On 19 October 2015, Bill Clinton took the floor at a fundraiser in Potomac, Maryland. A few months earlier, his wife, Hillary Rodham Clinton, had launched her campaign to become the Democratic Party's candidate for the 2016 US presidential election. At first, the erstwhile senator and secretary of state was the clear favourite in the primary race. Polls showed that she consistently commanded the support of more than 60 per cent of potential voters. The Democratic establishment, including both prominent elected politicians and major donors, overwhelmingly backed her candidacy. And yet by that day in mid-October – somewhat chilly for the time of year – her lead had begun to slip away, eroded by the challenge of Bernie Sanders, a self-described socialist who offered a radical break with the economic consensus of the recent past.

Addressing attendees at that fundraiser in Maryland, the former president was dismissive of Sanders’ campaign. Bracketing the veteran Vermont senator with the ex-communists of Greece's Syriza and the hard-left leader of the UK’s Labour Party, Clinton described all these political outsiders as “reflective of” the fact that, “when people feel they’ve been shafted and they don't expect anything to happen anyway, they just want the maddest person in the room to represent them”. According to Clinton, Sanders was a symptom of economic discontent, but he was not the solution to America's problems. In place of Sanders’ radical agenda, the former president offered his own alternative plan for the people and places that had been bypassed by prosperity:

This argument was reminiscent of Bill Clinton's own presidential bid more than two decades earlier: a campaign that was built around a similar kind of outward-looking, technology-enabled approach to growth.

“Work hard. Have fun. Make history.” Amazon's motto is emblazoned across its Seattle offices, alongside other motivational slogans such as “build yourself a great story” and “try something new”. Much like the business it houses, Amazon’s campus has expanded over time in new directions and into new spheres, including three interlocking geodesic domes that run along Lenora Street between 6th and 7th Avenues. Before the pandemic hit, Amazon's Seattle premises were home to over 50,000 staff, many of them well-paid knowledge workers who benefited not only from generous salaries and stock options but also from fussball tables, craft classes, a rooftop dog park and film previews. Amazon employees work in cutting-edge fields such as cloud computing, artificial intelligence, language processing and the design of new consumer electronics, while Amazon also invests heavily in the creation and distribution of digital content such as TV dramas and documentaries. Amazon's success story seems to epitomize the rise of the knowledge economy, as predicted by earlier advocates of knowledge-driven growth.

Yet there are other ways in which Amazon epitomizes the rise of the knowledge economy, reflecting facets of knowledge-driven growth that this previous generation of techno-optimists either failed to predict or sought to downplay. Amazon, like the knowledge economy era itself, does not only generate highskill, high-pay employment but also an abundance of less skill-intensive, lower-paid work in warehouses and on the streets. Modern managerial techniques are not exclusively a matter of break-out rooms and brainstorming spaces, craft classes and dog parks; lower down the income distribution, these techniques might involve optimizing the number of orders processed, the miles of warehouse corridors covered or the directions followed by delivery drivers, while minimizing time lost to sick leave and comfort breaks.

Amazon also epitomizes the ambiguous impacts of the rise of the knowledge economy on labour markets in advanced capitalist democracies. Emerging economies such as India and China now compete with developed democracies for knowledge work: Amazon's single largest office building in the world opened in Hyderabad in 2019, with its occupants working in fields such as machine learning and new payment technologies. Moreover, in addition to creating new jobs – for computer programmers, network architects, delivery drivers and warehousing staff – Amazon also seeks to automate these tasks, replacing workers with machines.

Social investment was not the only channel through which advocates of the knowledge economy believed that they could affect the pace and quality of growth. This chapter explores how dynamic markets, international openness and a stable macroeconomic framework were also integral to their plans for delivering inclusive prosperity. On the face of it, these aspects of the knowledge-driven growth agenda closely mirror the policy prescriptions of the neoliberal era. Nevertheless, as we will see, the advent of the knowledge economy brought about a change in how such policies were justified and in the results they were expected to achieve. When coupled with social investment, the combination of market liberalization, open borders and tight macroeconomic policies would supposedly advance progressive goals, empowering labour vis-a-vis capital and combating social exclusion. Taking each of these elements in turn, this chapter aims to reconstruct the case for knowledge-driven growth at its most coherent and compelling, the better to understand its limitations and blind spots.

