THEORY OF THIRD WAY IDEOLOGY

The Social Democratic Ideology

In order to properly evaluate the third way, I first examine the ideology of social democracy in general and then explain how its adaptation through time leads to the third way. There are some recurring key themes in social democratic ideology and discourse, such as social justice, fairness, solidarity, and egalitarianism. To serve as defining properties of social democracy, these concepts must have sufficient discriminating power to differentiate between social democracy and alternative values. On its own, neither social justice nor fairness satisfies this requirement. Clearly, no parties or interest groups advocate injustice or unfairness. By comparison, both solidarity and egalitarianism have more limited constituencies, and the varying importance accorded to these values is often crucial in determining what is socially just or fair for one party rather than another. Therefore, I will focus on them as two key philosophical principles that define social democracy and its adaptation through time.

By examining eight countries over a century, Steinar Stjernø (2005) identified solidarity as a principle shared but interpreted differently by social and Christian democracy. He traced the origin of solidarity as a valueladen discourse to French classic social theory, especially Auguste Comte's ([1852] 1973) idea of debt to past generations and Émile Durkheim's ([1893] 1984) mechanical and organic variants of solidarity. While Durkheim's mechanic solidarity is premised on homogeneity and common consciousness in closed primitive societies, the growing division of labor and specialization in modern societies leads to organic solidarity, based on interdependence between complementary skills.

Based on the experience of nine countries, this book has proposed several theories about various aspects of the third way. Among these theoretical propositions, the most important for the book's purpose is the possibility for conflicting ideologies to create incentives for making costly changes to institutions. This is the main focus of the book. As a general thesis potentially speaking to all patterns of institutional evolution, I used it to evaluate two well-known competing theories of welfare state changes: power resources and path dependency. The book's main task has been to demonstrate the possible circumstances under which ideological beliefs can create sufficient incentives for absorbing the cost of unmaking old rules and making new ones. On this basis, the book contributes to the welfare state literature, in outlining the possibilities for power resources to create path-breaking, rather than path-dependent, welfare reforms after the Golden Age.

In the process of establishing this argument, I have also proposed several other related theories. These include a thesis on contemporary social democratic ideological transformation, a thesis on the way in which positive externalities that result from being organized can spill benefits over to unorganized outsiders, and a thesis about the components and structure of the third way as a policy paradigm. None of these theories is deterministic about the outcomes. They merely identify the often (though not always) necessary, rather than sufficient, conditions for these outcomes to eventuate. The book, for example, does not lend strong support to those who believe that ideology is more powerful than institutional legacy, or that social democracy will reduce the insider–outsider divide. But the book does make clear that, given the right conditions, it can happen.

The third way is premised on labor market activation. Aside from subsidizing new jobs financially, few third way policies directly create jobs from the demand side. Ultimately, the effectiveness of labor market measures depends on an economy with a persistent capacity for job creation. Therefore, in addition to the core strategies of active and passive social protection, effective third way reforms also require an economic context of growth and investment, sufficient enough to sustain and increase employment opportunities in the labor market. Across OECD countries, due to a highly different economic context than in the Golden Age era, economic prudence is more than ever an important condition for sustainable job creation. Since the early 1980s, advanced industrialized economies have intensified the transition to a postindustrial service structure, and concomitantly there has been a further decline in the core manufacturing industries. At the same time, gradual economic internalization, especially in finance, has increased the cost of high budget deficits, and made devaluation or interest-rate manipulation unfeasible. This pressure toward low inflation and small budget deficits was especially strong for countries constrained by the Stability and Growth Pact and the conservative monetarist policy of the European Central Bank (ECB). It is important to emphasize that the key factor behind the pressure toward austerity is the internationalization of finance, rather than production or trade, which has historically been highly integrated internationally, especially for the Northern European economies (Huber and Stephens 2001).

Due to these constraints on government options in stimulating the economy, the extent of partisan differentiation is minimized in economic policy. Nevertheless, there is still some limited evidence for ideological preferences.

