Varieties of Capitalism or Dependency? A Critique of the VoC Approach for Latin America

Abstract

This article critically discusses the recent enlargement of the ‘Varieties of Capitalism’ (VoC) approach to Latin America as an attempt to come to terms with the persistence of transnational socioeconomic inequalities. It finds that the VoC approach largely fails to deliver a convincing analysis and, by implication, to inform political strategies capable of overcoming them. Through an engagement with the VoC approach's foundational theoretical body and the new ‘hierarchical market economies’ ideal-type, three main analytical shortcomings are identified: (1) the approach's functionalist firm-centrism; (2) its methodological nationalism; and (3) its fundamental ahistoricism. By way of conclusion, the article proposes an alternative perspective on transnational inequalities which is centred on classical dependency approaches but also combined with insights from geographical political economy, among others.

Keywords

Varieties of capitalism Latin America transnational inequalities dependency theory institutionalism neoliberalism

Introduction

This article critically analyses the recent enlargement of the influential ‘Varieties of Capitalism’ (VoC) approach to the political economies of Latin America as a novel attempt to explain the persistence of considerable socioeconomic inequalities on a transnational scale. These transnational inequalities — the fact that some economies seem to be consistently less successful than others at producing, enhancing, and capturing value, and at translating it into social gains for the majority of their populations — constitute a highly problematic and evidently extremely resilient feature of the global political economy (Babones, 2012; Kaplinsky, 2005: 43–47). In other words, these economies, or even entire world regions, seem to be in a kind of semi-permanent crisis, relative to others, in the sense that the income levels, social equality, job availability, quality and security, and many other features of ‘human development’ remain lower, with the gaps in many areas even widening. The resulting challenge for political economy scholarship is two-fold: to investigate the root causes of the discrepancies and, on a more practical-political level, to answer the familiar question of ‘what is to be done’ to improve the lot of this group (often referred to as ‘developing countries’ or the like), both in relative and in absolute terms (see Dicken, 2011: ch. 14).

Historically speaking, the political responses to this complex challenge have been extremely varied. Nevertheless, from the 1970s onwards the academic and policy mainstream was increasingly taken over by a new neoliberal orthodoxy. Its advocates argued that the one and only way to prosperity for developing countries would be to press ahead with economic liberalization, international opening, privatization, and a general dismantling of the interventionist state. Indeed, faced with the pressures of ‘globalization’, the adoption of such political strategies was seen as simultaneously inevitable and benign, as is well captured in Thomas L. Friedman's notion of the ‘golden straitjacket’ (Friedman, 2000: ch. 6). However, in recent years cracks have appeared in neoliberalism's dominance, for at least two reasons:

The stubborn refusal to materialize of the promised across-the-board improvements in terms of economic success and wellbeing, and the implied global convergence, and

The incidence of a series of increasingly severe economic crises, affecting many of those countries whose governments had been closely following the neoliberal precepts, and culminating (for now) in the current global upheaval (Wade, 2010: 147–57).

As a result, much attention has been diverted to understanding why the predicted globalization-induced ‘catch-up’ and convergence did not happen, and to deriving the appropriate policy lessons.

The VoC approach, through its recent enlargements to non-OECD (Organisation for Economic Co-operation and Development) political economies, is one of the most recent entrants to the scholarly field concerned with understanding the structural crisis of much of the developing world. Nevertheless, even at this early stage it merits attention because it builds on a refined analytical framework and methodological apparatus, which have led the approach to a canonical status in the long-established research tradition concerned with institutional diversity among the so-called ‘advanced capitalist economies’ and its impacts on socioeconomic performance. Proponents and scholars sympathetic to the approach have expressed considerable optimism that VoC-guided research on developing economies would yield new insights regarding both the ‘micro level’ of business strategy and, by implication, these economies' trajectories at the ‘macro level’ (see e.g. Hancké et al., 2007: 13–14, 37–38; Miller, 2010: 654–56; Schneider, 2009: 553–55).

In contrast, this article will argue that the VoC approach largely fails to live up to the challenge of explaining the persistent transnational inequalities in question and informing political strategies capable of overcoming them. This claim is the result of a critical engagement with the foundations of the VoC framework and in particular the ‘hierarchical market economy’ (HME) analysis, an ideal-typical notion developed by business historian Ben Ross Schneider and collaborators to capture what they identify as the defining features of a Latin American ‘variety’ of capitalism. For the purposes of this article, this particular enlargement arguably constitutes the most interesting among the new branches of VoC literature, since it refers to a ‘classical’ case of long-standing and deeply entrenched transnational inequalities and because it constitutes a relatively consolidated and rapidly expanding body of analyses.

The next section gives an overview of the VoC approach and introduces the HME model. The following main section identifies, through a theoretical, methodological, and empirical engagement with the associated analytical narrative, three central shortcomings: (1) its problematic functionalism and firm-centrism; (2) its methodological nationalism; and (3) its disregard for change and history. Moreover, it discusses the resulting problems in the VoC approach's policy recommendations. The final section then sketches out some ‘positive’ lessons to be drawn from the preceding critical engagement, with a view to developing a more adequate perspective on transnational inequalities.

