlyprogressive, but

corrupted by a high number of tax deductions for high-income earners. Some Canadian prov-

inceshave introducedflat income tax rates.For lower incomebrackets,both income tax rates

andwelfarebenefitsarefairlylowandsupporttheirincentivetowork.Transfersandtaxcredits

supportfamilieswithchildrenandtheworkingpoor.Sometransferprograms,e.g.childbenefits,

inconjunctionwithtaxratescreatehigheffectivetaxratesforsomelow-incomeearners.


Figure 49: Workers’ Social Security and Tax Contributions

Source: OECD Tax Database, 2011.

0

5

10

15

20

25

30

35

4039.9

31.4

28.0

25.1 24.8

22.8 22,7 21.9

Canad

aFra

nce

German

y

Netherl

ands

Spain

Swed

en

United

Kingdo

m

United

State

s

OECD-Average = 24.8


95

SpainfeaturesoneofthemostprogressiveincometaxsystemsinEurope,withthetaxratebeing

oneofthehighestworldwide.Taxevasion,however,isrampant,leavingeffectivetaxrateslower

than the formal rateswouldsuggest,especially foremployees,much lessso forself-employed.

Unemployment insurance is provided for a comparatively long time and on relatively lenient

terms, leadingtoasluggish labormarket.Reformsarecurrentlydebated.Othersocialbenefits

suchasfamilysupportareunderdevelopedandthoughttocontributetoSpain’slowbirthrate.

OUTLOOK

Theprecedingexplorativestudydefineskeyinstitutionsthatdojusticetothetermofthemod-

ernsocialmarketeconomy.Itfoundthatofthesamplecountries,Swedenbestexemplifiesthis

economicmodel.Whiletheindexdoesnotdirectlyascertaincausalitybetweenthemodernsocial

marketeconomyandpositiveeconomicperformanceorcrisisresistance,itprovidesafoundation

uponwhichbroaderanddeeperresearchcanbuild.Moreinvestigationshouldbecarriedoutin

ordertoinvestigatecorrelationsandcausalitywithperformanceindicators.Indoingso,however,

long-termdevelopmentratherthanshort-termperformanceshouldbetakenintoaccount,inline

withordoliberalapproaches.

Thestudyfillsadatagapinseveralinstitutionalareasofthemodernsocialmarketeconomy.Italso

providesatoolforstudyingthecomplex,structuralinteractionsofsocial,politicalandeconomic

institutionswithindiverseeconomicorders.Countryreportsforeachofthe8economieselaborate

onthewayinwhichinstitutionalframeworksinteractwitheachother,eitherbuttressingstrengths

orexacerbatingweaknesses.

Becauseasastartingpointtheindexfocusedonnationaleconomiesasthechosenlevelofanaly-

sis,itonlyscratchesthesurfacethroughanecdotalevidenceinthecountryreportsoninformation

pertainingtotheinteractionofinstitutionsbetweencountries.Thisaspectwouldproveespecially

interestingattheleveloftheEUorEMUduringfurtherresearch.

Ingeneral, thegreatdealofdivergence found in theexplorativestudyamongcountriesof the

EUand inparticularof theEMUraise importantquestionsabout thedegreeofdesiredversus

actualpolicyandinstitutionalcoordination.ThememberstatesoftheEUdefinedtheircommon

economicorderintheLisbonTreatyasahighlycompetitivesocialmarketeconomy.However,they

lackaclearlyoutlinedandmeasurableconceptfortheinstitutionsthatconstitutethisoverarching

economic order. The index can serve as a benchmark for measuring and monitoring progress

towardconvergencearoundthemodernsocialmarketeconomy.Itservesasapointofdeparture

fordiscussionsaboutalternativeorsupplementaryindicatorsthatmaybecomeapparentthrough

empiricalevaluation,learningandadynamic,iterativeredesigningprocessindialoguewiththe

memberstates.


96

METHODOLOGY

UlrichvanSuntum,TobiasBöhm,JensOelgemöller

Afterhavingestablishedthecloseconnectionbetweenmodernscientificconceptsandthefour

categoriesunderlyingournotionofamodernsocialmarketeconomy,weconstructedameans

tomeasurethedegreetowhichcountriesconformtoit.Theaimofthisendeavoristocompare

countriesthatdifferinmanyareasandtotracktheirrelativeperformanceovertime.

Tothisend,weassembledacomprehensivedatabasethatassignsone,orevenseveralnumeric

variables(indicators), toeachofourprinciples.Thesevariableswerethencombinedtobuilda

hierarchyofindices.First,weconstructedanindexforeachprinciplethatcouldbeinterpretedas

anumericsummaryofhowcloselyacountry’sinstitutionsconformtoourconceptofamodern

socialmarketeconomy.Inasecondstep,weaggregatedtheprincipleindicesintocategoryindices.

Finally,theseprovidedthebasisforacompoundindexmeasuringtowhichdegreetheconceptof

amodernsocialmarketeconomyprevailsineachcountry.

In this chapter, we explain our methodological approach before describing the calculation of

results.Itconcludeswithabriefdiscussionofrobustnesstests.

DATA SOURCES

Ourdatasetcontainstwotypesofvariables:quantitativeindicatorsthatwecollectedfromexternal

sources,(seethedatadescriptionintheappendixforfurtherinformation)andqualitativeindica-

tors.Forsomedimensionsofourprinciples,publiclyavailableinformationisextremelyscarce,

(e.g., fortheappropriatedegreeofmanagerliability).Toincorporatethesedimensionsintoour

analysis,weaugmentourdatasetofexternallycollecteddatawithexpertassessments,basedon

ourquestionnaire.Theseratingshavetheadvantageofbeingabletocapturebarelyobservable

nuancesofaprinciplethatarerelatedtoournotionofamodernsocialmarketeconomy.Further-

more,expertratingscanbettertakeintoaccountcertaincountryspecifics,forexampletheirrich

institutionalenvironment.