To provide a historical context for third way reforms, this chapter outlines the developments in key economic and social problems being increasingly confronted by the nine countries after the Golden Age, and how pre-third way governments attempted to respond to these difficulties. Amid all these interconnected problems of economic and social policies, rapidly increasing unemployment was especially relevant for third way reforms. As Figure 4.1 indicates, this is a universal and clear-cut trend across all the nine cases covered in the book. The unemployment problem not only directly shaped strategies of active and passive protection but also required corresponding adjustments in macroeconomic and incomes policies. For the third way ideology, unemployment posed one especially serious threat, in labor market and social exclusion due to long-term unemployment. The exclusion of the worst-off contradicts the principles of both solidarity and prioritarianism (protecting the weakest).

Unfortunately, historical data are relatively scarce for long-term unemployment, only sufficient for a decade span of nine-country comparison. To better discern the pattern of long-term unemployment, I have graphed the nine countries in two separate groups. In the low group (Figure 4.2), the share of unemployment one year or longer out of total unemployment ranges from 14% to 29%. In the high group (Figure 4.3), it ranges from 40% to 50%. Clearly, for the high group, long-term unemployment remained about as high at the end as the beginning. For the low group, it increased consistently through time, drawing these countries closer to the high group. In short, persistent labor market exclusion became a problem common to all countries by the eve of third way reforms.

This chapter turns the focus from the active to the passive side of social protection. While active protection enhances the possibility of labor market integration, passive protection can potentially facilitate exclusion from the labor market. Compared with the active side, the partisan difference in passive protection reforms is noticeably smaller. The fundamental reason behind this narrower partisan difference is precisely the passive nature of these measures. On an ideological level, massive labor market exclusion goes against not only the third way principle of productivist solidarity and prioritarian egalitarianism but also the secular-right advocacy of social Darwinism through hard work and competition. On a policy level, low labor force participation was the key factor contributing to the fiscal crisis of social security across all welfare state types. Fiscal pressure on social security was especially serious where ideological sympathy for labor market detachment has traditionally been strong: Christian democratic welfare states. In short, no OECD government can afford not to make some changes to passive protection. The attempt to restructure, or worse, retrench, was almost universal across partisan colors.

Therefore, as evidence for power resources, partisan difference in passive protection was not nearly as drastic as in active protection. Having clarified this overall pattern, it is nevertheless still possible to notice some contrasts between social democracy and the center Right in how they approach passive social reforms. Again, while the center-right strategy is more or less divided between secular-right cost cutting and Christian democratic inaction, the social democratic strategy is action, but without exclusive emphasis on cost cutting.

Since the start of the New Labor government under Tony Blair, the phrase “third way” has come to symbolize the transformation of contemporary social democracy. The Blair revolution played an indispensable role in stimulating today's third way literature. Chronologically, it ushered in a new era in comparative research: No third way studies predated New Labour. Cross-sectionally, its impact reached many countries. The only two social democratic governments openly self-identifying as the “third way” were the Tony Blair and Gerhard Schröder administrations, but this notion has been utilized to evaluate center-left reforms across the industrialized world. This situation, however, creates some analytic dilemma. If the concept only describes governments that are Blair's contemporaries, the analysis suffers from post hoc theorization. What caused such a qualitative change in contemporary social democracy since 1997? After all, the timing of New Labour's rise was arbitrary. If the concept is extended backwards to describe center-left reforms well before New Labour, then does it really imply anything distinctly new? There had long existed a rich literature on social democratic transformation (Stephens 1979; Esping-Andersen 1980; Korpi 1983; Przeworski and Sprague 1986; Kitschelt 1994). Third way theories will become trivial if they are simply a new way of referring to well-known arguments about social democratic reforms.

By examining welfare and labor market reforms in nine countries, this book shows that not only can the third way account for social democratic transformation through a longer historical framework, but it also brings new insights to contemporary social democracy.

This chapter focuses on the active dimension of social protection. As its name suggests, active social protection operates primarily by facilitating entry into the labor market for the unemployed and those out of the labor force. Fiscally, implementation of active labor market programs requires very large increases in public spending. Intellectually, active social protection requires a clear ideological transformation, toward a more productivist notion of solidarity and prioritarian orientation in social democratic egalitarianism. The active dimension of social protection is where the difference between social democrats and their center-right counterparts is clearest in policy paradigms.

