The literature identifies four enabling factors as the conditions under which effective state-business relations emerge:
State capabilities
Effective state-business relations often need the presence of an economic bureaucracy staffed by relatively competent individuals who are insulated from the pressures of special interests. Such bureaucracies are characterised by a high degree of well institutionalised and organisationally consistent career ladders, which bind staff to corporate goals while allowing them to acquire the expertise necessary to perform effectively (Evans 1995, 2010).
Effective bureaucracies are also characterised by autonomy and embeddedness. The autonomy of a bureaucracy, from the government and from the private sector, allows it to intervene selectively in favour of certain firms, sectors and industries and to provide both incentives to capitalists and to discipline them (Amsden 1989, Wade 1990). This also implies the ability of the state to let firms fail, when necessary, and for resources to be re-allocated from less productive sectors to more productive ones. The more a bureaucracy is insulated from politicians and the private sector, the more capable it is in taking difficult decisions to withdraw support for inefficient firms and to exit from industries where the country may no longer have a comparative advantage.
The embeddedness of a bureaucracy, in a dense web of interpersonal ties, can enable agencies and enterprises to construct joint projects at sectoral level with local capitalists (Evans 2012, p. 47). Avoiding capture and being able to discipline entrepreneurial elites were defining features of the “embedded autonomy” of East Asian developmental states, distinguishing them from less successful states in Asia and Africa (Evans 2012).
Effective bureaucracies have been crucial to the East Asian success stories by providing subsidies for technological upgrading and innovation to selected firms, and in closely monitoring them to ensure that they deliver greater export performance and capability development. The East Asian success stories suggest that technological dynamism in large conglomerates can co-exist with rent-sharing and high levels of corruption if the bureaucracy is capable of moderating the excesses of rent-extraction. The important feature has been the state-directed pressure of export success in an open economy that disciplines these excesses and keeps “collusion-prone firms and bureaucrats on their toes” (Bardhan, in press, p. 63).
The structure and capacity of the private sector
The emergence of effective state-business relations needs the presence of a diversified and active private sector. This may occur through large conglomerates that have encompassing business interests in several sectors of the economy (as in the case of Korea and Thailand) or with a large number of small and medium firms that are present in the dynamic and growth-oriented sectors of the economy (as in case of Mauritius and Taiwan) (Maxfield and Schneider 1997).
The emergence of effective state-business relations is also related to the presence of strong peak and sectoral business associations representing the interests of business (Doner and Schneider 2000). Peak and sectoral business associations that are active, independent of the state and representative of the private sector in the region, can resolve many of the collective action problems that are inherent in developing countries, where most firms are small or medium sized and are unable to articulate their views and concerns to state agencies (Doner and Schneider 2000).
Such business associations can provide information on investment opportunities and potential problems to its members, invest in the training of member firms’ workers, help in enforcing industry quality standards, and voice the demands of its members to industry ministries and state investment agencies (Cammett 2007). This can help reduce transaction and coordination costs and help members gain higher returns on investment.
Business associations can contribute to increasing the productivity of member firms by providing both market-supporting and market-complementing activities. Through market-supporting activities, business associations can strengthen the overall functioning of markets by supporting the provision of public goods such as electricity and roads which are critical for productive investments to take place (Doner and Schneider 2000). Market-complementing activities, on the other hand, address various types of market imperfections and involve “direct coordination among firms to reconcile production and investment decisions” (Doner and Schneider 2000, p. 264).
Business associations that can play an effective role in promoting the interests of the private sector are usually well organised, well-resourced and staffed by professionals (see section on Business associations). They are also likely to be more effective when they represent a sizeable portion of the productive economy, and represent the range of business interests in the country, such as a strong peak association that speaks for all of its members, including small and medium enterprises, rather than a few large, politically connected firms (Bräutigam et al. 2002, Handley 2008). Qureshi and te Velde (2012) found that, in Zambia, joining a business association was particularly useful for small and medium firms (SMEs) as this allowed them to participate in state-business relations, and voice their concerns, especially since they generally lacked the necessary financial and institutional means for effectively lobbying the government directly.