Transnational inequalities and Latin American HMEs: The VoC perspective

Over the last decade or so, the VoC approach has emerged as the most influential framework in institutionalist ‘comparative capitalisms’ (CC) research. The approach shares three central features with the wider CC literature that in turn shape its explanatory aims and (meta-)theoretical outlook:

The assumption that there are different (national) ‘varieties’ of capitalism

That these are distinguished primarily in institutional terms, and

That these institutional differences are of pivotal importance for the degree (and kind) of socioeconomic performance of different ‘varieties’ (Coates, 2005: 9–17).

What sets VoC apart from other CC frameworks (such as power resources-theoretical or historical-institutionalist variants) is its heavy reliance on rational choice theorems drawn from political science and business studies, particularly from transaction cost economics (Streeck, 2010: 21–22).

To elaborate, the following gives a brief overview of the central theoretical, conceptual, and methodological tenets of the wider VoC approach, before presenting in more detail the HME ideal-type and the associated perspective on transnational inequalities. Hall & Soskice (2001: 6–21), in the original and still most influential exposition of the VoC framework, put centre stage what they call a ‘relational view of the firm’. In this perspective, the degree and kind of competitiveness of any one national economy depend crucially on institution-mediated solutions to collective action problems, as construed by transaction cost economics, in five spheres in particular: corporate governance, inter-firm relations, industrial relations, firm-level relations with employees, and vocational training/education. There are two distinct but similarly efficient modes of coordination, each linked to a particular capitalist ‘variety’: (1) ‘market-based’ coordination, predominant across the primarily Anglo-American ‘liberal market economies’ (LMEs); and (2) ‘strategic’ coordination, prevailing in the Continental European and Japanese ‘coordinated market economies’ (CMEs). VoC proponents expect that under normal circumstances one or the other form will structure coordination in all relevant spheres of a given national economy, due to a process of self-selection based on the efficiency-enhancing effects of ‘institutional complementarities’. More precisely, where such complementarities exist, i.e. where the mode of coordination is the same across domains, firms will be able to draw on specific ‘comparative institutional advantages’. These, in turn, will lead them to develop distinct, but equally viable, specialization patterns which form the basis of international success and, by implication, good socioeconomic performance at the level of the national economy.

By design and choice of empirical focus the foundational LME/CME dichotomy limits the VoC approach's explanatory ambitions to institutional differences among so-called ‘advanced’ economies. Yet, more recently proponents of the approach have attempted to extend its relevance to geographical and substantial terrains which had previously been left largely to area studies and ‘development’ specialists. This has implied a small but critical alteration of the underlying rationale: whereas the LME/CME dichotomy was developed primarily to show that there were more diverse institutional sources of economic efficiency than neoliberal orthodoxy would have it, the HME ideal-type shifts the centre of attention to why this ‘variety’ seems quite stable despite its relative inefficiency in terms of economic success and social equality. By implication, the focus is on the structural differences of HMEs from their ‘advanced’ counterparts. These differences, in turn, are taken to represent likely root causes for the former's structural crisis, that is, their long-term inferior performance (Schneider, 2009: 555–56; Schneider & Soskice, 2009: 33).

In a nutshell, the HME analytical narrative draws on an application of the ‘relational view of the firm’, with some amendments and slight modifications. According to Schneider (2008: 8–9; 2009: 556–57), the main distinguishing feature of HMEs is the dominance of ‘hierarchical’ coordination across all the institutional spheres deemed relevant, rather than just in intra-firm vertical integration. However, this mode is held to be inferior on efficiency grounds, because it fails to deliver on a number of collective goods — particularly in, but not limited to, the area of education and skills. As a consequence, the proponents of the HME model suggest that the interaction effects across institutional spheres within this ‘variety’ should be seen as ‘negative complementarities’. These, far from sustaining virtuous cycles, merely render the dysfunctional configuration more resilient to change (Schneider & Karcher, 2010: 633; Schneider & Soskice, 2009: 47–8). As a result, Latin American economies develop mainly less beneficial, but persistent, ‘comparative institutional advantages’ in low-technology, low-value-added sectors such as agro-industry, minerals, and metals and, at best, the production of simple industrial commodities. Conversely, the VoC approach implies that normally they will be unable to establish ‘high road’ (high-technology, high-skills, and high-wages) production regimes and complementary welfare state arrangements which would be capable of reducing the considerable levels of inequality and informality (Karcher, 2011: 180–82; Schneider, 2008: 14–15; Schneider & Soskice, 2009: 41–43).

In more concrete empirical terms, then, VoC proponents see Latin American HMEs as characterized by four central features:

The dominance of diversified, largely family-owned and controlled, conglomerates — grupos económicos — over the domestic big business sector

Alongside these the strong role played by subsidiaries of foreign, often US-based, transnational corporations (TNCs)

Atomistic labour relations, both at the aggregate and firm levels, and

Low and general levels of education and vocational skills (Schneider, 2009: 558–63).