Market dynamism

In the knowledge economy era, in addition to social investment the other crucial ingredient for increasing productivity (and thus prosperity) was competition, which would incentivize individuals and businesses to innovate. As the UK Treasury put it:

Public policy thus had an important role to play in increasing the pitch of marketcompetition: removing impediments to the free play of market forces and reshaping both economy and government to allow the fullest possible expression of market incentives. This also implied that governments would not pursue activist industrial strategies that distorted market outcomes: in the words of the Lisbon Strategy, governments should “further their efforts to promote competition … shifting the emphasis [away] from supporting individual companies or sectors”.

Taxation, regulation and flexibility

Underpinning this agenda was the belief that markets foster innovation by offering financial rewards to successful innovators.

This book aims to enhance the understanding of credit rating agencies as constitutive actors in global financial capitalism. The relevance of these institutions goes far beyond the seemingly technical world of finance. A deeper understanding of the pervasiveness of credit ratings in today's financial markets raises awareness of the industry's political and social importance. It is not only corporations, banks and governments that are subject to the consequential judgements of these private companies. Academic institutions, infrastructure and transportation entities such as port authorities, highway operators and other public good providers in the health and medical sector are rated, as soon as they aspire to have access to international capital markets to refinance themselves.

The purpose of this book is not to criticize the CRAs for the sake of criticism. If this were the case, it would just contribute a further (probably unnecessary) line of argument to the already existing and extensive CRA critique. This book is an attempt to go beyond the conventional functionalist reading of the credit rating agencies’ role, which basically reduces the CRAs to institutions that decrease information asymmetries on financial markets. Ironically, the public attention paid to the CRAs in the course of the GFC has contributed to the corroboration of such preconceived notions about CRAs among policy- makers, practitioners, the media and scholars.

The agencies’ work is not replicable, and the oligopoly not easily replaced. CRAs do not discover ratings, as if the information about credit risk pre- exists, free from interpretation; they create ratings. Ratings are social constructions that rest on certain interpretations of the material world. Therefore, it is important to acknowledge the contingent character of assessing creditworthiness. In their capacity of epistemic authority, CRAs define the relevant knowledge about credit risk assessment. This allows them to exert narrative authority in the discourse about creditworthiness. In order to make disintermediated markets work, an epistemic authority that issues centralized judgements on creditworthiness is inevitable. A functionalist reading misses exactly this authoritative dimension of the agencies’ work, while underestimating the systematic role of the agencies: CRAs do not only decrease information asymmetries but, most importantly, coordinate market expectations, fix meanings and establish commonly held interpretations of debt issuers’ creditworthiness.

Covid-19 and the false necessity of the equity and efficiency trade-off

Barely having had the time to digest the economic and social aftershocks of the Great Recession, Europe has been confronted with an even more disruptive exogenous shock, the Covid-19 pandemic, threatening human life and entailing job losses for many as a consequence of the “freezing of the economy” through lockdown measures. The economy was massively hit: in the European Union, GDP shrank by 6 per cent in 2020 and the government debt-to-GDP ratio increased from 77 per cent at the end of 2019 to 90 per cent at the end of 2020. While unemployment peaked at about 15 per cent in the United States in April 2020, government intervention in the EU helped contain this rate to below 10 per cent over the same period. This headline indicator yet hides considerable differences across countries and segments of the population affected.

Before the Covid-19 virus struck, the aftermath of the Great Recession was already raising existential questions for future welfare provision, as it had deepened already existing social vulnerabilities, unemployment, inequality and poverty, within and between EU member states. Nonetheless, despite several invitations made by well-renowned scholars to rethink our economies and the way in which our societal progress is conceived – reiterated in the wake of an increased awareness of the challenges posed by climate change – it is fair to say that the global financial crisis was not sufficiently utilized as a window of opportunity for progressive welfare reforms.