In addition to business associations, trade unions can also play an important role in fostering or hindering the emergence of effective state-business relations. In the case of South Africa, Seekings and Nattrass (2011) argue that it was the inability of the state to bring organised labour through their trade union representatives into a possible growth coalition with the business sector, that led to the lack of a developmental growth path post-apartheid.
Dominant ideologies and elite incentives
The economic ideology of the political regime and the presence of incentives for political elites to foster a collaborative relationship with the private sector rather than a collusive one, are important factors for the emergence of effective state-business relations (Leftwich 2009). For example, in a comparative study of seven “middle African” countries (Côte d’Ivoire, Ghana, Kenya, Malawi, Rwanda, Tanzania and Uganda), Booth (2012) finds that economic performance was strong in periods where there was a political regime that had “a system to centralise the management of economic rents and orient rent generation to the long term” (p. 25). Under such regimes, the ruling elite had the disposition and capacity to use rents productively to enlarge the national economic pie, rather than obtaining the largest slices from it in the short term. Booth finds that all successful cases of growth in the seven countries had the following common features with respect to the dominant ideology and the political regime:
- a strong, visionary leader (often an independence or war-time hero);
- a single or dominant party system;
- a competent and confident economic technocracy;
- a strategy to include, at least partially, the most important political groups in some of the benefits of growth;
- a sound policy framework, meaning a broadly pro-capitalist, pro-rural bias.
In general, however, the type of political regime- whether it is a dominant party or multi-party system – is less important in explaining the emergence of effective state-business relations than the ideology of the key political actors, and whether there is a shared vision of the importance of growth oriented policies among rival political parties (Leftwich 2009).
- Peak business associations are organisations of the private sector that aim to represent all or most firms in the economy, independent of their industry affiliation or geographical presence.
- Amsden, A. (1989). Asia’s next giant: South Korea and late industrialisation. New York: Oxford University Press.
- Bardhan. P. (in press). State and development: The need for a reappraisal of the current literature. Journal of Economic Literature.
- Bräutigam, D., Rakner, L., & Taylor, S. (2002). Business associations and growth coalitions in Sub-Saharan Africa. Journal of Modern African Studies, 40(4), 519-547. See document online
- Booth, D. (2012). Development as a collective action problem: Addressing the real challenges of African governance (African Power and Politics Synthesis Report). London: ODI. See document online
- Cammett, M. (2007). Business-government relations and industrial change: The politics of upgrading in Morocco and Tunisia. World Development, 35(11), 1889-1903. See document online
- Doner, R. F., & Schneider, M. R. (2000). Business associations and economic development: Why some associations contribute more than others. Business and Politics, 2(3), 261-288. See document online
- Evans, P. (1995). Embedded autonomy: States and industrial transformation. Princeton: Princeton University Press. 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
- Evans, P. (2012). What will the 21st century developmental state look like? Implications of contemporary development theory for the state’s role. In S. W. Chiu & S. Wong (Eds), Repositioning the Hong Kong government: Social foundations and political challenges. Hong Kong: Hong Kong University Press.
- Handley, A. (2008). Business and the state in Africa : Economic policy-making in the neo-liberal era. Cambridge: Cambridge University Press.
- 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
- Maxfield, S., & Schneider, B. R. (Eds). (1997). Business and the state in developing countries. Ithaca: Cornell University Press.
- Qureshi, M. & te Velde, D. W. (2012). State-business relations, investment climate reform and firm productivity in Sub-Saharan Africa. Journal of International Development, 25(7) 912-935. See document online
- Seekings, J., & Nattrass, N. (2011). State business relations and pro-poor growth in South Africa. Journal of International Development, 23(3), 338-357. See document online
- Wade, R. (1990). Governing the market: Economic theory and the role of government in East Asian industrialization. Princeton: Princeton University Press.