Key issues around state-business relations
The literature suggests that effective state-business relations are a key determinant of economic growth and structural transformation. The evidence is drawn from statistical research and country case-studies, mostly from East Asia. There is limited evidence that effective state-business relations can also contribute to improving the wider governance environment.
The literature highlights five correlates of effective state-business relations:
- credible commitment on the part of the government to policies, deals or arrangements;
- formal and informal mechanisms that facilitate consultation, coordination and reciprocity between the state and business;
- sharing of information between the private sector and government;
- a stable policy environment;
- the role of checks and balances on government policy.
Key factors that explain the emergence and sustenance of effective state-business relations are:
- state capabilities;
- the structure and capacity of the private sector;
- dominant ideologies and elite incentives.
There is limited evidence of effective state-business relations emerging in the FCAS and low income country contexts. The literature identifies six political economy barriers to the emergence of effective state-business relations in these country contexts:
- the nature of the political settlement and elite commitment to growth;
- the nature of the private sector;
- the nature, extent and predictability of corruption;
- the prevalence of fragility and conflict;
- the nature of regulation;
- privatisation and the role of state-owned enterprises.
Approaches to state-business relations: guidance for donors
The literature provides the following considerations for donors:
- State-business relations matter – Productive collaboration between the state and the private sector to address market and government failures – whether through formal or informal mechanisms – is ultimately what drives economic transformation. In countries where economic transformation has occurred, a process of consultation and coordination between the state and the private sector has taken place – in order to inform the design of appropriate policies and interventions, and to generate feedback on what is working and what is not.
- Economic sectors – There is a need to move beyond economy-wide approaches to investment climate reforms towards tackling constraints that underpin specific economic sectors, and the political factors that ensure these constraints persist.
- Unpacking the private sector – This is a diverse group of businesses that experience different constraints and challenges, and have different motives and incentives. The challenge is to identify specific actors within the private sector that offer the greatest chances of delivering transformational change, and to engage with the specific forms of corruption and mismanagement that prevent them from growing, investing or adopting new technologies. An equally important imperative is to ensure that the state develops a strong disciplining function, enabling it to withdraw support from underperforming firms or industries.
- Going beyond the formal ‘investment climate’ – Wholesale reforms that improve the national ‘investment climate’ can be difficult in DFID partner countries. Further, these reforms can affect firms in different ways. There is huge variation of firms within the same country, which suggests that instead of just looking at the overall national investment ‘climate’, we should also look at how micro-climates for different kinds of firm are created and to what extent they can enable ‘deals’ to happen.
- Rules and deals – Efforts to improve laws and regulations may not actually improve the formal prospects for business and investment to flourish (Hallward-Driemeier and Pritchett 2015). Depending on the political economy environment, they may have little impact on the de facto investment climate that firms actually experience. In these contexts, there may be initiatives that have little impact on the formal rules/investment climate but that have a significant impact on the ‘deals’ environment and on investor expectations in ways that can help accelerate growth. The challenge will be to identify opportunities for the latter (Pritchett and Werker 2013).
- Supply and demand – Improving the prospects for credible deals to take place will involve working with supply-side and demand-side actors and institutions. It will be especially important to find ways to tackle specific issues from both angles simultaneously, or to identify issues of interest to both sides.
- Strengthening capacity – Strengthening the capability of the economic bureaucracy, improving organisational capacity, and increasing the representativeness of business associations to include small firms are likely to increase the effectiveness of state-business relations. This is especially the case where state capacity is limited, the private sector is fragmented, and business associations are subject to capture by large firms. The challenge here is to strengthen the capacity of the government to respond to the changing needs of, and challenges faced by, the private sector in an iterative but swift way. This will involve strengthening coordination among government agencies.
- Improving links across disciplines – For donors, encouraging more productive state business- relations requires a politically-informed approach. It means understanding the context-specific relationships between governments/the state and the private sector – i.e. the interests, incentives and dynamics among different kinds of political and economic actors and political elites. This needs to be combined with a wider appreciation of the feedback loops between growth and state capability. To do this effectively, much closer collaboration is needed between governance, economic and private sector specialists.
Key gaps in the evidence base
There is a lack of systematic analysis of the characteristics of effective state-business relations in low income and FCAS country contexts. The literature is predominantly conceptual, and the empirical evidence is mostly qualitative and largely consisting of country case studies. Most case studies are from East Asia, with relatively few studies of African and South Asian countries. There is also a lack of recent empirical evidence on the political drivers of how effective state-business relations emerged and were sustained, especially in low income country contexts, with most of the empirical evidence drawn from case studies undertaken prior to the 2000s.
While there is statistical and case-study evidence on the positive impact of effective state-business relations on economic development, the evidence on how state-business relations may contribute to the wider governance environment is limited.
There is also limited evidence on the success of donor interventions in contributing to effective state-business relations in low income and FCAS country contexts. A lack of baseline data limits the usefulness of ex post impact evaluations of donor interventions, and there has been a lack of rigorous experimental methods such as randomised control trials.
Key research questions and priorities
The review of the literature suggests the following key research questions and priorities:
Research questions
- What are the characteristics of effective state-business relations in low income countries? How do they emerge and how are they sustained? What are their developmental impacts, especially on the wider governance environment?
- Under what conditions are informal “hand-in-hand” relationships between the state and business effective? What factors prevent them from being collusive?
- How can donors better design interventions that improve state-business relations in FACS and low income countries? Which approaches work best and why?
- Which parts of the private sector are most likely to demand more effective state-business relations? How can donors best support private sector actors and business associations that are likely to push for more collaborative and transparent relations with the state?
Priorities
- Case studies of state-business relations, and how they become effective in FCAS and low income countries
- Impact evaluations of donor interventions in improving state-business relations
- Perception based surveys of what the public and private sectors see as the key constraints to the emergence of effective state-business relations
- Systematic analysis of the different approaches to improving state-business relations, with case-studies of successes and failures
- Quantitative studies on the impact of state-business relations on economic development and the governance environment, with improved measures of effective state-business relations.
- Hallward-Driemeier, M., & Pritchett, L. (2015). How business is done in the developing world: Deals versus rules. Journal of Economic Perspectives, 29(3). See document online
- Pritchett, L., & Werker, E. (2013). Developing the guts of GUT (Grand Unified Theory): Elite commitment and inclusive growth (ESID Working Paper No. 16/12). See document online