Probably the most striking example quoted for the assumed ‘negative complementarities’ is the ‘low-skills equilibrium trap’, a vicious circle theorem introduced from the rational choice literature on labour markets: firms, in the absence of a suitably qualified workforce, are unlikely to pursue high-skill, high-quality production strategies. Workers, in turn, in the absence of high-wage and better protected jobs which such strategies would create, have no incentives to make the necessary investments in enhancing their skills. Upward movement in the skills profile of HME workforces does not occur because the collective action problem of mutually protecting the entailed ‘co-specific assets’ remains unresolved (Schneider & Karcher, 2010: 634–39). In a significant extension of the HME narrative, Schneider & Soskice (2009: 43–47) also identify a larger-scale complementarity: since low-income groups are susceptible to electoral bribery, they are largely excluded from programmatic voting. In consequence, the (hypothetical) ‘median-voter’ has an interest in the retention of regressive welfare transfers. This, the authors argue, sustains a structural centre-right bias in electoral behaviour which militates against politically mediated redistribution. As a result of these and similar problematic interaction effects, the HME model is fortified, despite its economically and socially problematic implications.

Firm-centrism, methodological nationalism, and ahistoricism: Problems and lacunae in VoC and the HME construct

As a matter of course, it is to be welcomed that new perspectives are being developed to explain the stubborn persistence of transnational inequalities and to aid the formulation of policies and strategies to counteract them. Yet VoC analysis, in terms of the HME ideal-type, comes with crucial shortcomings in both regards, as this section will set out in more detail. In particular, three analytical problems with the VoC perspective on the relative deficits of Latin American political economies will be identified:

Its reliance on unqualified functionalist, firm-centric assumptions, leading to a neglect of capitalist power relations and the role of the state

Its methodological nationalism, resulting in a relative ignorance of the systemic, transnational structures and processes in which institutions at the nation-state level are embedded, and

Its neglect of change and history.

These deficits, in turn, lead to questionable policy implications which, with a modernization-theoretical bent, partly mirror and partly legitimise the largely discredited neoliberal approaches.

Functionalist firm-centrism and the neglect of capitalism

According to Hall & Soskice (2001: 14), one of the distinctive strengths of the VoC approach is the integration of ‘analysis of firm behaviour with the analysis of the political economy as a whole’. In this sense, a fundamental assumption underlying the VoC approach's ‘micro-to-macro’ explanatory framework is that individual firms are the decisive economic agents, whose behaviour aggregates into socioeconomic outcomes at the macro level. The analytical privilege afforded to institutionally mediated firm behaviour is thus central not only to the VoC framework's understanding of distinctive production regimes but also to its analyses of the relative strengths and weaknesses of different political economy configurations. However, this view, while being attractive to many due to its obvious simplicity, leaves a number of important blind spots in the methodological framework, ultimately leading to a questionable functionalist firm-centrism pervading VoC analyses of Latin American economies.

One of the most important lacunae concerns the role of labour, which is taken into view only insofar as it represents a potential partner for business in resolving collective action problems (see also Bruff & Horn, Bieler, and Sippola in this special issue on the role of labour). The best labour can do, it is implied, is to seek mutually beneficial cross-class settlements. In the HME ideal-type this line of reasoning is particularly prominent in the treatment of the area of education and skills. Here, the explanation given for the persistence of a ‘low-skills equilibrium’ and the associated problem of informality assumes that, in principle, it should be in the interest of business and labour alike to move towards a ‘high road’ production regime which would open more profitable ventures for the former and provide better jobs for the latter. The persistence of informality is thus viewed primarily as the effect of a dysfunctional institutional context which gives perverse incentives to both sides (see e.g. Schneider, 2009: 568; Schneider & Karcher, 2010: 634–35).

It seems relatively safe to assume that most workers would be interested in moving from informality to jobs in the normally more protected and better paid formal economy. But, conversely, much empirical research on labour informality suggests that its availability plays a significant role for firms to enhance and ensure their global competitiveness. Even though the employment conditions in TNC subsidiaries themselves are normally comparatively good, the same mostly does not hold for suppliers further down the line. In this sense, transnational production networks are characterized by a hierarchical coupling of the formal and informal economies (Knorringa & Pegler, 2006: 472–76; Phillips, 2011: 384–89). The Mexican apparel industry after the introduction of the North American Free Trade Agreement (NAFTA) in 1994 constitutes a striking example. In their analysis of this sector's development, Bair & Gereffi (2003: 158–63) found that, despite its apparent dynamism due to the fact that US-based TNCs increasingly shifted higher value-added activities across the border, generalized improvements for workers further downstream did not follow. On the contrary, under pressure from lead firms the profit margins of smaller Mexican suppliers often decreased, as did their workers' wages, while economic benefits were reaped by a small group of local elites (see also Olmedo (2006) for a case study from Argentina). More broadly speaking, such processes are not merely the results of an institutional ‘perversion’ of firms' better rationality. Rather, they are constitutive of the organization of cross-border production networks, insofar as their attractiveness for TNCs is in good part based on the possibilities of articulating activities across territories with different regulatory regimes and factor endowments, enabling them to reap benefits from regulatory arbitrage and an uneven division of labour (Dicken, 2011: 221–25).

