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What is a Coordinated Market Economy? Definition and Examples

A coordinated market economy is one of the varieties of capitalism identified by Peter A. Hall and David Soskice with the other being a liberal market economy. A coordinated market economy is often characterized by relatively long-term cooperative relations between economic actors. This economy relies on formal institutions to regulate the market and coordinate relations between companies and their suppliers, financiers, employees, and customers as well as the interactions between companies.

Here, we shall discuss what a coordinated market economy means and also look at examples of countries where this kind of market exists.

See also: Free market vs regulated market

What is a coordinated market economy?

A coordinated market economy (CME) refers to a market economy that is regulated by formal organizations such as trade unions and employers associations. The industry interaction between existing businesses as well as the relations of companies with investors, suppliers, employees, and customers are also coordinated by these formal institutions.

Generally, coordinated market economies have a high level of job security, institutionalized forms of worker participation based on work councils, a relatively cooperative relationship between employer’s associations and trade unions, and a good record of training and development. Based on these, industries that operate in coordinated market economies usually have comparative advantages in the world economy. They tend to be good at process innovation and the production of high-quality value-adding goods.

Coordinated market economies support incremental innovation and specialization in extremely narrow niches of production. Hence they favor long-term investment in skills, thus the capital goods, engines, and auto industries in these economies are well-developed. Companies are close nit through membership in influential employer’s associations and cross-shareholding. These provide the companies access to a substantial exchange of private information which allows firms to develop reputations that permit them some access to capital on terms that depend more on reputation than share value.

What is a coordinated market economy: Definition and examples
Definition and examples of a coordinated market economy

Industry associations play a major role in setting standards that have to do with substantial amounts of technology transfer and legal endorsements through interfirm collaboration. Companies are not so concerned about their current profitability hence the market is usually more stable especially because it is built on long-term relationships which eliminate day-to-day disruptions in the market. Emerging entrepreneurs find it difficult to break into a coordinated market since the market set-up is quite restrictive and they cannot readily get capital nor win contracts from existing businesses.

Employees enjoy a high level of job security and longer job tenure even though the labor market is less fluid. Salaries are mostly set through collaborations between employer associations and trade unions. They also supervise collaborative training schemes which endow workers with industry-specific skills and assurances of available job openings if they invest in the training.

See also: Free Enterprise vs Capitalism

Examples of coordinated market economies

  1. Germany
  2. Japan
  3. Sweden
  4. Austria

Germany

The most commonly known example of a coordinated market economy is Germany. Its economy is the 5th largest in the world in terms of Gross Domestic Product based on purchasing power parity (GDP PPP ). Trade and employer associations are prevalent and present in almost all sectors. The country has a highly skilled labor force and is a leading exporter of vehicles, household equipment, chemicals, and machinery. Research and development are an integral part of the economy.

The most important trade union in Germany is Deutscher Gewerkschaftsbund (DGB). It is the German Confederation of Trade Unions which serves as the umbrella body for other trade unions such as the Education and Science Workers’ Union, Vereinigte Dienstleistungsgewerkschaft (United Service Union), IG Metall, etc. IG Metall is the largest trade union that organizes over 2.3 million members in the electronics, automobile and machine building, wood, textile, synthetic, and steel industries.

The umbrella body for the German employers association is Bundesvereinigung der Deutschen Arbeitgeberverbände (BDA); The Confederation of German Employers’ Associations. The Confederation is committed to ensuring that companies in Germany can invest, drive innovation and create jobs and apprenticeships. 50% of all German workers were covered by collective bargaining agreements as of 2022. Trade unions and employer associations usually bargain at the industry-region level. This has led to considerable standardization of wages and employment conditions across Germany.

Although Germany has all the attributes of a coordinated market economy, the Hartz reforms which were geared at tackling unemployment have made it a bit contestable if the country’s economic market is still a CME or not.

Japan

Another country that is a good example of a coordinated market economy is Japan. Its economy is the 4th largest in the world in terms of Gross Domestic Product based on purchasing power parity (GDP PPP ). The country boasts of a formidable labor force which was estimated at 66.5 million as of 2020, thus it has a low unemployment rate (2.8%). Its currency is the third-largest reserve currency in the world. It was the world’s 4th largest importer and exporter in 2021. The main imports comprise fossil fuels, foodstuffs, raw materials, chemicals, and machinery, and equipment while the exports comprise semiconductors, iron and steel products, motor vehicles, and auto parts.