Theseratingswereobtainedfromcountryexpertsinaconsecutiveevaluationprocess.Theywere

chosen to reflect theviewsofacademicsandpractitioners fromboth thefieldsofpolitical sci-

enceandeconomics.Eachexpertcompletedaquestionnairethataskedhimtoprovidenumerical

assessmentsfor18questions.Toreducethescopeformisunderstanding,thequestionnairepro-

videddetailedexplanationstoeachquestion.Moreover,foreachquestionweofferedfiveresponse

options,whereaswithineachresponseoptionahighandlownumericalassessmentwasavailable

resulting in tendifferentnumericalvalues thatcouldbeassigned.Moreover, theexpertswere

asked tosubstantiate theirnumericalassessments inacountryreportbyreferring toconcrete

examplesand/ordataifpossible.

Methodology

97

Whencompletingthequestionnaire,theexpertscoulddrawuponthequantitativeindicatorsthat

hadalreadybeencollected,butcouldnotaccessthenumericalassessmentsfromtheotherexpert,

makingsurethattheirratingsweregivenindependently.Thecountryreporthowever,wasdrafted

byoneexpertandsubsequently reviewedby theotherswhocouldmakesuggestionsand/or

providesupplementarymaterial.

Duringadiscursiveprocessinvolvingthecountryexpertsandthecoordinators,theexactmean-

ing of each question was clarified and all participants agreed on numerical assessments that

properlyreflectcross-countrydifferences.

DATA STANDARDIZATION

Sinceourdataaremeasuredondifferingscales,weneedtostandardizethembeforeconstructing

ourindex.Wedecidedtostandardizeallvariablestothesamescaleastheexpertratings,i.e.,1to

10,with10beingthebestvalue.Thus,onlyquantitativeindicatorsthataremeasuredonascale

different from 1 to 10 remain to be standardized (transformed). Our standardization approach

proceedsasfollows:

1. Forcategoricalvariablesthathaveaclearlydefinedmaximumandminimum,e.g.,theindicator

“PoweroftheCompetitionOversightAuthority”whichcantakeonvaluesbetween0and5,we

assignavalueof10tothehighestpossibleandavalueof1tothelowestpossiblevalueofthe

originalvariable.Fororiginalvaluesbetweenthemaximumandminimum,thetransformed

valuedependslinearlyonthedistancetothemaximum,thusthevariable“PoweroftheCom-

petitionOversightAuthority”istransformedaccordingtothefollowingformula:

TransformedValue=1+1.8*(OriginalValue),

resultingintransformedvaluesbeingequallyspacedbetween1and10.

2. Forthosevariablesthatdonothaveaclearlydefinedmaximumandminimum,e.g.,continuous

variableslike“SpendingonChildcareandEarlyEducation”,weassignatransformedvalueof

10tothehighestandatransformedvalueofonetothelowestobservedvalueoftheoriginal

variable.Again,forintermediatevaluesoftheoriginalvariablethetransformedvaluedepends

linearlyonthedistancetotheobservedmaximum.

3. Ourdatasetcontainssomevariables forwhichweexpectanonlinearrelationshipwiththe

underlyingcategoryor,moregenerally,ourconceptofamodernsocialmarketeconomy.While,

for example, very low levels of employment protection do not conform to our concept of a

modernsocialmarketeconomy,neitherdoveryhighlevelsofemploymentprotectionthattend

tointroducefrictionsinthelabormarketthatharmtheunemployed.Averysimilarargument

appliestothevariables“ActiveLaborMarketPolicy”whichbelongstothesamecategoryand

Methodology

98

thevariable“SocialSecuritySpending”withinthecategory“EconomicandEcologicalSustain-

ability”.So,toderiveforexamplethelevelofemploymentprotectionthatismostconsistent

withourconceptofamodernsocialmarketeconomy,weproceedintwosteps.First,wecalcu-

lateapreliminaryindexfortheunderlyingcategoryusingonlythosevariablesthatweconsider

tobelinearlyrelatedtothecategory.Inasecondstep,weestimatetheoptimalvalueofthe

“nonlinear”variabledefinedasthevalueofthe“nonlinear”variable,whichisassociatedwith

thehighestvalueofthepreliminaryindex.Finally,basedonitsdistancetotheestimatedopti-

malvalue,wetransformthe“nonlinear”variabletothe1to10scale.Thenextfigureillustrates

ourapproach.

Figure 50: Employment Protection

Source: OECD, Employment Protection.

Fitted values Data Points

United Kingdom

Prel

imin

ary

Cate

gory

Sco

re

Employment Protection

6

1 1.5 2 2.5 3

5

7

8

9

United States

Canada

Sweden

Netherland

Germany

France

Spain

Thefigureplotsthevariable“EmploymentProtection”againstapreliminaryindexforthecategory

“SocialInclusion”foroursampleofeightcountries.Thebluesolidlinedepictsaquadraticfunc-

tionthatbestapproximates(inaleastsquaressense)therelationshipbetweenthepreliminary

indexand thevariable“EmploymentProtection”.Note that thebell shaped formof thiscurve,

which takeson itsmaximumatan intermediate levelofemploymentprotectionataround1.9,

confirmsourprior intuitionthatanintermediate levelofemploymentprotectionconformsbest

tothecategory“Social Inclusion”.Moreover, transformingthevariablebasedonitsdistanceto

theoptimal levelof1.9 implies that lowandhigh levelsofemploymentprotectioncan lead to

Methodology

99

identicaltransformedvalues.Forexample,whileCanadaandFrancehavevastlydifferentlevels

ofemploymentprotection(1.06vs.2.89),thetransformedvariableassignsroughlyequalvalues

tobothcountries.