Now, the social aftershocks of Covid-19 crisis management already point to undermined employment opportunities for millennials as well as an identification of the disproportionate burden of household and care chores on women. And, although the high-skilled were able to work from home to reduce Covid-19 virus transmission risks, medium-skilled production and construction workers were temporarily put on furlough schemes, without knowing for how long. At the same time, low-paid workers in “essential services”, such as health care, retail, delivery, public transport and waste disposal, were doomed to face high contagion risks. All this has important consequences for the overall perception of the increasing uncertainty within which citizens and institutions are called upon to live.

This book has been a long journey, enriched throughout our whereabouts on the European continent. Our collaboration has its origins in Brussels, where, at the invitation of David Rinaldi, we started working together on how the long-promised idea of “social Europe” could eventually find its place in the EU budget. The mandate we received from the Bertelsmann Foundation and the Foundation for European Progressive Studies (FEPS) was a report primarily targeted at a policy audience. Yet as we started doing the maths, and collecting the evidence, we felt that something bigger was a stake. On presenting our first findings to various stakeholders in Brussels, we received enthusiastic and critical feedback. Then Francesco Corti joined the team, bringing in his expertise on the European Pillar of Social Rights (EPSR). On the initiative of Laszlo Andor, this project culminated with the presentation of our report to Nicolas Schmitt, European commissioner for jobs and socials rights; both of them should also be thanked for their insightful comments.

After this episode, although life first took us on different paths, our joint commitment to developing a bigger argument lingered on. A new opportunity arose with the invitation by the Joint Research Centre (JRC) of the European Commission to present our thinking at a workshop, organized by Giulio Pasi, under the ambitious headline “Policy paradigms, approaches and tools: a comprehensive pathway to make the European social model fit for the future”. The JRC urged us to reflect on the main trends impacting on EU social protection systems, to identify the conceptual relationships between different principles and ideas to define what the European social model is and how it should work, and to provide a conceptual map for a better understanding of the core of welfare systems and the role of EU policies in advancing resilient welfare states. In other words: such wide guidelines provided the perfect excuse for us to give our project the time and dedication it deserved!

It is hard to remember when we realized that our renewed collaboration would end up far exceeding the scope of our presentation and discussion with the JRC to become a book. With the benefit of hindsight, we can recollect several factors that made us pick up our pen again, even after long working days in Rotterdam, Bonn or Florence.

Introduction

With the onslaught of the global financial and economic crisis, the European Union transformed – à contrecoeur – from a benign project of Pareto-optimal single market expansion and currency integration into a more contested political project. There are debates today as to how close the euro came to breaking down in the wake of the Greek sovereign debt crisis. What is certain is that the sovereign debt crisis fed back into political distrust in some EU citizens and among the leaders of some member states, with the European Commission caught in the middle of the crossfire. Be that as it may, the recent politicization of the European Union cannot be understood as a mere by-product of the Great Recession. The bumpy debate on the draft EU Constitutional Treaty revealed a narrative of welfare paradise lost, pitted against the “liberalizing” ambitions of the European Union, as already pointed to in the context of the “Bolkestein directive”.

It is a fact, however, that the perception of welfare betrayal by the European Union further increased in the wake of the E(M)U Great Recession crisis management. After a brief spell of “fire brigade” Keynesian stimulus in 2009, the Greek debt crisis confronted the European Union with a wholly novel fiscal aftershock. With contamination concerns spreading from Greece to the periphery of the eurozone, including Spain, Portugal and Ireland, EU institutions turned to fiscal consolidation measures. The financial crisis was redefined in the debate as a crisis of fiscal profligacy, opening up the way for tough and prolonged welfare retrenchment and deep labour market deregulation. In addition, however, less exposed economies, especially those that had had to bail out systemic banks, such as France, the Netherlands and the United Kingdom, staged austerity-oriented welfare reforms, including cuts in civil servant salaries, pension benefit freezes and retrenchments in social services. The European Council, with the establishment of the “European Semester”, created an institutional device to urge member states to pursue fiscal consolidation. And, although the 2011 Annual Growth Survey (AGS) identified overgenerous welfare states as impediments to European growth and competitiveness, the “fiscal compact”, agreed in December of the same year, provided the European Union with new tools to reinforce national budgetary discipline.