In that they question the VoC approach's analytical and normative emphasis on ostensibly mutually beneficial cross-class settlements, these findings constitute a challenge to the approach's foundational understanding of ‘capitalist society […] as an economy, and society and economy as happily unified in a joint search for economic efficiency’ (Streeck, 2010: 31). In this sense, they support claims by Marxist political economists and proponents of the power resources school, among others. Scholars from these positions argue that analyses of capitalist institutions and their variation need to pay more attention to the conflictual and hierarchical character of capital-labour relations, in the sense of an independent explanatory dimension. The cornerstone of these views is the argument that capitalism is not just any mode of organizing production, but also a ‘mode of exploitation [and] a relationship of power’ (Wood, 1981, cited in Bruff, 2011: 489), which contrasts markedly with the VoC approach's functionalist firm-centrism.

A related shortcoming concerns the lack of attention given to the role of the state in the VoC approach's treatment of Latin American capitalism. While Schneider (2009: 554–55, 573) acknowledges that in the subcontinent the state is ‘rarely out of sight’, he argues that the emphasis on firm behaviour is adequate, indeed necessary, because the market reforms since the 1980s have effected a shift to a ‘model of business-led development’. As a consequence, where the role of the state is brought into view, this is done through the firm-centric lenses of the approach, as in Schneider & Soskice's (2009: 43–47) stylized treatment of ‘negative complementarities’ between HME production regimes and electoral systems (as sketched out above).

The problem with this perspective is not only that it empirically misses much of the still-considerable role of public companies and state regulatory intervention virtually all over the region (Sánchez-Ancochea, 2009: 70–79), but also, more fundamentally, it underestimates the potential significance of state action for the future trajectories of Latin American capitalism. For instance, while the HME narrative emphasizes the resilience of the institutional deficiencies which sustain this model's economic inefficiency and socially inegalitarian outcomes, recent years have in fact seen significant reductions in social inequality. For example, Nora Lustig and her colleagues found that, between the late 1990s and the late 2000s, the regional Gini coefficient fell from 0.53 to 0.503, with reductions in some countries, including notoriously unequal Brazil, well beyond 10 per cent and up to Ecuador's 17.1 per cent. This trend, while not reducible to a single origin, seems to be related to the broader resurgence of left-of-centre politics in the region, as one crucial driver consists of increasingly progressive government transfers (Lustig et al., 2011). Latin America remains a highly unequal region by any standard, but nevertheless this development defies the negativity of the VoC approach's predictions for the future of its ‘variety’ of capitalism. Conversely, it signals the importance of research into transnational inequalities to be attentive to politics, including the ongoing contestation over appropriate economic strategies which in many parts of the region has given way to a broader revaluation of the state's economic role (Schrank, 2009: 57–58; Thwaites Rey & Castillo, 2008: 40–43).

Methodological nationalism and the neglect of transnational structures and processes

Another key assumption underlying the VoC framework and, by implication, the HME ideal-type is the focus on the nation-state level. In other words, the VoC approach takes nation-states as coherent and relatively self-contained regulatory units, vis-à-vis other scales, be they sub or trans-national. Individual countries thus serve as the VoC approach's basis for institutional analysis, categorization, and ideal-type building (Hall & Soskice, 2001: 16). Consequently, the HME analytical narrative conceptualizes Latin American political economies and their associated less-than-benign comparative institutional advantages as the results primarily of a mutually reinforcing web of ‘internal’ negative complementarities. As will be argued in this subsection, this near-exclusive focus on the national level amounts to a marked case of methodological nationalism. This comes with yet another series of shortcomings with regard to the task of understanding the specificities of Latin American political economies and the causes of transnational inequalities.

While the national indisputably remains the single most important level at which institutions governing economic action are ‘bundled’, long-standing trends, such as the growing intensity of cross-border economic interaction and international regime formation etc., render any inflexible focus problematic. This has already been hinted at above with regard to the VoC approach's questionable reduction of the behaviour of TNCs to a function of national institutional contexts (see e.g. Schneider & Karche r, 2010: 633–44). More fundamentally, national institutions constitute merely one ‘layer’ of a multiscalar environment of economic action, reaching from the global to the local level and linked together, among other things, by the networks established by TNCs (Dicken, 2011: 54–56). Thus, the political-economic configurations which the VoC approach seeks to capture in the HME ideal-type are invariably transnationally embedded.

Consider, for instance, to name but one example particularly relevant to the contemporary Latin American context, the formation of international economic regimes. This process has been ongoing for more than two decades in the region and has become pervasive, particularly in the form of bilateral or small subregional trade and investment agreements. Crucially, these agreements over-determine national-level institutions and policies whereby they contribute, among other things, to a fortification of existing specialization patterns. While they demand far-reaching, ‘WTO-plus’ measures regarding liberalization of market access and international investment (i.e. measures that go beyond those established by the statutes of the World Trade Organization), they prohibit outright the discrimination against foreign producers and service providers, policies which are used by governments of a broadly developmentalist inclination to enable the consolidation of higher-level ‘indigenous’ industrial capacities. Moreover, they ban most forms of performance requirements, mandatory technology transfer, and local supply exigencies, i.e. heterodox governance tools that can be employed to channel foreign investments in such a way as to strengthen local capabilities for value creation, enhancement, and capture (Estay & Sánchez, 2005: 36–77; Kaplinsky, 2005: 240–42). Thus, the agreements in question imply a considerable weakening of the legal and institutional basis for certain kinds of state regulatory action that seek to create comparative advantages in higher value-added production, which have been (and partly continue to be) used by the governments of successful ‘late developers’ like China and the East Asian ‘tigers’ (Acosta, 2004: 92–96; Chang, 2002: ch. 2). In this sense, they constitute significant international constraints on government-led attempts to move beyond the structural deficiencies whose persistence the VoC approach attributes to the ‘internal’ configuration of the HME model itself (see also Rodrigues & Reis on Portugal in this special issue).

