State-business relations are relations between the public and private sectors. They can take the form of formal, regular, co-ordination or informal ad hoc interactions, and their scope can include the whole economy or target specific sectors, types of firms or policy processes.
State-business relations in low income countries are seen as a key determinant of inclusive growth (employment-generating economic activities that increase incomes and raise the productivity of workers), and of structural transformation (shifts in economic structure to more productive activities and sectors). Effective state-business relations can have a positive impact on economic growth by increasing the rate of investment and the productivity of investment.
Characteristics of effective state-business relations are:
- information flows: the exchange of accurate and reliable information between business and government;
- reciprocity: the capacity of state actions to secure improved performance in return for subsidies or other forms of state support;
- close consultation and coordination between state and business.
Effective state-business relations are underpinned by:
- credible commitment of the state to policies, deals or arrangements, which can be ensured through both formal and informal institutions;
- a stable policy environment, which provides a measure of security for investment by the private sector;
- strong checks and balances on government policies, tax and expenditure, which help to ensure that taxation policies and the provision of public goods are appropriate and of good quality.
Collusive or ineffective state-business relations are characterised by rent-seeking relations between business and the state. In such relations, elites use state agencies and business associations for their own benefits and not for collective goals of improved efficiency and economic transformation.
The emergence of effective state-business relations can be explained by:
- the presence of an economic bureaucracy staffed by relatively competent individuals who are insulated from the pressures of special interests;
- the presence of strong national-level, and sectoral, business associations representing the interests of business;
- the economic ideology of the political regime, and the incentives of political elites to foster collaboration with the private sector.
The most significant political economy barriers to the emergence of effective state-business relations in low income countries and fragile and conflict-affected states (FCAS) are:
- the lack of a stable political settlement in which informal relationships between political and economic elites are based on trust and reciprocity;
- a fragmented and weak organisational capacity of the private sector, with a large part of the economic elite in non-competitive sectors
- a high degree of corruption and its lack of predictability
- the prevalence of significant fragility and conflict, which gives rise to capital leaving the country, weakening the private sector and leading to lack of durability in the political settlement
- regulatory reforms that stress the creation of formal “arms-length” relationships between the state and investors in weak governance environments, when informal “hand-in-hand” relationships may be more effective.
Current approaches to improving the effectiveness of state-business relations are:
- support for business associations;
- investment climate reforms;
- investment facilitation;
- public-private dialogue mechanisms;
- the creation of special economic zones.
The literature provides the following considerations for donors:
- consider the need to move beyond economy-wide approaches to investment climate reform, or the need for Presidential Investors Advisory Councils to tackle constraints that underpin specific sectors, as well as the political factors that ensure these constraints persist;
- identify specific actors within the private sector that offer the greatest chances of delivering change, and engage with the specific forms of corruption and mismanagement that they experience;
- look at how micro-climates for different kinds of firm are created and to what extent this enables “deals” to happen, instead of focusing on wholesale reforms to improve the national “investment climate”, which in many contexts can be difficult;
- identify initiatives that may 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;
- work on both the supply and demand sides of state-business relations, tackling specific issues from both angles simultaneously, or identifying issues of mutual interest;
- strengthen the capability of the economic bureaucracy (for example, the ministries of commerce, finance and industry) and the organisational capacity of business associations.