INDEX AGGREGATION

Thestandardizedvariablescanthenbecombinedintoacompoundindexthatmeasurestowhich

degreeinstitutionspositedbytheconceptofamodernsocialmarketeconomyprevailinourset

ofcountries.OurmethodologicalapproachresemblestheoneusedtoconstructtheSsustainable

GgovernanceIindicators.Inordertocapturetheperformanceofcountriesacrossprinciplesand

categoriesaswell,weproceedinthreesteps.

First,wederiveasub-indexforeachprinciplebycalculatingthearithmeticmeanofallvariables

thatareassociatedwiththisprinciple.Bygivingeachvariablethesameweightwerecognizethat

allvariablescaptureequallyimportantaspectsoftheunderlyingprinciple.Moreover,ourmethod

ofaggregatingvariablesdoesnotdiscriminatebetweenexpertratingsandquantitativeindicators,

whichmeansthatbothtypesofvariableshavespecificstrengthsandweaknesses.Notefurther

thatusingarithmeticmeansimpliesthatalowvalueinonevariablecanbecompensatedforbya

highervalueinanother,reflectingasubstitutiverelationshipbetweenvariables.

Inasecondstep,wecalculatethearithmeticmeanoftheprinciplesub-indicestoderiveanindex

for the associated category. Again, our choice of aggregating sub-indices by building averages

reflectsthefactthateachprincipleisequallyimportantfortheunderlyingcategory.

Inalaststep,weconstructthecompoundindexforourconceptofamodernsocialmarketeconomy

asthearithmeticmeanofthecategoryindices.

CALCULATION OF RESULTS

1. Competitive and Efficient Markets

Asdescribedabove,wefirstevaluate theperformanceofeachcountryalongeachof the three

principlesbeforeweaggregate the threeprinciplesub-indices to thecategory index.Sincewe

lackinformationonthelevelofsubsidiesforSweden,thescoreofSwedeninthesecondprinciple

“EffectivePriceSystem”isbasedonthevariables“PriceControl”and“AdministrativeandMarket

Prices”only.

Methodology

100

Theresultsforthefirstcategoryareshowninthefollowingtable:

Table 7: Competitive and Efficient Markets

Open Market Effective Price System Competition Category Score

Canada 8.14 7.33 6.50 7.32

France 7.23 8.17 6.50 7.30

Germany 7.27 5.67 9.00 7.31

Netherlands 8.16 5.59 7.50 7.08

Spain 7.64 4.42 7.00 6.35

Sweden 8.79 8.01 7.00 7.93

United Kingdom 7.95 8.67 8.00 8.21

United States 7.94 7.31 9.00 8.08

Source: Own calculations based on questionaire and external sources (see Apendix).

Controls on Capital Movement


Barriers to Market Access

Product Market Regulation

Price Control

Admin. Prices vs. Market Prices

Subsidies an other Transfers

Media Pluralism

Competition

Oversight Authority

Arithmetic Mean of

Open Market


Competition

Swedenperformsbestinthefirstprinciple,whichisduetoitsopenfactormarketsanditsrela-

tivelylowbarrierstoentryandexit.Itsaverageof8.79onascalefrom1to10inthefourvariables

assigned to the principle “Open Market” corresponds to 86.6% (=(8.79-1)/9) of the maximally

attainablescore.Thiscontrastssharplywiththe69.2%achievedbyFrance,thelowestperform-

ingcountry,whichleadstoadifferencebetweenSwedenandFranceintherangeof3standard

deviations.Thesecondprinciple,“EffectivePriceSystem”,exhibitsconsiderablevariation.While

Spainperformspoorlyacrossallthreeindicators,thelowperformanceofGermanyandtheNeth-

erlandscanbeexplainedbythehighlevelofsubsidiesinbothcountries.In“Competition”,thelast

principle,thevarianceisagainhighwhereasespeciallyGermanyandtheUnitedStatesreceivea

veryhighscore,resultingfromthehighlevelofmediapluralisminGermanyandhighlyeffective

competitionenforcementauthorityintheUS.

Thelastcolumnaveragesthescoresofthethreeprinciplesandrevealsthatoverall,theUKper-

formsbestinthefirstcategory,followedbytheUSandSweden.Whilethedifferencesbetweenthe

firstthreecountriesaresmall,thegapbetweenthethirdandthefourthcountryCanadaalready

exceeds1standarddeviation(whichis0.57).OnlySpainperformsmarkedlyworse,fallingshort

fromthecountryonseventhplacebyalmost1.5standarddeviations.

Methodology

101

2. Efficient Property Rights

Thescoresofthesecondcategory,“EfficientPropertyRights”,whichconsistsofthreeprinciples

areshowninthefollowingtable.

The score in the first principle, “Property Rights”, is based variables which capture the level of

minorityshareholderprotectionagainstmisuseofcorporateassetsandintellectualpropertyrights

protection.TheAnglo-Saxoncountrieshavethehighestscoreinthefirstprinciplesincetheyexhibit

thehighestdegreeofinvestorprotectionwhichmayreflectthelongtraditionofequityfinancingin

thesecountries.Bycontrast,countrieswhichtraditionallyrelymoreheavilyondebtfinancingscore

considerablyworsehere.Thesecondprincipleistheonlyonewherethebestperformingcountry,

Swedeninthiscase,attainsthehighestpossiblescore.Theperformanceofalltheremainingcoun-

tries, however, exhibits only very little variation, which is not surprising given that our sample

comprises only highly developed countries. We observe more variance however in the principle

“Liability”.TheUK’scomparativelybadscorecanbeexplainedbyitsunbalancedfirmsizedistribu-

tionwhiletheperformanceoftheUSsuffersfromtheinappropriatelevelofmanagerliability.

Combiningthescoresof thesethreeprinciplesrevealsthatSwedenexhibits themostefficient

propertyrights, leading therankingbyalmost1standarddeviationaheadofCanada.The low

performanceofFranceandSpainseemstobedrivenbythepoorlevelofpropertyrightsprotection

andliabilityinparticular.Again,thedifferencesbetweenthecountriesatthetopandatthebottom

aresizableandamounttoslightlymorethan3standarddeviations(whichis0.56).