Moreover, such international trade agreements also contribute to perpetuating the problematic character of the comparative advantages which many Latin American economies do actually possess in simple commodity and agricultural production. Particularly in the latter area, the USA and the European Union (EU) continue to protect their markets and thus foreclose improvements in opportunities for Latin American producers. This limits the potential macroeconomic and social benefits which could be gained from such exports and renders these kinds of comparative advantages permanently precarious, because they continue to depend on market conjunctures marked simultaneously by a secular trend of declining producer prices and increasing volatility (Kaplinsky, 2005: 57–61). The asymmetries which this selective protectionism implies are quite obviously at odds with the Ricardian theory at the heart of the case for free trade. Nevertheless, many smaller Latin American countries, and especially those with a higher ‘political trade dependence’, have found themselves compelled to conclude such agreements in order not to forfeit unilaterally granted trade privileges and the benevolence of the powerful North American neighbour (Shadlen, 2008: 12–14).

In summary, the example of international economic regimes underpins the more general argument that national institutional ensembles are by no means discrete institutional containers, but are systemically embedded within a multiscalar transnational context. Moreover, it shows that this context is constitutively asymmetric, that is, it is marked by hierarchical structures of power between states, groups of firms, and other socioeconomic actors (see also Becker & Jäger on Europe in this special issue). In this sense, this discussion draws attention to the importance of appreciating the extent to which individual ‘varieties’ are not equal as units, but instead are parts of a hierarchically structured global political economy, for understanding the specific weaknesses of Latin American (and other peripheral) economies and the reasons for the persistence of transnational inequalities (Brenner et al., 2010: 187–88; Panitch & Gindin, 2005: 140–44).

Ahistoricism and the neglect of change

The very raison d'ětre of the VoC approach is crystallized in its proponents' insistence on the reproduction of the distinctiveness of the identified ‘varieties’ and, notably in contrast to the globalization mainstream of the 1990s, on the economic sustainability of the CME model (see e.g. Hall & Soskice, 2001: 21). The implied focus on the relative stability of the status quo is inherent to the VoC approach's HME extension as well, even though here it comes in a more negative spirit. The assurances of its proponents that HME analysis should not be taken to suggest the impossibility of change generally come as a mere afterthought, the significance of which they do not systematically explore (see e.g. Schneider & Karcher, 2010: 645; Schneider & Soskice, 2009: 48). As a result, this focus turns out to induce a rather problematic bias towards static and ahistoric analyses.

One of the most immediate pointers to the resulting inability of the VoC approach to come to terms with actually occurring change is the resurgence of left-of-centre politics throughout the region (Schrank, 2009: 57–58). While the VoC approach suggests that the only likely direction of model change in HMEs, if it occurs at all, will be a limited transition to more market-based coordination, the only argument offered by way of an explanation for this obviously countervailing trend is the recent commodity boom, which is held to constitute one of the ‘occasional exogenous shocks [that] can alter the usual logic’ of the Latin American ‘variety’ (Schneider & Soskice, 2009: 46; see also Schneider, 2009: 571). It is, of course, absolutely warranted to point out that it is quite uncertain whether the new left-of-centre governments will succeed in fundamentally altering the institutional characteristics which the VoC approach seeks to capture in the HME ideal-type. In this vein, a historically-informed awareness of the continuities, for instance, the persistence of high levels of labour informality (see e.g. Féliz, 2012), is an important antidote to partly over-enthusiastic, uncritical debates about the ‘pink tide’. Against this background, the VoC approach may be seen to strike a welcome cautionary note.

However, the VoC approach's commodity boom argument, if anything, explains away the sources of change — the exhaustion and increasing crisis-proneness of neoliberal policies, the resurgence of protest and resistance, and the subsequent decomposition of neoliberal power blocs — which are at the heart of the processes which brought left-of-centre governments to power in countries as diverse as Nicaragua, Venezuela, Bolivia, Brazil, and Uruguay, to name but a few (Ramírez Gallegos, 2006: 33–43; Sader, 2009: 171–73). Thus the framework does not provide tools for arriving at a more nuanced understanding of the sources of and potential for change, a task for which one would have to engage with a number of the issues referred to throughout this article, such as conflicts of interest, power balances, and political contestation. In contrast, the account of contemporary processes of change that comes with the VoC approach is based on a concept of path-dependence which is excessively narrow and over-emphasizes continuity. In this sense, it represents what Streeck (2009) has called an ever-present basso continuo, asserting that everything will remain the same unless the basic equilibrium is offset by shocks which, by definition, are ‘external’ to the model and thus essentially unpredictable within the analytical framework (see also Bruff & Horn's article on the more general problem this poses for institutionalist approaches in this special issue).