Across the nine countries examined here, the transfer of power to social democracy almost always initiated the clear expansion of various measures in active social protection. By contrast, center-right incumbency demonstrated much less enthusiasm in increasing the active measures. Instead, there was either little action or, in some cases, much enthusiasm for rolling back existing active schemes. Such consistent policy contrast between left and right incumbencies across diverse country settings clearly reflects a power resources pattern of welfare state changes. While there are strong policy paradigm contrasts for different partisan governments, within the same type of partisan government there are also enormous diversities across countries in policy implementation. Here, institutional constraints provide the key explanation.

On a theoretical level, the nine country cases in this chapter illustrate the combination between a power-resources explanation of policy paradigms and a path-dependent explanation of policy implementation.

This book started out with a question: Did governments adopt market-oriented reforms in the 1980s and 1990s as a result of learning?

This question is important, for several reasons. From a substantive point of view, at least two theoretical issues needed to be tackled. First, the argument that the switch to more liberal economic policies during the last two decades of the twentieth century was motivated by a process of learning from past mistakes is prevalent in the literature on market-oriented reforms. Yet, it remained untested. Second, beyond the specific topic of market-oriented reforms, the claim that policies change because policy makers learn from policy failures and successes is hardly questioned in many public policy arenas, both domestic and international; however, it is much more frequently assumed than actually demonstrated. Thus, whether learning actually happens matters for public policy and international relations in general, and for understanding the switch to liberal economic policies at the end of the twentieth century in particular.

In large part, debates about learning have remained in the realm of speculation because of methodological difficulties involved in, first, testing arguments about learning and, second, convincingly demonstrating that policy switches are caused by learning.

BRIEF ORIGINS

The World Bank, in the form of the International Bank for Reconstruction and Development (IBRD), was founded at an international conference at Bretton Woods, New Hampshire, in 1944. Its purpose was to move toward the creation of a framework for world economic governance. The conference had been called, largely at the initiative of the United States, to work out a system for global economic stabilization following the depression of the 1930s and for reconstruction after the Second World War. Forty-four governments, including the USSR, attended.

The architects of the new system were, principally, Harry Dexter White, U.S. Treasury Secretary Morgenthau's chief economist, and legendary British economist John Maynard Keynes. At Bretton Woods, White took charge of the proposals for monetary stabilization. An outstanding intellect who authored the proposals that he hoped would help save the world from more wars, he was later brought before Senator McCarthy's Unamerican Activities Committee. Keynes, the leader of the UK delegation, had separately come up with his own ideas of a central bank for the world. However, he went along with the American plan, and he assumed responsibility, with reluctance, for running the discussions on the Bank.

The initial focus at Bretton Woods was on the stabilization of the world economy, and the conference proposed the establishment of the International Monetary Fund (IMF) as the center of the system. The World Bank, that is, the IBRD, was at the time the secondary concern and subject to less scrutiny.

The finances of the Bank came under a number of pressures during the reorganization period. First of all, the Strategic Compact itself set aside some $570 million for the Bank's reorganization over three years, including $420 million for re-engineering (less $170 million in expected savings) and $150 million for redundancies. At the same time the reorganization period saw a rise followed by a steep decline in total lending that has been maintained since, a shift in the structure of lending away from income-generating large loans to small, loss-making knowledge products, and finally an increase in administrative costs. Prima facie these changes would have been expected to create pressures on the Bank's net income, on its financial sustainability, and on its operational independence. How far was the Bank able to manage these pressures?

LENDING FALTERS

A potential decline in IBRD lending, due partly to high transaction costs, was one of the principal concerns aired in the Strategic Compact. As shown inFigure 8, a plateauing in lending volume occurred in 1996, and this was the source of the Compact's concern. But the onset of the Asian economic crisis for a time obscured the problem, as the growth of new lending approved by the IBRD recovered and rose to a record in 1999 of $22 billion. Thus the Compact was agreed on, by chance, just prior to a peak in lending.