Table 8: Efficient Property Rights

Property Rights Freedom of Contract Liability Category Score

Canada 8.07 8.67 8.33 8.36

France 7.24 9.00 5.67 7.30

Germany 6.95 9.00 8.67 8.21

Netherlands 7.04 8.67 7.33 7.68

Spain 6.22 8.00 7.00 7.07

Sweden 7.57 10.00 9.00 8.86

United Kingdom 8.02 8.33 6.00 7.45

United States 8.03 8.67 7.00 7.90


Investor Protection

Patent Protection

Intellectual Property Rights

Occupational Choice

Market Transparancy and Consumer Protection

Judicial Review

Private Insolvence

Ratio Medium sized to Total Companies

Manager Liability

Arithmetic Mean of

Eff. Property Rights

Freedom of Contract

Liability

Methodology

102

3. Economic and Ecological Sustainability

Thefollowingtablecontainsthescoresforthethirdcategory.

Table 9: Economic and Ecological Sustainability

Financial Stability Consistency of Policy Efficient Environment Protection

Category Score

Canada 6.71 4.48 4.14 5.11

France 5.59 5.23 4.70 5.17

Germany 6.64 8.36 6.56 7.19

Netherlands 5.73 3.78 7.33 5.61

Spain 5.98 1.68 4.92 4.19

Sweden 6.71 7.47 6.87 7.02

United Kingdom 6.30 5.55 6.14 5.99

United States 7.25 6.19 3.67 5.70


Central Bank Independence

Depth of Credit Information Index

Public and Private Credit Registry Coverage

Prevention of Too- Big-to-Fail

Bank Capital to Assets Ratio


Control of Financial Consolidation

Extent of Staff Training

Pension System Linked with Life Expectancy

Social Security Spending

R&D Spending


Environmental Policy

Revenue from Green Taxes

Arithmetic Mean of

Financial Stability

Consistency of Policy

Efficient Environment Protection

TheUSleadstherankinginthefirstprinciple“FinancialStability”followedbySwedenandGer-

many. Note that although all countries belonging to the Eurozone have the same score in the

variable“CentralBankIndependence”,thescoresinthefirstprincipleexhibitarelativelyhigh

amountofvariationowingtolargedifferencesinthelevelofcreditinformationavailability.The

secondprinciplecontainsthevariable“SocialSecuritySpending”,whichwesuspecttoberelated

inanonlinearwaytothecategory“EconomicandEcologicalSustainability”.Totransformthisvari-

able,wefirstestimatetheoptimalvaluethatconformsbesttothecategory.Weindeedfindthatthe

relationshipbetweenourthirdcategoryand“SocialSecuritySpending”ishumpshapedwhereby

asocialsecurityspendinglevelof34.5percentofGDPisassociatedwiththehighestlevelofthe

preliminaryindexforthiscategory.Thetransformationofthis“nonlinear”variablerevealsthat

Sweden’samountofsocialsecurityspendingcomesclosest totheestimatedoptimum.Overall,

Germanywhichistheonlycountrywithaconstitutionallystipulatedpublicdebtbrake,makingit

Methodology

103

scorehighonthevariable“ControlofFinancialConsolidation”,leadstherankinginthesecond

principlefollowedbySweden.Finally,thecentralandnorthernEuropeancountriesexcelinthe

thirdprinciple.ThetoppositionoftheNetherlandsseemstoresultinparticularfromitsveryhigh

revenuesfromenvironmentallyrelatedtaxes.

Overall,ouranalysisshowsthatGermanyhasthehighestlevelof“EconomicandEcologicalSus-

tainability”followedbySwedenandtheUK.Weobserveahighlevelofvariationinthiscategory.

Thedifferencebetweenthefirstandthethirdcountry(theUK)alreadyamountstomorethan1

standarddeviationandthedifferencebetweenthebestandtheworstperformingcountry(Spain)

exceeds3standarddeviations.

4. Social Inclusion

Ouranalysisofthelastcategory“SocialInclusion”isbasedontwoprinciples.Notethatthefirst

principle “Effective Labor Markets” contains two variables, “Active Labor Market Policy” and

“EmploymentProtection”forwhichweconfirmanonlinearbellshapedrelationshipwiththecat-

egory“SocialInclusion”.

Table 10: Social Inclusion

Effective Labor Markets Social Mobility Category Score

Canada 5.75 7.14 6.45

France 4.99 7.57 6.28

Germany 6.82 7.14 6.98

Netherlands 8.05 7.86 7.95

Spain 2.74 6.29 4.51

Sweden 8.10 8.00 8.05

United Kingdom 4.32 7.71 6.02

United States 4.32 7.00 5.66


Active Labor Market Policy

Employment Protection Legislation

Prevention of Duality



Social Inclusion (SGI)

Non-Discrimination (SGI)

Public Spending on Childcare and Early Education


Compulsory Unemployment Insurance



Arithmetic Mean of


Social Mobility

Methodology

104

Sincethefirstprincipleexhibitsmarkedlyhighervariationthanthesecond,ourresultsindicate

thatdifferencesintermsofsocialinclusionstemmainlyfromdifferencesintheeffectivenessof

labormarketinstitutions.Thelowperformingcountriesinthefirstprincipleallappeartospend

toolittleonactivelabormarketpoliciesandlackeffectivelabormarketprograms.However,we

alsoobservesomeheterogeneityamongthosecountriesatthebottomofthefirstprinciplerank-

ing.Forexample,althoughboththeUSandFrancescorevery lowon“EmploymentProtection

Legislation”,thelevelofemploymentprotectioninFranceisfoundtobeexcessivelyhighwhile

employmentprotectionintheUSistoolowtobecompatiblewithournotionofamodernsocial

marketeconomy.Incontrasttothefirstprinciple,thesecondexhibitslittlevariationacrosscoun-

tries,whichisalsotruefortheindividualvariablesassignedto“SocialMobility”.