A closely related problem with the VoC approach's HME analysis is that it takes the historical genesis of today's ‘variety’ into its present form and its structural crisis virtually completely out of the picture. In passing, its proponents note that the present-day political economies of Latin America are the result of a long history which, in the more recent past, has been characterized especially by various waves of far-reaching neoliberal-inspired ‘structural adjustment’ (Schneider & Karcher, 2010: 633; Schneider & Soskice, 2009: 33). Yet, they do not insert this recognition anywhere into their analytical narrative. Rather, they locate the reasons for the persistent problems experienced by most Latin American countries in achieving the desired long-run economic dynamism and improvements in social wellbeing, including the failure of the neoliberal reforms to ‘deliver’ on their respective promises, in the HME model's present (Schneider, 2009: 573; Schneider & Karcher, 2010: 624–25). This perspective, however, is flawed. To demonstrate the full scope of the problems which result from this fundamental ahistoricism for the VoC approach's analytical narrative, one arguably would need to go back centuries to the earliest integration of Latin America into the nascent capitalist world economy. But, for the present purposes, it is sufficient to point to some manifest connections between the neoliberal reforms of the 1980s and 1990s and the problems which the VoC approach identifies as being parts of today's HMEs. For instance, the (further) rise in non-standard forms of employment, by definition many of them informal, was an immediate and often consciously accepted part of neoliberal labour market reforms, as was a weakening of labour unions through the decentralization of collective bargaining (Fraile, 2009: 217–28). Similarly, trade and investment agreements, which figured among the central recommendations of the ‘Washington Consensus’, considerably increased the ability of TNCs to exercise their economic power in a hierarchical fashion over smaller domestic firms, workers, and local and even national governments, due to the implied reduction of regulatory restraints on capital mobility and an enhancement of investors' legal status vis-à-vis governments (among other factors) (Estay, 2004: 125–37). The VoC approach, however, does not further explore such obvious historical connections but instead presents a narrative in which various negative characteristics seem linked to each other quasi-causally, in a seemingly self-perpetuating and ‘always-already’ existing web of negative equilibria.

Policy prescriptions

Like most other approaches in the wider CC field, the VoC approach self-consciously seeks to extrapolate lessons for economic and social policy-making from its analyses. In accordance with its transaction cost economics foundations, the approach's proponents thereby posit the (more) effective cooperation of economic actors with each other as a fundamental goal. On the basis of the notion of ‘institutional complementarities’, they emphasize the need for policies to be ‘incentive compatible’ relative to the coordination capacities already embedded in a given economy's institutions (Hall & Soskice, 2001: 45–48). In contrast, the general thrust of the HME analysis implies that a wholly different, deliberately ‘incentive incompatible’, approach needs to be taken in order to improve this model's relatively inferior socioeconomic performance and thus lay the ground for overcoming transnational inequalities. In other words, in order to overcome the dominant ‘oxymoronic coupling of hierarchy with markets’ (Schneider, 2009: 556), it will be necessary to intervene more directly and heavy-handedly to unsettle the perverse ‘hierarchical’ equilibrium (Schneider & Karcher, 2010: 645). But the VoC approach's policy prescriptions suffer from a number of limitations, following in good part from its analytical shortcomings of functionalism and methodological nationalism, as well as its ahistoricist bias.

First, it is evident that the VoC approach's proponents see the most promising strategy for improving the socioeconomic performance of today's HMEs as the modification of institutional incentives faced by economic actors, so as to induce them to cooperate in a more ‘rational’ manner. However, the above critique of the VoC approach's functionalist firm-centrism suggests that institutional reform initiatives premised on such assumptions are likely to miss their aims, because they do not recognize the extent to which the current state of affairs — dysfunctional or not from the point of view of some hypothetical ‘collective efficiency’ — can indeed be in the best interest of powerful actors, including large shareholders of TNCs and the owners of domestic grupos. In this sense, since agents with different structural positions in capitalist political economies will usually disagree on a single ‘performance indicator’, institutions which are in fact dysfunctional for the wellbeing of the majority of the population may persist so long as they are backed up by actors with the necessary power (see Amable, 2003: 9). Against this backdrop, rather than relying on functionalist and firm-centric efficiency criteria, what seems necessary is an exploration of the conditions for reasserting the improvement of the wellbeing of the majority as the fundamental aim of economic and social policies over firms'; unmitigated profit interests. However, by assuming that ‘markets’ and ‘hierarchies’ constitute an oxymoron, the VoC approach largely takes capitalism as a contested system of power out of the picture.

Second, since the VoC approach's HME narrative construes the institutional configuration sustaining the problematic HME equilibrium as one which is overwhelmingly ‘internal’ to the nation-states in question, possible strategies for overcoming them are envisaged principally as exercises in national-level institutional engineering. However, the general lack of attention paid to the embeddedness of these institutions within a hierarchically structured transnational system means that such policy prescriptions will remain skewed and of limited effectiveness. In contrast, in order to sustainably improve the socioeconomic performance of these economies, it seems warranted to bring back to the political agenda topics such as a more equitable world economic order, which would, inter alia, imply a revaluation of the principle of special and differential treatment in the global trade regime and the reassertion of states' sovereignty vis-à-vis national and international investors. This is not a priority with the VoC approach, however, which recommends, in a move which seems remarkably similar to the recommendations of the modernization-theoretical approaches of about half a century ago, that policy makers seek to model national institutions in the image of the more prosperous ‘advanced’ economies.

