While the importance of effective state-business relations in economic transformation and governance is widely recognised in the academic and policy literature, several issues of contention are unresolved.
Can collusive state-business relations become collaborative over time?
Collusive state-business relations are characterised by rent-seeking relations between business and the state, and the capture of state agencies and business associations by influential bureaucratic, political and economic elites (Leftwich 2009). When state-business relations are collusive, elites use state agencies and business associations for particularistic benefits and not for collective goals of improved efficiency and economic transformation (Maxfield and Schneider 1997). On the other hand, when state-business relations are collaborative (or effective), there is a synergistic and productive relationship between the government and the private sector (Maxfield and Schneider 1997). Both collusive and collaborative state-business relations are an outcome of close, and often personalised, interactions between the state and the business sector so, in practice, it is often difficult to distinguish between the two types of relations in many country contexts. Collaborative state-business relations can turn collusive if economic and political elites find larger gains in short-run rent-seeking, rather than through cooperation and coordination that delivers increased growth, innovation and capability development only in the long term.
Collusive state-business relations are difficult to change for three reasons (Leftwich 2009).
- Institutional inertia may hamper reform in a business association or a state agency which is poorly functioning or weakly organised, and there may be little incentive for key actors to change their behaviour.
- Rent-seeking relations between the state and the business sector may be retained by actors and groups who benefit and who may oppose change.
- Associated institutional arrangements such as a culture of bribe-taking among bureaucrats for granting licences may add resistance as stakeholders realise that changes in one institutional sphere may have knock-on effects in others.
Collusive state-business relations may become sustained or consolidated over time, and are highly resistant to external reforms (Chingaipe and Leftwich 2007). However, there may be opportunities for change when events occur which call into question existing institutional arrangements or allow the chance for them to be changed. For example, the global financial crisis of 2008 triggered far-reaching changes in the rules and regulatory frameworks governing the financial sector in developing and developed countries (Leftwich and Sen 2010).
Are the boundaries between the state and business clear?
In many countries, the boundary between the state and the business sector is fluid. Politicians or political parties may own large private corporations leading to a concentration of political and economic power, and making it difficult to distinguish between the public and private sector (Chingaipe and Leftwich 2007). Informal collusive deals between politicians and private sector associations may also blur the distinction between these sectors, even though, formally, the state and business associations may have an arms-length relationship. In country contexts, where the boundary between the state and business sector is not well defined, and open to capture by vested interests, both the organisations of the state and of the business sector associations may not have the necessary degree of relative autonomy from each other, leading to the emergence and persistence of collusive state-business relations (Chingaipe 2013).
How should the state intervene in industrial policy?
Industrial policies target the dynamic development of a sector or sub-set of activities in the economy (te Velde 2013). Industrial policies are used by governments to alter the structure of production towards the sectors that offer the best prospects for sustained economic growth based on innovation and structural transformation. Industrial policies, through which the state creates (and withdraws) opportunities for profitable investments in certain activities, are shaped by state-business relations, and the ability of the public sector to work with the private sector for a common purpose, without being captured by the latter (Schmitz et al. 2013).
In the development policy literature, there is little consensus about whether state intervention through industrial policy can bring about improved economic performance (Lin 2012). Several countries in Latin America, Sub-Saharan Africa and South Asia, which have attempted different types of industrial policies during their import-substitution phases of development, have failed to spur economic growth or technological upgrading. In several cases, firms or sectors which received targeted support from the government in the form of subsidies or protection from internal and external competition have not developed the capability to innovate or to compete in world markets (Lin 2012).
On the other hand, in the case of East Asia as well as in countries such as Ireland and Mauritius, industrial policy has been largely successful in promoting economic growth and industrial competiveness (Stiglitz and Yusuf 2001, Evans 2010, Chang 2006). In these countries, policy-makers have managed to direct the market towards dynamic and high growth sectors using clustering, subsidised credit, targeted technology and human resource development (te Velde 2013). Effective industrial policy is an outcome of strategic collaboration between the private sector and the government in identifying the most significant obstacles to restructuring and how to remove them (Rodrik 2008). It is not about the quantity of state intervention but about its quality. Effective industrial policy, as has been followed in East Asia, has several common features (Rodrik 2008).
- The state does not target sectors or firms, but activities that have clear potential for building firm capabilities and providing knowledge spill-overs, agglomeration benefits, technological upgrading and demonstration effects.
- Incentives are provided only to new activities, rather than existing activities.
- There are clear benchmarks/criteria for success and failure.
- There are built-in sunset clauses, where the state withdraws support to favoured firms and sectors which are not performing as desired.