Overall, our analysis shows that while Sweden and the Netherlands feature the highest levels

ofsocialinclusion,theUS,theUKandalsoFranceperformrelativelypoorly.Wefindthelowest

levelofsocial inclusionforSpain,whichcanbeattributedto itsparticularlypoorlabormarket

institutions.

The Compound Index

Finally,wecombinethefourcategoryindicestoformacompoundindexthatmeasurestowhat

extenttheinstitutionsinoursetofcountriesarecompatiblewiththeconceptofamodernsocial

marketeconomy.

Table 11: Compound Index

Country Market Allocation Efficient Property Rights Sustainability Social Inclusion Compound Index

Index Rank Index Rank Index Rank Index Rank Index Rank

Canada 7.32 4 8.36 2 5.11 7 6.45 4 6.81 6

France 7.30 6 7.30 7 5.17 6 6.28 5 6.51 7

Germany 7.31 5 8.21 3 7.19 1 6.98 3 7.42 2

Netherlands 7.08 7 7.68 5 5.61 5 7.95 2 7.08 3

Spain 6.35 8 7.07 8 4.19 8 4.51 8 5.53 8

Sweden 7.93 3 8.86 1 7.02 2 8.05 1 7.96 1

United Kingdom 8.21 1 7.45 6 5.99 3 6.02 6 6.92 4

United States 8.08 2 7.90 4 5.70 4 5.66 7 6.84 5


Methodology

105

OurresultsindicatethatSwedenandGermanyexhibitinstitutionsthatcomeclosesttoournotion

ofasocialmarketeconomy.Thesetwocountriesarefollowedbyasetoffour,theNetherlands,

theUK,CanadaandtheUS,whichperformquitesimilarlyandscoreapproximately1.5standard

deviations(=0.65)lowerthanSweden.France,whichscoresmorethan2andSpainwithascore

almost4standarddeviationsbelowSweden,areatthebottomofourranking.

Interestingly,whileFranceandSpainscorelowacrossallourcategories,therelativeperformance

ofallothercountriesvariessubstantiallyacrosscategories.Moreover,onaverage,scoresarelowest

inthethirdcategorywhichisrelatedtosustainablepolicymaking.Thisfindingcanbeattributed

touniformlylowperformanceintheprinciple“EfficientEnvironmentProtection”whichmeasures

thelevelofecologicalsustainability.

ROBUSTNESS CHECKS

Weperformedvariousrobustnesscheckstoassessthesensitivityofourresultstotheassumptions

wemadeintheconstructionthecompoundindex.

First,wetransformallourvariablestoz-scores,(i.e.,eachvariableismeasuredinstandarddevia-

tionsfromitsmean)togaugetheimpactofourchosenmodeofvariablestandardization.Thenext

tablecontainsbothcountryranksafter thez-transformationandthechanges incountryranks

relativetothebaselinecompoundindex.

Table 12: Robustness Tests

Country Robustness Tests

Compund Index Rank Z Score Rank Rank Difference Geom. Mean Rank Rank Difference

Canada 6.81 6 0.12 4 -2 5.92 7 1

France 6.52 7 -0.35 7 0 5.97 6 -1

Germany 7.40 2 0.35 2 0 6.89 2 0

Netherlands 7.08 3 0.18 3 0 6.47 3 0

Spain 5.53 8 -0.85 8 0 4.73 8 0

Sweden 7.96 1 0.79 1 0 7.43 1 0

United Kingdom 6.91 4 -0.15 6 2 6.39 4 0

United States 6.84 5 -0.07 5 0 6.04 5 0

Source: Own calculations based on questionaire and external sources (see apendix).

Methodology

106

Observe that thez-transformationhasan impacton therelativepositionofsomecountries. In

particular,CanadaandtheUKswitchpositions.Notehowever,thatbothcountriesbelongtothe

middlegroup,whichhadvery similar scores inourbaselineanalysis.Moreover,note that the

z-transformationpreservesthesizeofthescoredifferencesbetweencountries.Forexample,the

difference between the best and worst performing country still amounts to almost 4 standard

deviations.

Inasecondrobustnesscheck,wecombinecategoryindicesmultiplicativelybycalculatingtheir

geometricmeantoderivethecompoundindex.Whilethishelpstoassesstheinfluenceofourcho-

senmodeofvariableaggregation,thereisalsoasubstantivereasonforthisexercise.Inparticular,

oneshortcomingofconstructingourindicesasanarithmeticmeanisthatindexscorescansub-

stituteperfectly(i.e.oneforone)foreachother.ThispropertydoesnotfullysquarewithEucken’s

originalworkthatemphasizedtheinterdependencyofboththeprinciplesandthecategoriesand

positedthatagoodperformanceineachprincipleandcategoryisessentialforthefunctioningof

amodernsocialmarketeconomy.Putdifferently,alowerperformanceinoneprinciplecanonly

imperfectlybeoffsetbyanequivalentincreaseintheperformanceofanotherprinciple.Thisidea

iswellcapturedbyaggregatingprinciplescoresbygeometricmeans.

Toseethat,considerthefourthcategorywhichconsistsoftwoprinciples.IfI1andI2denotethe

principle indicesfor“EffectiveLaborMarkets”and“SocialMobility”, thecategoryindexwould

nowbegivenby

ISoc.Incl.=√(I1·I2)

Now consider the following hypothetical scores for two countries: Country A scores 7 in both

principleswhilecountryBscores5inthefirstand9inthesecondprinciple.Whilethearithmetic

meansofprinciplescoresarethesameforthesetwocountries,countryAperformsbetterifthe

categoryindexiscalculatedasageometricmean(√7·7=7>√5·9=6,7).Thus,moreuneven

principlescorestendtoleadtolowercategoryscores.Ofcourse,thesameargumentappliestothe

aggregationofcategoryindexscorestothecompoundindex.

