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This is the second of three chapters on the role of economic interests, and of systems for representing those interests, in the politics of welfare state reform. They explore the linkages between national welfare states and national economies, and examine the processes through which economic actors press their interests on policy makers. Section 1 of Manow's chapter offers a critical account of contributions that predict the formation of new political coalitions along the cleavage line between those firms and workers that are forced to adjust to international market pressures and those that enjoy domestic shelter from globalized markets; a brief discussion is included of the relative importance of the electorate in current welfare reforms as compared with the role played by organized interests of capital and labour. Section 2 presents a transaction cost argument that seeks to identify one central logic linking production and protection in continental welfare states and coordinated market economies, respectively; the central argument is that generous welfare state programmes may enhance and not diminish international competitiveness and can be part of the comparative institutional advantage of an economy rather than solely contributing to its comparative cost disadvantage. Section 3 concludes by briefly discussing the implications of the argument presented in Sect. 2 for the present debate on the compensatory role of the welfare state in a globalized economy.

This chapter develops a simple model to illustrate how various tax policy decisions can affect international competitiveness, and applies the model to various provisions in the U.S. Internal Revenue Code (IRC). It also describes a tax system that does not harm competitiveness, while providing each country with wide latitude to set its own tax policies.

This chapter focuses on one determinant of national advantage in the Diamond framework – demand conditions – and examines empirical evidence. Although the idea that the domestic market may affect competitiveness positively is by no means a new one, the publication of The Competitive Advantage of Nations led to increasing attention on the favorable impact the domestic market, through ‘advanced domestic users’, may have on the international competitiveness of a country. The chapter presents a critical appraisal of the theoretical and empirical evidence on the hypothesis that ‘advanced domestic users’ have a positive impact on the international competitiveness of a country. Examining evidence presented by three studies, it is found that the findings of these studies are consistent with the predictions made by Porter.

This chapter explores how the resource‐base theory of strategy can be extended from the competitive advantage of firms to the competitive advantage of countries. A country's competitiveness will ultimately depend on three factors. The first is the strength of the competitive advantage of its individual firms. The second is the access to scarce resources that are available within a country. Most importantly, it will rely on the existence of supportive networks of firms and activities, which facilitate: speed, flexibility of response, and the construction of a base of tacit knowledge.

In balancing international competitiveness for a high productivity growth economy, wage increases and currency appreciation are substitutes. From the Scandinavian model of wage adjustment and inflation, high wage growth in tradables (manufacturing) industries more or less matches productivity growth when the exchange rate is fixed. This high wage growth creates inflation in the nontradable (service) sectors, where productivity growth is lower. Nevertheless, international competitiveness in the tradables sector can remain balanced without exchange rate changes—as shown by evidence from Japan and later China. However, if the high-growth economy is forced to appreciate its currency, and expectations of further appreciation become embedded in labor bargaining, then wage growth falls below productivity growth in its manufacturing sector. As in Japan in the 1980s and 1990s, deflation with falling prices and interest rates compressed toward zero sets in—possibly with several “lost decades”. China bashers beware!

The Commerce Act 1986 expressly states its object is to promote “effective or workable competition.” This traditional Harvard School approach has been consistently assailed by big business interests in New Zealand, assisted by a phalanx of “down-under” Chicago School economists and lawyers. Chicagoans have had minor successes in terms of amendments to the principal Act, and some quite notable court victories, but the glittering prize, the overall objective of the Act, has remained unchanged. Chicago won several battles, but lost the war. A major amendment to the Act in 2001, promoted by a Labour government, recast its object to state that its purpose was “to promote competition in markets for the long-term benefit of consumers within New Zealand.” After a quiet period where nothing seemed to have changed, the most recent signs are that a mild preference for consumers is appearing. The chapter also examines the international competitiveness arguments of Michael Porter.

This chapter reviews the nuts and bolts of implementing a carbon tax. Invoking principles of administrative simplicity, ease of compliance, and avoidance of design features that dilute the price signal, it gives practical advice on who should be responsible for collecting the tax and remitting it to the government. It explains how the tax should handle the possibility that we can capture and permanently store carbon dioxide emissions and how we should tax emissions related to internationally traded goods so the United States is not disadvantaged in global trade. Finally, it identifies, and warns policymakers away from, various pitfalls in carbon tax design.