This paper aims to give an insight into the success of austerity as a viable way of recovering from the Global Financial Crisis of 2008. For this purpose I have chosen two countries which appear to be rather similar, the countries are Ireland and Iceland. Both of them are small open countries relying on export.
Both countries were hard hit by the Global Financial Crisis in 2008 and therefore seem to be the most logical countries to compare. Their differences seem small, the biggest being that while Ireland is part of the European Union Iceland has so far declined entry, for various reasons.
This paper is split into two parts both comparing Ireland and Iceland. The first part of the paper endeavors to expose both the similarities and differences between the countries. To achieve this I decided to compare the countries with Hall and Soskice’s Varieties of Capitalism.
In Part one I compare the two countries’ institutional complementarities, which will give an idea of how similar the two are, to put a perspective on what factors are at work on the two countries.
Part one will be split between the two countries, examining industrial relations, education and training systems, the market for corporate governance and access to finance, inter-firm relations, and finally intra-firm relations. For the last one, I will primarily examine the countries using Hofstede as a starting point to show organizational culture.
The second part of the paper attempts to compare the austerity measures taken by the two countries. This will be done with a constructivist approach. I will examine austerity measures and the discourse in media and in policy about the measures to scan for what Blyth names cognitive locks and ideological weapons. This will tell how the austerity measure issue has been framed for the public and from where policy has been decided.
Comparing with Varieties of Capitalism Approach
In this part of the paper, I will be analyzing the countries institutional complementarities setting them up against each other will show whether they are Liberal Market Economies or Coordinated Market Economies, however, my interest lies in the comparison of the countries before their type, which does not necessarily have an impact on my main question because I chose countries that are rather similar. This part of the paper is primarily to show that the countries are worth comparing for the sake of the research question, though I will conclude with how I would class the countries I make use of Hall and Soskice’s Five Dimensions:
Industrial relation is a key pillar of Hall and Soskice’s framework, it is under this pillar that one examines the relationship between labor and capital, that is the power balance between employers and employees. The best way to get insight into this power relationship is to look at workers’ rights, wage bargaining, union density, and employees’ participation in decision making. In LME’s we should see company based bargaining, low unionization, and top management in unilateral control over the company. While in CME’s we would expect, widespread collective bargaining agreements, high unionization, and work councils.
First and foremost it has freedom of association, but it also uses this right fairly moderately because union density in Ireland is 33% in the private sector, which seems little when you are more familiar with higher union densities of around 75% as in Denmark, but is actually moderately high, compared to nations such as UK, France, and Greece. Ireland determines the basic terms and conditions of employment by economy-wide collective bargaining. Otherwise, collective agreements are widespread at the company and industry level.
The state can mediate on disputes and unions have the right to strike so long as they are not military or police. Employees enjoy protections against termination to some degree, also for part-time work.
As in Ireland, there is freedom of association, but Iceland has a much higher union density a staggering 82% which makes a good deal of sense since the trade unions and employers periodically collectively negotiate even the basic terms of employment, such as worker’s pay, hours and other conditions. The state has institutions in place for the mediation of disputes.
Unions have the right to strike, except certain public sector workers. Workers are guaranteed the right to information and consultation in undertakings, and to encourage employees representatives to work in the spirit of cooperation. 3. 2. Education and Training systems This pillar looks to the investment in securing the workforce has a necessary skill level for a company to be competitive. The key aspect to look at is vocational training, in LME’s it would focus on general skills, in CME’s it would be more likely to be specific skills, through trainee programs.
In Ireland, we see that there is a special institution for the sake of providing vocational education, the Irish Vocational Education Association, which takes on the job of coordinating and representing vocational education committees. There is a widespread need according to IVEA for what is called lifelong learning, and increasing the overall skills of workers, with the skills for work program. On the other hand, they also have VTOS, which provides the unemployed the opportunity for learning, while paying those who have over one-year unemployment to participate.
Vocational training is split into many parts in Iceland mirroring the Danish system, with school-based education and training and work-based apprenticeship type training. The issue with the work-based training is that for many companies it is difficult to make apprenticeship agreements due to size or the nature of the work. Changes to the system are being discussed. But overall companies do not invest much in apprenticeships, yet have access to skilled workers by other means.
Financial System and Market for Corporate Governance
This pillar deals with the securing of finance, how do firms get access to the capital required to finance their activities? Which aspects are deemed important when it comes to companies? In LME’s we would see a greater dependence on current earnings and shares price on the equity market because in LME’s finance would primarily come from the bond and equity market. In CME’s Bank lending would be more common, and as companies would have extensive networks, they would be less attentive to share price and their current profitability.
Ireland has high stock market capitalization but has also had an increase in regulation since the Global Financial Crisis. Ireland also has rules regarding corporate governance.