Tocapturethiskindofimperfectsubstitutabilitybetweenprincipleandcategoryscores,wethus

calculated the category indices as thegeometricmeanof principle indices and the compound

indexasthegeometricmeanofthecategoryindices.Theresultsinthetableshowthatourrank-

ing is hardly affected by our chosen mode of index aggregation. However, country scores are

slightly lowercomparedtoourbaselineresultsowingtothe imperfectsubstitutabilitybetween

category scores. For example, the score for theUSdecreases considerably (andmore strongly

than,e.g.thescoreofSweden)duetothemoreunevenperformanceoftheUSacrosscategories.

Methodology

107

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AppENDIX

DATA DESCRIPTIONS FROM EXTERNAL SOURCES

1. Competitive and Efficient Markets

ProductMarketRegulation

Source: OECD.Shortdescription:http://www.oecd.org/dataoecd/32/9/42131723.pdf

OECD,http://www.oecd.org/economy/pmr

Description:“TheOECDIndicatorsofProductMarketRegulation(PMR)areacomprehensiveand

internationally-comparablesetofindicatorsthatmeasurethedegreetowhichpoli-

ciespromoteorinhibitcompetitioninareasoftheproductmarketwherecompetition

isviable.Theymeasuretheeconomy-wideregulatoryandmarketenvironments[…];

theyareconsistentacrosstimeandcountries.

Theindicatorscoverformalregulationsinthefollowingareas:statecontrolofbusi-

nessenterprises;legalandadministrativebarrierstoentrepreneurship;barriersto

internationaltradeandinvestment.”

Scale: From0(leastrestrictive)to6(mostrestrictive).

Year: 2008

PriceControl

Source: EconomicFreedomoftheWorld(EFW),AnnualReport.

http://www.freetheworld.com/2011/reports/world/EFW2011_complete.pdf

Description:“Themorewidespreadtheuseofpricecontrols,thelowertherating.Thesurveydata

oftheInternationalInstituteforManagementDevelopment’s(IMD)WorldCompeti-

tivenessYearbook(variouseditions)wereusedtoratethecountries(mostlydevel-

opedeconomies)coveredbythisreport.Forothercountries,othersourceswereused

tocategorizecountries.Countriesweregivenaratingof10ifnopricecontrolsor

marketingboardswerepresent.Whenpricecontrolswerelimitedtoindustrieswhere

economiesofscalemayreducetheeffectivenessofcompetition(e.g.,powergenera-

tion),acountrywasgivenaratingof8.[…]Aratingofzerowasgivenwhenthere

waswidespreaduseofpricecontrols throughoutvarioussectorsof theeconomy.”

(http://www.freetheworld.com/2011/reports/world/EFW2011_complete.pdf,p.200.)

Scale: From0(widespreaduseofpricecontrol)to10(nopricecontrol).

Year: 2009


112

AdministeredPricesvs.MarketPrices

Source: World Governance Indicator with external Source: Institutional Profiles Database

http://info.worldbank.org/governance/wgi/pdf/IPD.xlsx

Description:“ThedatabasewasbuiltbyresearchersfromtheFrenchMinistryfortheEconomy,

Industry and Employment (MINEIE) and the French Development Agency (AFD)

andwasconstructedfromaworldsurveyconductedwithMINEIEandAFDagencies

presentinthecountriescoveredinthedatabase.TheadministrativePricesinclude

subsidies onprices of primaryproducts. The indicatorpresents theproportion of

administeredprices:Administeredpricesandmarketpricesvaryingfrom1=large

proportionto4=verysmallproportionornil.”

Scale: 1(administeredprices)to4(marketprices)

Year: 2010

SubsidiesandotherTransfers(%ofexpense)

Source: World Development Indicators, World Bank. http://data.worldbank.org/indicator/

GC.XPN.TRFT.ZS

Description: “Subsidies, grants, and other social benefits include all unrequited, nonrepayable

transfers on current account to private and public enterprises; grants to foreign

governments, international organizations, and other government units; and social

security,socialassistancebenefits,andemployersocialbenefitsincashandinkind.”

Scale: Metric.

Year: 2010(France,Germany,Netherlands,UK:2009)

MediaPluralism

Source: SGI,BertelsmannStiftung.

http://www.sgi-network.org/index.php?page=indicator_quali&indicator=S2_2

Description:“Doesthestructureofmediaownershipensureapluralismofopinion?Texts+scores

arebasedon independent assessmentsby twoexperts.Resultswere adjusted for

cross-nationalconsistencybytheregionalcoordinatorandSGIboard.”

Scale: From1(stronggovernmentalinfluence)to10(freemediaandpluralism).

Year: 2011


113

PowerofCompetitionOversightAuthority

Source: GlobalCompetitionReview.

www.gvh.hu/domain2/files/modules/module25/71971CF24AFBE45D.pdf

Description: “The global competitive report analyses over 100 competition authorities. Among

otherthingsthesizeandthestructureoftheinstitutionismeasured.Thestructure

ofthestaff,existenceofsector-specialist,andthenumberofeconomistwithinthe

staffarenoted.Here:Bestperformingauthoritypercountry”

Scale: Theseindicatorsarefittedtoafive-star-ranking,5excellent.