- The authority for carrying out industrial policies is vested in competent agencies.
- Implementing agencies are monitored closely by a principal with a clear stake in outcomes and political authority at the highest level.
- The agencies of the state carrying out promotion communicate clearly with the private sector.
- Promotion activities have the capacity to renew themselves so that the cycle of discovery of new products and processes continues.
Key concepts in industrial policy
Agglomeration benefits: these are benefits that are obtained by clustering production in a defined geographical area. Firms benefit from agglomeration by having access to a pool of skilled workers and specialised inputs produced by other firms in the area, and to local public goods such as roads and electricity specially provided by the state.
Firm capabilities: the ability of the firm to integrate, build and reconfigure internal competencies such as managerial skills and technological acquisition for investment and growth of the firm.
Knowledge spillovers: these are the exchange of ideas that underpin the creation of new goods and new ways to produce existing goods.
Self-discovery: A process of learning and experimenting by firms and the government in what to produce, and how to produce them at the least cost or highest quality.
Technology upgrading: Investment in several dimensions of technology, such as computers, software, patents and innovation activities.
Processes versus policies
Policies and instruments for private sector development, such as competition policies and subsidies for investment promotion, are important for showing investors that the state has an interest in promoting the growth of the private sector (te Velde 2013). However, in many low-income countries, such policies and instruments have been common for several decades but have not yet had the desired effect on economic development (Altenburg and von Drachenfels 2006). For example, many African countries have had competition policies in place since the 1990s, but these policies exist mostly on paper, with limited enforcement of laws and regulations prohibiting anti-competitive behaviour and restrictive trade practices (Sengupta and Dube 2008). Such policies are less likely to be effective in country contexts where the public sector does not have capacity to implement these policies well, or where there is limited political will to implement them (Taylor 2012). Where the state’s enforcement and implementation capabilities are weak, and where formal institutions function badly, an emphasis on reforming the processes of state-business interaction is more likely to encourage the state and business sectors to collaborate effectively, as may have occurred in Mauritius in the 1970s when it began to develop (Bräutigam and Diolle 2009, Leftwich and Sen 2010).
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- Bräutigam, D., & Diolle, T. (2009). Coalitions, capitalists and credibility: Overcoming the crisis of confidence at independence in Mauritius (DLP Research Paper No. 4). Birmingham: Developmental Leadership Project. See document online
- Chang, H-J. (2006). The East Asian Development Experience: The Miracle, the Crisis, and the Future. London: Zed Books.
- Chingaipe, H. (2013). Particularistic concertation: state-business relations and state formation in colonial Malawi. In K. Sen (Ed.), State-business relations and economic development in Africa and India. London: Routledge. See document online
- Chingaipe, H., & Leftwich, A. (2007). The politics of state-business relations in Malawi (IPPG Discussion Paper No. 7). Manchester: IPPG. See document online
- DFID. (2015). Guidance note – Assessing the impact of corruption on private sector development. London: DFID. See document online
- Evans, P. (2010). The challenge of 21st century development: Building capability enhancing states (Global Event Working Paper). New York: UNDP. See document online
- Leftwich, A. (2009). Analysing the politics of state-business relations: A methodological concept note on the historical institutionalist approach (IPPG Discussion Paper No. 23A). Manchester: IPPG. See document online
- Leftwich, A., & Sen, K. (2010). Beyond institutions (IPPG Synthesis Paper). Manchester: IPPG. See document online
- Lin, J. Y. (2012). New structural economics: A framework for rethinking development and policy. Washington DC: World Bank. See document online
- Maxfield, S., & Schneider, B. R. (Eds). (1997). Business and the state in developing countries. Ithaca: Cornell University Press.
- Rodrik, D. (2008). Second-best institutions. American Economic Review, 98(2), 100-104. See document online
- Schmitz, H., Johnson, O., & Altenburg, T. (2013). Rent management – The heart of green industrial policy (IDS Working Paper 418). Brighton: IDS. See document online
- Sengupta, R., & Dube, C. (2008, March). Competition policy enforcement experiences from developing countries and implications for investment, best practices in promoting investment for development. Paper presented at OECD Global Forum for International Investment, Paris. See document online
- Stiglitz, J., & Yusuf, S. (2001). Rethinking the East Asian miracle. Washington, DC: World Bank. See document online
- Taylor, S. D. (2012). Influence without organizations: State-business relations and their impact on business environments in contemporary Africa. Business and Politics, 14(1), 1-35. See document online
- Te Velde, D. W. (2013). Introduction and overview. In D. W. te Velde (Ed.), State-business relations and industrial policy: current policy and research debates. London: ESRC DFID Growth Research Programme. See document online