As of July 2020 the Chinese corporate bond market had grown to become the second largest in the world, valued at $7.4 trillion, behind the United States at $10.9 trillion. The United States and China make up make up 45 per cent of the total global corporate bond market, in which 53 per cent ($21.5 trillion) of outstanding corporate bonds are issued by financial institutions. In the light of such empirical dynamics, it is imperative to look at credit rating in China.

A brief history

China's endeavour to create a more market- oriented financial system over the last 30 years predetermined, at least in the long run, that banks would no longer play their traditional role in financial intermediation and that a financial infrastructure would be needed in which CRAs fulfil a key role in the governance of capital flows. In recognition of the structural power of non- state actors, such as CRAs, in a financially globalized world, the Chinese authorities started to develop a domestic credit rating industry in the context of its own capital market development. In 1987 China took the first steps to establishing a credit rating industry by introducing new regulations on corporate bonds (Cousin 2007: 35). At the beginning of the 1990s corporate bond rating became the core business of the Chinese rating industry (Gras 2005: 32). As the former planning commission, the National Development and Reform Commission (NDRC), retained exclusive authority as the market's gatekeeper, Chinese CRAs had the symbolic function of creating the semblance of a developed capital market. Consequently, the factual influence of CRAs on bond issuers and investors was characterized as weak at the time (Kennedy 2008).

This began to be reversed only in the early 2000s, when the industry started to develop (Chen & Everling 2002). In 2002 the China Securities Regulatory Commission (CSRC) brought in comprehensive regulations for the CRA industry, including accreditation requirements (Kennedy 2008: 75). This was the same CSRC, preceded by the People's Bank of China (PBoC), that had since the late 1990s been the guiding force behind the creation of a fully fledged and functional credit rating industry following the American model.

BEYOND MARKET AND STATE: A FRAMEWORK FOR EXAMINING THE CHINA MODEL

“Modern capitalism can no longer work,” warned French president Emmanuel Macron at the virtual World Economic Forum Davos Agenda Meeting on 26 January 2021. He contended that contemporary capitalism and the market economy, which once provided the middle class with opportunities for upward mobility, has resulted in a downward spiral and confronts a profound moral and economic crisis. As a response, he called on global leaders to make efforts to tackle inequality and climate change. Macron's words should be understood against the background of increasing social protests in recent years in Western countries, in particular the severe social conflicts and divisions revealed in the 2020 US presidential election, and the inability of many so-called neoliberal economies in containing the Covid-19 pandemic. One cannot help but ask what is going wrong with “modern capitalism”. Is it a failure of the market, of the state, or of both?

Obviously, calls for more state intervention are resonating around the world. For example, in his recent book People, Power, and Profits (Stiglitz 2020), the Nobel Prize-winner Joseph Stiglitz argues that a society must envisage a role for the state in pursuing sustainable economic development and the orderly operation of a society and the establishment of a balance between market, state and civil society. The role for the state is at least twofold: one is the establishment of the rules and institutions required for the market to operate; the other is state support for and investment in public goods, including research and development, education, health care and basic infrastructure. In this situation a consequential question is: what does more state intervention imply? Does it mean that a different socio-economic system is taking shape? Or does it mean that analytical approaches that treat market and state as antipodes are no longer meaningful?

Indeed, binary distinctions between states and markets and between liberal market capitalism and state capitalism are persistent. The market involves a logic of exchange embedded in private property rights and mediated by monetary relations, and gives rise to greater efficiency, whereas the state is an institutionally ordered domain of governmental practices, mediated by the play of politics and social struggles, and acts as an obstacle (Peck 2021).

INTRODUCTION

China is a geographically large country, with diversity in terms of natural environment, levels of development, population composition and local cultures (Zhang & Peck 2016). Therefore, it is imperative that the state deal with central– local relations (Zhang & Chen 2014). Spatial governance is an important part of the China model, equipping the state and the regions and socially embedding them in a spatial market economy system. The role of spatial governance is, on the one hand, to establish and adjust the rules and conditions that are required for facilitating market operation and, on the other, to promote social justice and balanced regional development. Hence, spatial governance is one of the most distinctive features of the China model, as a tool for the “state” to intervene in the market and society and coordinate them to achieve sustainable development. In promoting this goal, the spatial governance is not static but is adjusted and improved, to reflect requirements and feedbacks from the market and society.