Year: 2006

2. Efficient Property Rights

InvestorProtection

Source: WorldBank:DoingBusiness.

http://www.doingbusiness.org/data/exploretopics/protecting-investors

Description:“DoingBusinessmeasuresthestrengthofminorityshareholderprotectionsagainst

directors’misuseofcorporateassetsforpersonalgain.Theindicatorsdistinguish3

dimensionsofinvestorprotections:transparencyofrelated-partytransactions(extent

ofdisclosureindex),liabilityforself-dealing(extentofdirectorliabilityindex)and

shareholders’abilitytosueofficersanddirectorsformisconduct(easeofshareholder

suitsindex).Thedatacomefromasurveyofcorporateandsecuritieslawyersand

arebasedonsecuritiesregulations,companylaws,civilprocedurecodesandcourt

rulesofevidence.The rankingon thestrengthof investorprotection index is the

simpleaverageofthepercentilerankingsonitscomponentindicators.”(http://www.

doingbusiness.org/methodology/protecting-investors)

Scale: Theindexrangesfrom0to10,(withhighervaluesindicatingmoreinvestorprotec-

tion).

Year: 2011


114

JudicialReview


http://www.sgi-network.org/index.php?page=scores&indicator=S4_2

Description:“Doindependentcourtsmonitorwhetherthegovernmentandadministrationactin

compliancewith the law? Judicial reviewevaluates the strength of scrutinygiven

bycourtstotheexecutive’sactionsandnorms.Theefficacyofthisreviewinturn

dependson theappointmentprocess forhigh justices themselves– judgesput in

place through a transparent, cooperative process can be better trusted to render

independentverdictsthanthoseappointedsolelybyasinglegovernmentactor,for

example.”

Scale: From1(Courtsarebiasedfororagainsttheincumbentgovernment,andlackeffec-

tiveoversight) to10 (Independent courts reviewexecutiveactions, ensuring legal

compliance).

Year: 2011

PatentProtection

Source: ParkIndexofPatentRights.

http://www.american.edu/cas/faculty/wgpark/upload/IPP-Research-Policy-

May-2008-3.pdf

Description: A country’s rank in patent strength is based on five extensive criteria: coverage,

membershipininternationaltreaties,restrictionsonpatentrights,enforcement,and

durationofprotection.

Scale: From0(worst)to5(optimal).

Year: 2008

IntellectualPropertyRights

Source: World Economic Forum’s 2011-2012 Global Competitiveness Index, p. 391. http://

www3.weforum.org/docs/WEF_GCR_Report_2011-12.pdf

Description: Surveyparticipantswereaskedtocommentonthequestion“howweakorstrongare

intellectualpropertyprotectionandanti-counterfeitingmeasuresinyourcountry”

Scale: From1(veryweak)to7(verystrong).

Year: 2010-2011


115

3. Economic and Ecological Sustainability

CreditInformation–Aggregatedindicator:

www.doingbusiness.org/methodology/getting-credit

DepthofCreditInformationIndex


http://data.worldbank.org/indicator/IC.CRD.INFO.XQ

Description:“Creditdepthofinformationindexmeasuresrulesaffectingthescope,accessibility,

andqualityofcreditinformationavailablethroughpublicorprivatecreditregistries.”

Scale: 0-6:highervaluesindicatingtheavailabilityofmorecreditinformation.

Year: 2011

PublicCreditRegistryCoverage


http://data.worldbank.org/indicator/IC.CRD.PUBL.ZS

Description:“Publiccreditregistrycoveragereportsthenumberofindividualsandfirmslistedin

apubliccreditregistrywithcurrentinformationonrepaymenthistory,unpaiddebts,

orcreditoutstanding.”

Scale: Thenumberisexpressedasapercentageoftheadultpopulation.

Year: 2011

PrivateCreditBureauCoverage


http://data.worldbank.org/indicator/IC.CRD.PRVT.ZS

Description:“Privatecreditbureaucoveragereportsthenumberofindividualsorfirmslistedby

aprivatecreditbureauwithcurrentinformationonrepaymenthistory,unpaiddebts,

orcreditoutstanding.”

Scale: Thenumberisexpressedasapercentageoftheadultpopulation.

Year: 2011


116

BankCapitaltoAssetsRatio(%)

Source: WorldDevelopmentIndicators.

http://data.worldbank.org/indicator/FB.BNK.CAPA.ZS

Description:“Bankcapitaltoassetsistheratioofbankcapitalandreservestototalassets.Capital

andreserves includefundscontributedbyowners,retainedearnings,generaland

specialreserves,provisions,andvaluationadjustments.Capitalincludestier1capi-

tal(paid-upsharesandcommonstock),whichisacommonfeatureinallcountries’

bankingsystems,andtotalregulatorycapital,whichincludesseveralspecifiedtypes

ofsubordinateddebtinstrumentsthatneednotberepaidifthefundsarerequired

tomaintainminimumcapitallevels(thesecomprisetier2andtier3capital).Total

assetsincludeallnonfinancialandfinancialassets.”

Scale: Percentage.

Year: 2011(France,Spain,UK:2010;Sweden2009)

ControlofFinancialConsolidation

Source: OECD:RestoringPublicFinances.

http://www.oecd.org/dataoecd/51/58/47558957.pdf

Description: ExistenceofadebtbrakeorotherrulesanchoredintheConstitution

Scale: Dummy-Variable(0|1).

Year: 2011

ExtentofStaffTraining

Source: WorldEconomicForum:GlobalCompetitivenessReport,p.449.

http://www3.weforum.org/docs/WEF_GCR_Report_2011-12.pdf

Description:“Towhatextentdocompaniesinyourcountryinvestintrainingandemployeedevel-

opment?”

Scale: 1=hardlyatall;7=toagreatextent.

Year: 2010-2011


117

PensionSystemsLinkedwithLifeExpectancy

Source: OECD:PensionsataGlance.

http://www.oecd-ilibrary.org/docserver/download/fulltext/8111011ec009.pdf?expire

s=1346328652&id=id&accname=guest&checksum=0620F4C53C96025A3A3D1F34

1DA1A590(p.84)

Description:Pensionsystemsaroundtheworldhavebecomemuchmorediverse.InPensionsata

Glancethereisanoverviewofthosethatinvolveanautomaticlinkbetweenpensions

andlifeexpectancy,withdifferentwaysoflinkingpensionstolifeexpectancy.