The 3 major trade unions in Japan include the Japanese Trade Union Confederation (Rengo), the National Confederation of Trade Unions (Zenroren), and the National Trade Union Council (Zenrokyo). The main goal of Japan’s Federation of Employers’ Associations (Nikkeiren) is to drive regulatory and business reform in the country in order to contribute to its economic development. Wages are usually discussed yearly in spring during the spring offensive where trade unions submit claims for wage increases under the coordination of Zenroren and Rengo.

Employers respond to the employee’s claim under the guidance of Nikkeiren. Once an agreement is reached by these major players, the standard wage payment is set for medium and small-sized companies. However, the financial circumstances of individual firms are further taken into consideration when adopting the set wage. Written and signed collective agreements may vary in terms of validity, usually not exceeding 3 years. Agreements without a specified validity period may be terminated by either the employer or the employee at any time.

Sweden

Sweden is the 12th richest country in the world in terms of GDP per capita with timber, iron ore, and hydropower constituting the bedrock of the economy. It has a robust exportation industry being the 9th largest arms exporter in the world and its engineering sector accounts for 50% of exports. The telecommunications, pharmaceutical and automotive industries are crucial parts of the economy. It also ranks among countries with the highest internet access and telephone penetration. The Swedish economy is characterized by a large knowledge-intensive and export-oriented manufacturing sector, a large public service sector, and a small business service sector.

Sweden is a good example of a coordinated market economy as it has well-organized trade and employer’s unions. There are three central trade union organizations which include the Swedish Trade Union Confederation (LO), the Swedish Confederation of Professional Employees (TCO), and the Swedish Confederation of Professional Associations (SACO). LO coordinates professionals in the public and private sectors, special employees, and employees such as auxiliary nurses, car mechanics, restaurant workers, teachers, and factory workers. TCO coordinates employees in the public and private sectors, including professionals such as engineers, nurses, journalists, teachers, police officers, and accountants. SACO coordinates academics in the public and private sectors, such as accountants, lawyers, physiotherapists, and teachers.

The Swedish Enterprise or Confederation of Swedish Enterprise is a major employers’ organization for private sector and business sector companies in Sweden. It was formed in March 2001 through a merger between the Swedish National Federation of Industry and the Swedish Employers Association. It comprises over 60,000 member companies. Trade unions, employers’ associations, and collective agreements cover a large share of the country’s employees. Thus, employees generally enjoy standardized wages and good working conditions.

Austria

Austria’s highly industrialized and well-developed economy makes it consistently rank high in terms of Gross Domestic Product (GDP) per capita. Another important contributor to its economy is its robust international tourism sector. Trade unions are very influential in labor politics and economic expansion. The Austrian Federation of Trade Unions or Austrian Trade Union Federation commonly abbreviated as OGB is an employee labor union that was founded in 1945. Its major function is in the development of new laws as it provides political reviews of and comments on bills submitted by other bodies which are incorporated into the decision-making process. It also initiates the drafting of bills.

The most important Austrian employers associations are the Federation of Austrian Industries and the Federal Economic Chamber (WKO). The Federation of Austrian Industries represents the interests of the manufacturing industry and has a voluntary membership of almost five thousand (5,000) industrial companies. The WKO advises the government on legislation that will impact businesses and also serves as an official representative of employers for wage negotiations with the OGB. They also further export promotion and the formation of business certification.

Employees generally benefit from the collective agreements that are negotiated by the OGB at industry levels which cover both white and blue-collar jobs. These include overtime compensation, working hours, holiday and Christmas bonuses, etc. They also negotiate wage increases and assist works council members in legal issues, elections, and other concerns. Hence, Austria is another example of a coordinated market economy.

See also: Mercantilism vs capitalism

Conclusion

Coordinated market economies offer both employers and employees a lot of benefits as they engage in production or work. The cooperative relationship that exists between companies makes room for a high level of niche-specific specialization which leads to incremental innovation, business sustainability, economic growth, and the production of high-quality goods in the long term. This makes most industries in coordinated markets become world leaders in the various industries where they operate. They also have easy access to funding based on reputation and inter-firm relations.

Employees who work in a coordinated market economy enjoy strong representation rights, a high level of job security, a well-developed system of vocational training, and significant statutory protections. This makes job contracts last longer with employees getting standardized wages based on negotiations between the trade unions and employers associations. The cooperative relationship that exists between the employer’s associations and the trade unions as well as the inter-firm relations further aid these economies to have a strong and healthy economy.

Last Updated on November 3, 2023 by Nansel Nanzip Bongdap