Third, the VoC approach recommends pushing for change with the aim of making the market reforms of the 1980s and 1990s work, thereby assuming that the latter were well intentioned, adequate at least in principle, and merely hampered in their effectiveness by institutional deficits external to them. The problem with these assumptions is that they neglect the historicity of Latin American political economies and, more immediately, the ways in which the neoliberal reforms themselves have contributed to the emergence of these political economies as we study them today. Similarly, the resulting policy prescriptions essentially amount to a call for ‘more of the same’. Differing explanations of the failure of the neoliberal reforms to ‘deliver’ the promised socioeconomic results, and thus further global convergence, are pushed to the sidelines. This concerns especially those related to critical positions vis-à-vis the VoC approach's functionalist firm-centrism and its methodological nationalism: these reforms could never have been expected to increase long-term socioeconomic performance and the wellbeing of the majority of Latin American populations, because they were the results of a class project driven particularly by transnationalized capital fractions and orchestrated so as to benefit especially metropolitan locations (as will be briefly discussed in the next section). In contrast, what seems needed when devising policy strategies capable of overcoming the problems in question is a careful and critical appraisal of how the ‘Washington Consensus’ reforms have sustained or perhaps even created (some of) them. Fortunately, this is a process which is currently occurring in parts of the region.

Back to the future? Towards an alternative perspective on transnational inequalities

Moving on from a critical evaluation of the analytical shortcomings in the VoC approach's extension to Latin America and the problems in the entailed policy recommendations, this concluding section adopts a somewhat more constructive outlook. In this sense, it presents and briefly discusses a number of theoretical and methodological approaches which enable us to tackle the VoC approach's distortions and limitations, and may thus inform analyses of differential socioeconomic performance and transnational inequalities. It should be stressed that the aim of this section is not to present a new ‘macro-synthesis’ which could somehow ‘replace’ existing theories, and neither is it simply to offer a ‘mix-and-match’ toolkit. Rather, its goal is to show how different approaches can contribute to a research perspective which is diverse, flexible, and open, but consistent at a fundamental theoretical level; moreover, it is united around the common analytical-normative purpose of understanding the persistence of transnational inequalities and pointing to ways of overcoming them.

As the preceding discussion has shown, three fundamental theoretical and methodological exigencies from such a research programme are:

To incorporate an understanding of capitalism as a system, including the inherent structural asymmetries and conflicts of interest

To include a sensitivity for the multiscalar, transnational embeddedness of the institutional environments which govern economic interactions, and

To be attentive to the historicity of contemporary political-economic configurations, including sources and processes of future change.

With these points in mind, it would seem instructive to revisit one of the main paradigms from the classical ‘development’ debates of the 1960s and 1970s which speaks to all these points: the (primarily Latin American) dependency approaches. The following will sketch out some of the central tenets which make them interesting as a central point of reference for the analysis of transnational inequalities, thereby drawing particularly on the influential formulation of Cardoso & Faletto (1983).

Against the background of the critique of the VoC approach's functionalism and firm-centrism advanced above, what makes this perspective appear particularly adequate for the task at hand is its firm grounding in critical political economy. This is apparent in the centrality accorded by Cardoso & Faletto (1983: 21–22) to the ‘sociological’ analysis of the structures of domination and social stratification which condition control over, and decision making in, the economic system. In this sense, dependency approaches cast specific political-economic configurations as the contested subjects of conflict-ridden interaction among diverse socioeconomic groups. Thus, they appear considerably better placed to accommodate empirical phenomena such as the structural coupling between formal and informal economies, which characterizes many political economies outside the capitalist cores. Probably the key characteristic of dependency theories is their decisive argument that the structural crisis-proneness of peripheral capitalisms is the result of a mutually constitutive relationship between ‘internal’ and ‘external’ factors. Thus, dependency approaches are firmly grounded in an understanding of the transnational embeddedness of national economies which the VoC approach mostly lacks. In this sense, Cardoso & Faletto (1983: 19–20) advance a perspective which emphasizes a dialectical co-constitution, positing that the dependency of peripheral capitalist configurations is the result of the inscription of ‘external’ influences into relations between social groups and classes within nation-states. Such a formulation is more adequate than the VoC approach's focus on states as institutional containers for understanding the power effects of international economic regimes on the relations between different kinds of firms, workers, and government apparatuses at national and sub-national levels.

Finally, and considering the analytical shortcomings and problematic policy implications resulting from the VoC approach's ahistoricism, dependency theories constitute a more suitable basis from which to construct analyses of global socioeconomic inequalities. Arguably the most famous formulation of their historicist imperative is Frank's (1966) sharp critique of the dominant modernization approaches of the time for neglecting the ‘development of underdevelopment’. Frank pointed to the ways in which the relations between ‘metropoles’ and ‘satellites’, over the long run, have contributed to the structural and deeply entrenched socioeconomic problems of the latter — a critique which could easily be turned against the VoC approach's HME construct in its present form. Obviously, such a perspective would be much more attentive to the historical significance of the neoliberal reforms, which were driven by the international financial institutions, for (re)producing and aggravating the problems whose persistence the VoC approach seeks to pin down as the result of contemporary HMEs.