Scale: Dummy-Variable(0|1).

Year: 2011

SocialSecuritySpending

Source: OECD;(SocietyataGlance,2009,pp:98,99)

http://www.oecd-ilibrary.org/docserver/download/fulltext/8109011e.pdf?expires=13

48232073&id=id&accname=guesg&checksum=DF1C2AD91FA930B35E61492862B6

5C0A

Description:“AcomprehensiveaccountofthetotalamountofresourcesthateachOECDcountry

devotestosocialsupporthastoaccountbothpublicandprivatesocialexpenditures,

andtheextenttowhichthetaxsystemaffectstheeffectiveamountofsupportpro-

vided.”

Scale: PercentageofNNIatfactorcosts,2005

Year: 2005

R&DSpending

Source: OECD;MainScienceandTechnologyIndicators,OECDScience,TechnologyandR&D

Statistics

http://www.oecd-ilibrary.org/science-and-technology/gross-domestic-expenditure-

on-r-d_2075843x-table1

Description:GrossdomesticexpenditureonR&DasapercentageofGDP

Scale: PercentageofGDP

Year: 2010(USA:2009)


118

EnvironmentalPolicy



Description: “Doesenvironmentalpolicypreserveandprotect resourcesand thequalityof the

environment?”

Scale: From1(Policieslargelyfailtoprotectnaturalresourcesandenvironmentalquality)

to10(Policiesprotectandpreservenaturalresourcesandenhanceenvironmental

quality).

Year: 2011

RevenuefromGreenTaxes

Source: OECD: http://www2.oecd.org/ecoinst/queries/PercentTaxes.pdf, or http://www2.

oecd.org/ecoinst/queries/TaxInfo.htm

Description:Environmentallyrelatedtaxesaredefinedasanycompulsory,unrequitedpayment

togeneralgovernmentleviedontax-basesdeemedtobeofparticularenvironmental

relevance.Taxesareunrequitedinthesensethatbenefitsprovidedbygovernment

totaxpayersarenotnormallyinproportiontotheirpayments.Requitedcompulsory

paymentstothegovernment,suchasfeesandchargesthatareleviedmoreorless

inproportiontoservicesprovided(e.g.theamountofwastescollectedandtreated),

arealsoincluded.

Scale: Percentoftotaltaxrevenue.

Year: 2010(Canada,Netherlands:2009)

4) Social Inclusion

EmployerContributiontoUnemploymentInsurance

Source: http://www.oecd.org/els/socialpoliciesanddata/40262531.xls.

Description: Is there a compulsoryunemployment insurance? (For a40-year-old singleworker

withoutchildren,witha22-yearemploymentrecord).

Scale: Dummy(1(yes)|0(noorvoluntary)).

Year: 2005


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SocialInclusion

Source: SGI;BertelsmannStiftung.


Description:“Dowelfarepoliciesfosterequalopportunityinsocietyandpreventpoverty?”

Scale: From1(Policiesexacerbateunequalopportunitiesandexclusionfromsociety)to10

(Policieseffectivelyfostersocietalinclusionandensureequalopportunities).

Year: 2011

PublicSpendingonChildcareandEarlyEducation

Source: OECD;FamilyDatabase.

http://www.oecd.org/dataoecd/45/27/37864512.pdf

Description:Publicexpenditureonchildcareandearlyeducationalservicesincludingallpublic

financialsupport(incash,in-kindorthroughthetaxsystemforfamilieswithchildren

participatinginformaldaycareservices(e.g.crèches,daycarecentersandfamilyday

careforchildrenunder3)andpre-schoolinstitutions(includingkindergartensand

day-carecenterswhichusuallyprovideaneducationalcontentaswellastraditional

careforchildrenagedfrom3to5,inclusive).

Scale: PercentofGDP.

Year: 2007

Non-Discrimination

Source: SGI;BertelsmannStiftung.

http://www.sgi-network.org/index.php?page=scores&indicator=S3_3

Description:“Howeffectivelydoesthestateprotectagainstdiscrimination?”

Scale: From 1 (The state does not provide effective protection. Discrimination is wide-

spread,) to 10 (State institutions actively prevent discrimination. Discrimination

extremelyrare).

Year: 2011


120

ActiveLaborMarketPolicyperUnemployed

Source: OECD:http://stats.oecd.org/Index.aspx?DataSetCode=LMPEXP

Description:PublicexpenditureonactivelabormarketpoliciesinUS$perunemployed,constant

prices, constantPPPs (Public expenditure on active labourmarketprogramsas a

percentageofGDP*Grossdomesticproduct(expenditureapproach)/Unemployment

(total))

Scale: US$.

Year: 2010(UK:2009)

EmploymentProtectionLegislation

Source: OECD

http://www.oecd.org/document/11/0,3746,en_2649_37457_42695243_1_1_1_

37457,00.html

Description:“TheOECDemploymentprotectionindicatorsarecompiledfrom21itemscovering

three different aspects of employment protection:” dismissal of workers, costs for

collectivedismissalsandregulationoftemporarycontracts

Scale: Scalefrom0(leaststringent)to6(mostrestrictive).

Year: 2008


121


122

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production Credits

©2012BertelsmannStiftung

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33311Gütersloh

Germany

www.bertelsmann-stiftung.de

Responsible

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CortnieShupe

Editing

TimJudah

GraphicDesign

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PhotographyCredits

MichaelBodmann/iStockphoto

Printing

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Impressum

Address | Contact

Bertelsmann Stiftung

Carl-Bertelsmann-Straße 256

33311 Gütersloh

Germany

Phone +49 5241 81-0

Fax +49 5241 81-81999

Cortnie Shupe

Project Manager

Shaping Sustainable Economies

Phone +49 5241 81-81530

Fax +49 5241 81-681530

[email protected]

www.bertelsmann-stiftung.de

Index of Modern Social Market Economies...The social market economy, as an economic order, emerged...

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