Introduction

The years following the Second World War are generally perceived as a period of steady economic development until structural change was adopted in the 1970s and 1980s. Before that break a regulated capitalism had existed, sometimes called the ‘Golden Age of Capitalism’ or ‘Fordism’. The break in the 1970s led to a much more market-based type of capitalism in nearly all western countries and to a specific type of globalisation. What we call ‘Neoliberal Globalisation’ shaped the world economy and national economies. With regard to economic purposes the key elements of Neoliberal Globalisation involve the liberalisation of national and international financial markets, the liberalisation of national labour markets including reforms in the social safety net, and a change in corporate governance structure following the shareholder principle. These developments increased the power of the financial system and of the agents acting in the financial spheres. Compared with the 1950s and 1960s, economic development in the 1990s and 2000s became much more unstable and volatile. GDP growth rates declined and unemployment figures increased. A long sequence of currency crises and domestic financial crises developed. The subprime financial crisis, which in 2008/09 triggered the deepest crisis in the world economy after the 1930s, is only the latest example. Moreover, the neoliberal development went along with an increasingly unequal income distribution. In this book we set out to explain how countries created a more liberal and market-based type of capitalism and how they adjusted to the era of Neoliberal Globalisation, which for most countries was beyond control. We do not analyse in depth the political processes that led to these changes. We rather concentrate on the economic policies that were carried out, and the effects these policies have had. We furthermore focus on policies on the macroeconomic level including the institutional changes that have had significant macroeconomic repercussions. Together with the school of rational expectations, developed mainly in the 1970 and 1980s, and later the New Keynesians, who now dominate economic thinking, the microfoundation of macroeconomics became popular. In these approaches representative households and companies are analysed, and their behaviour is directly transferred to the macroeconomic level as if one single agent represented the whole household sector or the businesses of a country. Our

approach is to analyse the macroeconomic level, which gives single households and companies the parameters for their actions. We endorse a macrofoundation of microeconomics. Macroeconomic policy is traditionally characterised by monetary policy, fiscal policy, wage policy and foreign economic policy as well as their interaction. We support this view. These policies and their interaction are of paramount importance for the development of an economy. However, macroeconomic polices cannot be analysed on a theoretical level that does not take into account the very specific institutional framework of a country. For example, wage policy on a macroeconomic level means a policy that enables the realisation of a certain increase in the level of nominal wages. Obviously, to achieve such an aim wage policy must be very much supported by an adequate institutional framework like strong trade unions and/or strong employers’ associations, which in many countries do not exist or are very weak. Referring to monetary policy, it makes a world of a difference if a central bank is equipped with only one policy instrument, the interest rate, or whether it can use capital controls as a second instrument or even direct restrictions on credit expansion as a possible third instrument to achieve its monetary goals. Institutions can be actively changed by policy actions. Abandoning control over international capital flows, forcing employers to become members of employers’ associations or allowing commercial banks to use their own risk models to calculate legal equity requirements are all political decisions with the aim of changing institutions. But institutions can also change beyond the control of policy-makers. The breakdown of the Bretton Woods System in 1973 and the switch to flexible exchange rates between the key currencies in the world was an example of institutional change that could not be influenced, at least not by smaller countries. Taking everything into account we define a macroeconomic policy regime as the interaction between monetary policy, fiscal policy, wage policy and foreign economic policy within a framework of both, macroeconomic institutions which can be actively changed by policy-makers and become part of economic policy, and institutions which are beyond the control of policy-makers. To analyse macroeconomic policy regimes we follow a qualitative analysis that considers the many institutional changes that characterise the development of the past decades and that paved the way for the macroeconomic policies. In our opinion econometric tools are not suitable for capturing the deep qualitative changes or the interactions between monetary policy, fiscal policy, wage policy and foreign economic policy, which to a great extent also depend on institutional changes. Keeping in mind what has been mentioned above, we argue that the macroeconomic policy regime is a broad concept in which we attempt to incorporate macroeconomic policies and the relevant institutions as well as their changes – a wide range of factors which can hardly be captured by quantitative econometric analyses that only focus on a very few variables. Consequently, the empirical part of this book rests upon qualitative analyses combined with numerical investigations. By illustrating the use of macroeconomic policies and the

country-specific institutional development, case studies will be presented in order to explain the different types of macroeconomic regimes. A complex analysis of the economic development throughout the 1950s and 1960s and the breakdown of the regulated capitalism of that time period is beyond the scope of this book. Instead, we concentrate on how countries acted and reacted in the era of Neoliberal Globalisation. Considering their role as the engines of the change in the neoliberal era we decided to confine our analysis to the developed western economies. There is a big chance that countries like China, India or Brazil will shape the world, but only in future decades. Given their major importance, we focus on the four biggest countries in the western world as cases: the United States, United Kingdom, Germany and Japan. As the largest country, the United States deeply influences the world’s economic development including fundamental institutional changes in all of these countries. President Ronald Reagan who was elected US President in 1980 headed one of the governments who actively and radically changed domestic and international institutions, and gave birth to the Neoliberal Globalisation. Almost equally important in triggering neoliberal development was the United Kingdom. Margaret Thatcher, elected Prime Minister in Great Britain in 1979, introduced policies no less radical than the ones followed by Ronald Reagan. However, the economic size of countries is not the only deciding factor. Following the neoliberal changes very hesitantly at first, Germany and Japan are the latecomers in the neoliberal era. Both countries are characterised by particularly interesting developments. While the German case also highlights the problems of the European Monetary Union, Japan suffered from deflation – a phenomenon thought to be dead after the Great Depression in the 1930s. In addition, we would like to stress that our approach can serve as a blueprint for analyses of other countries, such as Italy, France or the Scandinavian countries, and even developing countries. The countries we have chosen can therefore be considered exemplary despite their respective country-specific conditions. The structure of the book is straightforward. First, we analyse the macroeconomic policy regime in detail to clarify our theoretical approach. Then the case studies are presented. We finish with the outline of a reform strategy with the aim to overcome the Neoliberal Globalisation. A German version of this book was published in 2006 (Heine et al. 2006). Therefore we would especially like to thank Michael Heine and Cornelia Kaiser who could not join the publication of the English version. We are indebted to the Hans Böckler Foundation and especially Frank Gerlach for their financial support for the German publication, as well as the Berlin School of Economics and Law where we work. Last but not least, we thank Peter Bofinger, Trevor Evans, Eckhard Hein, Ulrich Fritsche, Arne Heise, Dierk Hirschel, Jürgen Kromphardt, Jan Priewe, Wolfgang Scheremet, Dieter Scholz, Achim Truger, Rudolf Welzmüller, as well as Florian Zinsmeister who gave their invaluable contributions to the development of this project. Most of them were members of the Academic Advisory Board of the project, which led to the German publication. As research projects are never identical, this English publication is now substantially different

from the German original. In the meantime, the subprime financial crisis and its effect on the world economy have improved the understanding of Neoliberal Globalisation and led to different judgements on policies. For providing data research for the English publication we are grateful to Marco Scheufel, Bea Ruoff and Stefanie Marie Scholz.