Iceland has high stock market capitalization, though it has gone down in recent years. Iceland wants to rely on corporate governance to decrease the need for public surveillance and regulation.
This dimension deals with how firms relate to each other, through coordination or through arms length legal contracts.
This is also the pillar under which the law on competition falls. One of the key aspects I looked at is the membership of business associations and the extent of competition law. In an LME we should see less membership in business associations and strict competition laws.
Ireland has a great deal of coordination in its business community, the Irish Business and Employers’ Confederation(IBEC), is the voice of the business community and the umbrella body of Ireland’s leading sector groups and associations.
IBEC represents the interest of its member’s business objectives, and services directly its 7500 members, ranging from very small to large companies, employing over 70% of the private workforce in Ireland. IBEC’s core element is lobbying so that members can influence the business environment in which they operate. The IBEC provides a voice on the impact of potential legislation so that policymakers can make good decisions. Other areas in which the IBEC provides services include; employment law, HR practices, Training and development, management consulting, and health and safety.
Ireland has a strong competition law, made stronger by increasing its punitive powers in recent years. Irish competition law prohibits and renders void all agreements which have as their object the prevention, restriction, or the distortion of competition. These agreements include; price-fixing, limiting or controlling markets, sharing markets or sources of supply, attach supplementary obligations to a contract that does not deal with that issue. Irish competition law also prohibits the abuse of a dominant position, what that means is that you can hold a dominant position, but you cannot deliberately crowd out smaller competition.
Iceland has a good deal of business coordination, which is expressed through the SA-confederation of Icelandic Employers. The SA is a service organization for the Icelandic business community. The SA negotiates collective agreements with unions on wages and working conditions, it advocates an internationally competitive legal and regulatory environment, provides the interpretation and communication of policy decisions that directly affect the business environment. The SA has 8 member associations and a firm that joins one of these becomes an automatic member of the SA.
It consists of around 2000 businesses and the organization accounts for around 50% of all salaried employees on the Icelandic labor market. The SA provides other services, including; economic analysis and fiscal information, health and safety, European affairs, and environmental issues. The key policy issues it advocates include; a flexible labor market, competitive tax regime, and minimal regulatory burden. Competition law in Iceland has been undergoing evolution; at first, it didn’t address the formation of cartels or conglomerates, now it does.
What is perhaps more astounding is that today the Competition council has a number of tools available to address problems of monopoly networks and dominant firm abuse. The Council has the power to issue orders against anti-competition acts by public entities; they can even issue orders against “circumstances that are detrimental to competition” ensuing from the decisions of government entities. All in all Iceland’s competition law mirrors European standards, deals with cartels, mergers, and acquisitions as well.
This pillar deals with the firm’s internal structure. To reflect that we have to look at how the decision is made, how much power does upper management have, and the average job tenure. In LME’s we would typically see, shorter job tenure, more unilateral power with top management. In CME’s it would be, longer average job tenure and more consensus-based decisions. To help determine how decisions are made I’ll look at a few of Hofstede’s five dimensions, Power distance, individualism, masculinity/femininity(MAS), uncertainty avoidance, long-term orientation.
Ireland has low power distance, which translates into “a society that believes that inequalities amongst people should be minimized. Within Irish organizations, hierarchy is established for convenience, superiors are always accessible and managers rely on individual employees and teams for their expertise, both managers and employees expect to be consulted and information is shared frequently. At the same time, communication is informal, direct, and participative. ” Ireland scores a 68 on the MAS making it a masculine society in which, people should strive to do their best and conflicts are resolved on an individual basis.
Ireland scores 43 on the Long-term orientation, meaning they forsake long term planning for short term goals and quick results. Irish workers have average job tenure of 10. 9 years.
Iceland has a low power distance, resulting in the same sort of society as Ireland, where managers and employees expect to be consulted and informed frequently. Iceland scores incredibly low on MAS, conflicts are resolved by long discussion until consensus is reached. Long-term orientation mirrors Ireland. Icelandic workers have average job tenure of 8. 8 years.
LME or CME conclusion
While neither is a pure example of either orientation they do represent different orientations, Iceland is a CME moving towards becoming an LME, we see this in inter-firm relations and financial system, where Iceland has moved to be more LME like. Ireland, on the other hand, is an LME moving toward a more CME like quality, this is seen in Education and Training systems as well as Inter-firm relations such as increased coordination between businesses, also some of the industrial relations such as collateral agreements across sectors.
Comparing Austerity Measures
Ireland has been forced by the EU to undertake austerity measures because it is critically important that Ireland cuts its deficit to 3% GDP for the Aid package that the European Union is willing to give them. These are the measures taken by Ireland. Public wage freeze or reduction. Control of the size of civil service. Savings from pension and healthcare-related spending. Reduction in social benefits and public investment. Tax increases; personal income, capital gains, value-added/sales, property tax. Improvement in tax compliance.
