Evidence drawn from statistical research and country case studies suggests that effective state-business relations are a key determinant of economic growth and structural transformation. However, the strongest evidence is mostly from East Asia, with more mixed results in other regions, and there is still a significant empirical challenge in addressing problems of measurement and attribution when many other factors can contribute to economic growth (Sen 2010).
Statistical research and country case studies have produced a large body of evidence that effective state-business relations contribute to economic growth, increasing both the rate of investment and the productivity of investment (Sen 2013b, te Velde 2013). Sen and te Velde (2009), using quantitative measures of effective state-business relations for 19 Sub-Saharan countries proposed by te Velde (2006), show that improvements in state-business relations between 1970-2004 led to higher economic growth. Similarly, Cali and Sen (2012), using quantitative measures of state-business relations for 16 Indian states proposed by Cali et al. (2011), show that improvements in state-business relations in these states between 1985-2006 have significantly increased economic growth at the subnational level in India. A macro-level study using time-series data that has found evidence of effective state business relations contributing to economic growth in Mauritius is Rojid and Seetanah (2013). Using firm-level data from seven Sub-Saharan African countries (Benin, Ethiopia, Madagascar, Malawi, Mauritius, South Africa and Zambia) Qureshi and te Velde (2012) find that effective state-business relations enhance firm productivity. Ackah et al. (2013), Kathuria et al. (2013) and Hampwaye and Jeppesen (2014) find similar support for effective state-business relations enhancing firm productivity for Ghana, India and Zambia. In Korea, developmental business-government relations established under the regime of Park Chung Hee since the early 1960s have been seen as the catalyst for the rapid economic growth that followed for the next few decades (Amsden 1989, Evans 1995). Many other case studies of state-business relations in developing countries have also consistently shown that improved state-business relations have contributed to better economic performance, either at the sectoral or economy-wide level (Johnson 1987, Maxfield and Schneider 1997, Abdel-Latif and Schmitz 2010, Page 2012). The country experiences with improvements in economic performance due to more effective state-business relations has been varied, with economic growth occurring through the growth of large firms as in the case of Korea (Amsden 1989) or with small and medium firms as in the case of Mauritius and Taiwan (Wade 1990).
An important limitation of the statistical evidence, that relies on country level panels, and country case-studies, that attempt to establish the causal evidence of effective state-business relations on economic growth, is that there are concerns of reverse causality in understanding the relationship between state-business relations and growth. As economic growth occurs, state-business relations become more effective; the bureaucratic capacity of the state improves and it is better able to provide the appropriate regulatory framework and key public goods necessary for private sector growth (te Velde 2006). Furthermore, with economic growth, the private sector grows, diversifies, and is more capable of coordinating its relationship with the state (te Velde 2006). Thus, whether improvements in effective state-business relations cause growth or are caused by it, remains a matter of empirical debate.
There is limited evidence on how effective state-business relations emerge in low income and FCAS country contexts. The literature is predominantly qualitative and theoretical. Most of the available case studies date from pre-2000, focusing on the factors that could explain rapid and sustained growth in East Asia. There are few case studies of state-business relations for African and South Asian countries. There is also limited evidence on the success of donor interventions in contributing to effective state-business relations. Analysis of the impact of donor interventions is difficult, as these cases do not lend themselves to experimental approaches, such as randomised control trials, and there is a lack of baseline data for most of these interventions. Evidence that effective state-business relations can contribute to improving the wider governance environment is limited.
Measuring effective state-business relations
Te Velde (2006) suggests that there are four elements in good state-business relations that can be measured:
- How the private sector is organised in relation to the public sector: this could be captured by the number of private sector business organisations in the country; the prevalence of these organisations in the overall community and the presence and length of existence of any umbrella organisation linking other businesses and associations together.
- How the public sector is organised in relation to the private sector: this could be captured by the presence and length of existence of an investment promotion agency (IPA) to promote business and the existence of other government institutions that interact with, and provide support for, the government.
- How the state interacts with business: this will be captured by the existence of active forums for public-private dialogue such as Joint Economic Councils.
- Mechanisms to avoid collusive behaviour: this will be captured by well-designed and functioning competition laws.
Applying these elements to 20 Sub-Saharan African countries for 1970-2004, te Velde finds that there has been in an improvement in the effectiveness of state-business relations for all these countries since the mid-1990s. However, the rate of improvement has differed, with the most improvement seen in Botswana, Mauritius, Uganda and Mozambique and the least in Malawi, Zimbabwe, Madagascar, Zambia and Cote d’Ivoire.
- Another weakness of the state-business relations literature is that the focus has been mostly on how the state can foster effective state-business relations, and there is limited knowledge of how the private sector can contribute to such relations, especially in low income country contexts.
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