Generally speaking, spatial governance plays a role in the China model in two ways. One is spatial plans and planning systems, which act as regulations guiding development. The other is the control of productive factors, including land (Lin 2014), and population, including labour in space (Yang & Dunford 2018; Chen & Fan 2016; Sun & Fan 2011; Fan 2002).

The implementation of spatial governance tools in China is much rooted in its governance culture, as described in Chapter 2. Dominated by Confucianism, benevolence is a central principle applied in an orderly social hierarchy, in which it contributes to the establishment of a stable social order (Dunford & Liu 2015). Profoundly affected by this thinking, when China shifted to a market economy its planning system did not collapse (ibid.). Plans and planning are not considered emblematic features of a centrally planned economy distinctive from a market economy. Chinese leaders such as Deng Xiaoping regarded the market and planning systems to be just instruments for promoting economic development (see Chapter 1).

Issuers, investors and intermediaries

What purposes do ratings fulfil in today's financial markets? Who uses credit ratings and what do they use them for? In order to understand the role of CRAs in contemporary finance, we need to consider the different perspectives of the consumer of ratings. From the perspective of the issuer, having a rating enables the issuer to have access to capital markets in the first place. It expands “the pool of investors and available capital”, implying a diversification of funding resources. This is in contrast to the situation when an issuer borrows money from a bank to refinance itself. Resorting to capital markets to access credit means that an issuer faces a myriad of potential investors, instead of depending on only one or a limited number of financial institutions to take out a loan. This may sound more beneficial for the issuer than it actually is, however. Admittedly, the dependence on banks for funding is significantly reduced. At the same time, a new dependence is created. With the pervasiveness of rating, issuers now depend heavily on the judgement of a few credit rating agencies to gain access to capital and secure favourable funding conditions. According to S&P, the issuer uses ratings to “optimize the cost of funding”; having a rating from the Big Three allows debt issuers to refinance themselves on capital markets at a lower cost. The rating signals whether an issuer is creditworthy, reflecting a price tag of credit risk to investors. This knowledge reduces perceived uncertainty, and thus reduces the risk premium issuers have to pay on financial markets.

From the perspective of investors, ratings represent a “third- party opinion of credit quality”. CRAs regard their ratings as supplementary to the investors’ own credit analysis. Legally speaking, a rating does not exempt investors from due diligence; it is not an investment recommendation. To put it bluntly, investors are ultimately responsible for their own choices. Furthermore, ratings create comparability across asset classes, geographies and peers, helping investors to make informed decisions. This implies that different type of issuers compete for funding; a nation state competes for funding with its peers as well as with private companies.

Credit rating agencies (CRAs) are of consequence far beyond the world of finance. Before the global financial crisis (GFC) few outside academia and the financial industry had heard of them, but their role in the credit crunch of 2008 catapulted them onto the front pages of newspapers, where their practices became an issue for scrutiny. As time has passed, and the catastrophe of the systemic global financial crisis of 2008 has receded into history, lessons about the far- reaching relevance of key financial market actors, such as credit rating agencies, have faded. Once investment bankers, accountancy companies, private equity firms, hedge funds and other creatures associated with Wall Street and “casino capitalism” (Strange 1986) disappear from the pages of the major media outlets, policy- makers, the general public and large sections of academia relegate issues pertinent to finance to a technicality, leaving deeper analytical engagement to specialists, quants or experts. The ambition of this book is to bring credit rating agencies and their role in the economy back into focus, offering a more holistic understanding of the agencies and their ratings. In addition to introducing basic and important terms and concepts, this book pays tribute to the often neglected political and social dimension of the agencies’ work and the authority that comes with it.

Credit rating agencies are private firms, whose core business is to assess the creditworthiness of debt issuers on financial markets. The famous alphanumeric codes, such as AAA, BB+ and Baa3, can decide the fate of a company or a whole country. The long- standing credit rating agency oligopoly of the Big Three – namely Standard & Poor's Global Ratings, Moody's Investors Service and Fitch Ratings – dominates the global rating market.