Now, while these are some good reasons for considering dependency approaches as potential sources of inspiration for a critical research programme on transnational inequalities, one cannot brush over the reasons why they have fallen out of favour with many political economy scholars, including some of their erstwhile advocates, since the 1970s. Clearly, in part, these reasons are political, related to the effects of the wider neoliberal roll-back. But to some extent they can also be traced back to analytical shortcomings in the dependency frameworks themselves, which need to be carefully reconsidered if one wants to make these approaches fruitful in the present. This points to a number of ways in which the assumptions and concepts of the dependency school need to be complemented, respecified, modified, or even replaced.

A first critical point relates to the insufficiency of understanding of the complexity of capitalist societies inherent in many dependency analyses. In line with most political economy approaches of their time of origin, both Marxist and otherwise, they often remained overly focused on a narrowly conceived economic sphere. Thus, they frequently ignored the importance of the structural categories of (for example) ‘gender’ and ‘race’, which continue to play a critical role in the hierarchical structuring of the social relations of production (Grosfoguel, 2000: 367–69). In order to accommodate the entailed complexity, Quijano (2007: 115–17) devised the notion of ‘heterogeneity of social classification’, which he takes to refer to a continuous process of classification and re-classification with respect to a hierarchically organized distribution of labour along these different structural axes. To replace the economistic (class-)reductionism of dependency approaches with such a nuanced framework seems necessary for a fuller understanding of capitalism as a system, for instance, with regard to the unequal incidence of labour informality and poverty.

Another frequent critique of dependency approaches concerns their alleged overemphasis on the ‘external dimension’. While this critique is often overstated, it retains a grain of truth, namely that many scholars in this tradition remain overly fixated on the nation-state as a ‘tool’ for overcoming the situation of (external) dependency. Thus, they ultimately fail to break fully with the notion that the key to overcoming transnational inequalities would lie in some form of nationally-conceived ‘development’ (Grosfoguel, 2000: 361–63; Kay, 1989: 174–76, 184–86). Evidently, such an idea is hard to square with the character of economic interactions which fundamentally and increasingly transcend any single institutional scale. In contrast, network approaches in geographical political economy, such as the global production network (GPN) framework, lend themselves to analyses of the cross-border dimension of economic processes, their institutional framing on and across different scales, and their social results (Coe et al., 2004: 469–76). In the context of the present discussion, their strengths are to be seen in the way they combine an understanding of the fundamental significance of cross-border production processes for contemporary political economies on the one hand, and the latter's territorial ‘grounding’ on the other.

A third point relates to dependency approaches' understanding of historical change. In particular, Frank's (1966: 23–27) adamant insistence on the impossibility of a substantial change of peripheral countries’ structural position has been criticised for being overly schematic, and such points appear to have been vindicated by trends of differentiation among peripheral economies. In this context, Cardoso & Faletto's (1983: 144–60) analysis of change, centred on the notion of ‘associated-dependent development’, seems more suitable for coming to terms with global trends which have taken place since the heyday of the dependency debates — including, for instance, the emergence of Mexico as a major export power in the wake of NAFTA. This term highlights that, on the one hand, the dynamism of some peripheral economic sectors is possible but that, in the absence of far-reaching changes in power relations, on the other this will often come at high social costs and rarely amount to a rupture with global hierarchies (also see Kay, 1989: 134–39).

In order to methodologically specify this notion for analysing how such forms of transnational interdependence impact upon national or sub-national institutional configurations in concrete situations, it may be useful to combine it with the concept of ‘variegated capitalism’ (see also Bruff & Horn and Sippola in this special issue). This concept has been developed over recent years by a group of critical economic geographers (see e.g. Brenner et al., 2010: 206–16) as a means of grasping different forms of ‘systematically produced geo-institutional differentiation’ while also embedding such analyses in their global context. As such, it is more methodologically specific than the dependency optic, and more attuned to contemporary processes of change, particularly the gradual and uneven ‘neoliberalization’ of political economies and the more recent widespread crisis of such neoliberalization processes (Schmalz & Ebenau, 2012).

To conclude this brief sketch of a critical perspective on transnational inequalities that learns in a critical-constructive fashion from the shortcomings of the VoC approach, it should be stressed that scholars interested in pursuing such an agenda should not ignore the contributions which institutionalist research on differential socioeconomic performance can make. A ‘critical institutionalist analysis’ has much to commend it, especially its ability to mediate between holism and individualism and thus to offer an entry point for research which can match the VoC approach in its empirical focus on concrete actors, but is simultaneously attentive to the wider structures within which their interactions take place (May & Nölke, 2012: 1–2). Thus, the network approaches and the concept of ‘variegated capitalism’ ought to serve not only for updating the dependency fundamentals of such a perspective but also constitute channels for a dialogue with critical-institutionalist perspectives, with the aim of incorporating the latter's insights so as to reach a better understanding of the reasons for the persistence of transnational inequalities and the policies and strategies necessary for overcoming them.

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