To deal with the immediate aftermath of the crisis by gaining a bailout from the international monetary fund, Iceland had to agree to a standby agreement, which included taking up some austerity measures, though by no means as strict as the IMF usually is. Included are these measures.
- Increase the relative tax burden on high-income individuals
- Adjusting for past Tax erosion
- Improvement in tax compliance
- The pre-payment of taxes
- Public sector wages kept in line with the private sector
- Cuts to operational and investment spending
- Introduction of Capital controls
It should be noted that Iceland resisted strict austerity measures and that these measures are common in a Keynesian welfare nation-state.
Framing the Issue of Recovery
What is immediately clear, when looking at the media coverage of the two situations, is how different the issue of crisis and recession was framed by both politicians and the media. In Ireland, the outlook seemed ambivalent, perhaps even not so concerned when Ireland slid into a recession. In Ireland, we have seen that policy seemingly inevitably turned to stabilize the banking system, a system linked with the Euro area through the common currency.
Policy turned then to regulating the financial market, here we see some bricolage, which is the combination of existing principles, to deal with increased supervision and the move away from principle-based supervision toward a rules-based regime. The economic policy further turned to the measures mentioned above, the understanding being that doing so will repair finances, allocating the burden on taxpayers, who will pay more tax, and receive fewer benefits as social spending is cut, but the public sector gets modernized, by integrating it and increasing flexibility of management, again this is bricolage.
Iceland however reacted with fear and shock, because while Ireland slipped into recession, Iceland’s whole financial system plummeted and crashed, banks with assets of more than 1000% the GDP where suddenly falling like flies. What makes Iceland unique was the way that it had decided to let the banks fall, there would be no bailouts, they would be nationalized, Iceland protected the consumers, they gave widespread mortgage debt forgiveness, and decided to start over and completely restructure the capital market.
Iceland proceeded to go against the grain, by not implementing the strict austerity measures enforced on other countries. Then the people decided us before foreigners and reneged on reimbursing foreign customers of the online bank Icesave. Furthermore, Iceland took legal action against those who were deemed the key actors responsible for the collapse, including the former prime minister. We are talking about some serious recombination of institutional practices, it has never happened before that policymaker was accused and sued for negligence. Iceland’s current problem lies in releasing capital controls.
Ideas as Weapons
Iceland has done things that other nations scoffed at, shaken their heads over, and generally been unable to fathom. Iceland has used its conviction against strict austerity measures to change the opinions of the nations of the world. What they decided to do was install capital controls, something completely against all sense. But the IMF now acknowledges that sometimes it pays to do things another way. There is also the idea of refusing to reimburse foreign investors, though they have decided to honor that obligation, slowly.
There is also the idea of not sacrificing the welfare state. Iceland forced the IMF to resort to bricolage and translation, by letting them reaching for policy tools that are not mainstream.
Ideas as Cognitive Locks
Ireland is a perfect example of these cognitive locks, these forms of intellectual path dependencies. Ireland and the Eurozone have this idea that to weather the crisis, strict austerity is the way forward. The policies produced to speed recovery are determined by narrow thinking and the limitations placed on Ireland.
The policy of saving the banks so extensively is part of the old financial framework, where banks seem like almost untouchable bastions of power and capital. Another lock is the cut in government spending on such things as pension and health care. What we see not is that “Ireland is “caught between the need to make more cuts and the need to instill more economic growth,” says Scott MacDonald, head of credit and economic research at Aladdin Capital Holdings LLC, a broker-dealer based in Stamford, Conn.”
Ireland and Iceland are comparable, even though they are supposedly on opposite sides on the VoC Ireland being an LME and Iceland a CME, they are not so far apart, where one is more coordinated another is more Liberal and vice versa. When we look at first glance we might say that austerity measures have not been any help in the recovery after the financial crisis, but that is simply not the case. While Iceland likes to say they avoided austerity measures, the truth is that some measures taken by Iceland are austerity, albeit not the level of strictness seen by Ireland and other European nations.
The austerity measures taken by both Iceland and Ireland have helped during the restructuring of the financial systems. It is however true that Iceland has seen much better recovery than Ireland, Ireland is still wobbling around a recession, but Iceland has had a better growth rate than the rest of Europe. Ireland is in a bind because they need to have some economic growth, austerity measures however are not conducive to economic growth, however, they also need the EU help, and they can only receive if they do away with their government debt. The issue becomes when austerity measures should be relaxed so that economic growth can be encouraged.
Overall what I have found is that strict austerity is not a viable solution to help recovery in the long run, it is at best a stopgap.
- Blyth 2001 http://blog-imfdirect.imf.org/2011/10/26/how-iceland-recovered-from-its-near-death-experience/
- OECD Economic survey Iceland 2005
- Hall and Soskice 2001
Cite this How Have Austerity Measures Helped Recovery from the Global Financial Crisis
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