Financial products that carry ratings, in most cases, involve some type of debt issuance by funding- seeking entities. “Bonds” represent the most common form of such products. The related debt can be issued by a number of entities: private companies (corporates), financial institutions (banks), governments (sovereigns), supranationals (e.g. the World Bank Group) and subnational institutions (e.g. municipalities). When these entities seek access to capital markets in order to satisfy their funding needs, the assigned rating signals to investors the extent to which the debt issuer is “creditworthy” – literally, “worthy” of receiving capital.

In the sciences, the word “model” is used to refer to “an idealized representation of reality [designed] in order to demonstrate certain of its properties” (Ackoff, Gupta & Minas, cited in Haggett 1965: 27). In this case, “model” refers to what is common to certain aspects of reality, rather than to what is different. In the 1990s the concept of the “social model” was used to refer instead to what made societies different and distinctive. One of the first cases was the identification of three different models of welfare capitalism. In the Western world after the Second World War capitalism was articulated with different varieties of welfare state. Esping-Andersen (1990) identified three different regimes of welfare capitalism: a social democratic model, committed to equality and high standards of provision; a corporatist conservative family-centred model, reflecting a distrust of markets in so far as social reproduction is concerned; and a liberal model of individual competition, which emphasizes the traditional work ethic. Other scholars then identified other welfare models. In 1997, drawing in part on theories of regulation (Aglietta 1976; Dunford 1990), Hollingsworth and Boyer (1997), published an edited collection concerned with the institutional mechanisms through which economic activity is coordinated and coined the concept of “social systems of production”, embracing industrial and financial organization, state structures and policies and societal values and norms. A central issue concerns the respective roles of markets and states/institutions at regional, national, transnational and global levels in identifying different societal models of economic governance. This interest in different social models was reinforced, yet also significantly narrowed, with the introduction of the concept of “varieties of capitalism” by Hall and Soskice (2001). In their study they distinguish between liberal market economies, closely corresponding with neoclassical representations of market economies, and coordinated market economies, with consensus-building institutions connecting employers and trades unions. This distinction overlaps with one drawn ten years earlier between neo-American and Rhine capitalism (Albert 1991). Subsequently many scholars drew on these concepts to examine different aspects of the performance of Western societies. More recently attention turned to China, and the Chinese social model or China model. In China itself, however, the term “social model” had been used at least as early as the early 1980s, by Deng Xiaoping (Deng 1994: 318).

Europe's experiential response to the Covid-19 existential shock

Still reeling from the economic and social aftershocks of the financial crisis, the Covid-19 pandemic confronted Europe with an even more dramatic existential shock. The pandemic has hit the member states of the European Union hard, with a lasting impact on both health and livelihoods. At the time of writing the pandemic has already resulted in close to 1 million virus-related deaths in the EU, separated families from loved ones, driven many workers into under-and unemployment and kept many children from attending school in person for an extended period. Except for front-line workers, many employees shifted to working from home.

In comparison to the Great Recession, the political response to the pandemic and the associated economic fallout was extraordinarily vigorous, both at the EU level and across the member states. Overwhelmed by the Covid-19 existential shock, policy-makers rushed to adopt a frame of national solidarity and collective effort in the first half of 2020. The “freezing of the economy” by lockdown restrictions and social distancing was assertively bridged by a bonanza of furlough schemes, wage subsidies and fiscal stimulus measures. These measures played a key role in preventing loss of livelihoods – and of lives – so as to ensure compliance with lockdowns and social distancing measure and buy time for the development of effective vaccines.

Since the onset of the pandemic in early 2020, EU governments have invested in extraordinary (and extraordinarily costly) emergency measures – from cash transfers to support households’ and companies’ liquidity, to massive retention schemes to save jobs, to sizable public investments to rekindle economies. Fiscal support by member states in 2020 amounted to around 8 per cent of GDP – twice as much as before the pandemic, and significantly more than what was provided in 2008/9 during the early stages of the Great Recession. Certainly, responses differed between EU countries, in part because of the differential impact of the pandemic and the varied characteristics of the national welfare regimes. But all countries reacted through swift and massive deficit spending and expansionary fiscal policy to protect incomes and jobs.