Social Democracy Going Down or Down Under: Institutions, Internationalized Capital, and Indebted States

Abstract

political power after World War II: internationally immobile capital in the goods producing sector of the economy and a state with sufficient revenue flows to provide a high social wage. In the 1970s and 1980s both these preconditions of successful social compacts over wages and investment and of welfare and incomes policy eroded. Both financial and productive capital internationalized rapidly in the 1970s and 1980s. International bond placements tripled over the 1980s and reached $1.6 trillion in 1996. By 1988 foreign direct investment flows were running at three times their average level in the early 1980s and six times average flows in the 1970s. These flows disproportionately affected the small European social democracies as firms positioned themselves for the emerging Single European Market.' Many European states responded to more trade, and more volatile trade, by expanding public sector spending to boost domestic demand and shelter the economy. By the early 1980s these policies created fiscal deficits that cumulated into substantial public debts and, among the weaker economies, substantial foreign public debts. Despite efforts to meet the Maastricht criteria, deficits and debt levels remain quite high.2 If the preconditions of the institutional underpinnings of social democracy are gone, has social democratic policy come to an end everywhere? One of the most important insights of the new institutionalist literature is that institutions need to be considered in their historical and environmental contexts. Institutions well suited for

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