State–Business Alliances and Economic Development

Turkey, Mexico and North Africa

Işık Özel

• Publisher: Taylor & Francis
• Year: 2014
• Print ISBN: 9780415529808
• eBook ISBN: 9781317817819
• Edition: 1
• Topic: Ciencias sociales
• Subtopic: Estudios étnicos

This book argues that a key dynamic behind economic development in the emerging markets is the coordination between the state and businesses. Exploring the links between institutions, state--business alliances and economic development in the context of tumultuous market transitions since the 1980s, the book tackles the formation and sustainability of coordination-inducing institutions besides their mere existence, and points out the new modalities of coordination in the age of new developmentalism. Based on extensive original research in Turkey and Mexico embedded in a comparative historical analysis, the book shows how state--business alliances have been formed, collapsed and re-formed between the respective states and shifting business actors since the launching of market transitions. It demonstrates how both the state and business actors, and their cohesiveness vs. fragmentation, play crucial roles in the making and sustainability of the institutions, which are central to state--business alliances. It explores the emergence of new actors, the diversification of the organizational landscape, and the evolution of the ways in which the states interact with businesses throughout major economic and political transformations that helped transform the respective states and their interactions with the non-state actors. It draws on the meandering developmental trajectories of Turkey and Mexico from the 1970s to the present and goes on to draw some lessons for institution-building and market reforms in selected countries in North Africa.

1 Market transitions, business, and the state in emerging countries

Opening of previously closed markets has never been popular, in spite of its alleged and anticipated benefits for the masses. Notwithstanding this seeming unpopularity, many emerging countries have gone through sweeping market transitions in the last three decades. These transitions have been extremely challenging for both state and society as they have affected interests through the remolding of institutional arrangements at many levels. Pressed by electoral concerns, state actors have had to invest in forming new alliances and sustaining some of the old ones. Outcomes of transitions have mostly depended on the form and content of these alliances with various societal interests. Market transitions brought about higher levels of economic development in some countries than in others, and in some time periods within the same country, too.

The first wave of studies on market reforms associated successful reforms with a central and autonomous authority insulated from societal interests and political pressures. Underlining the key role played by an insulated central authority as pivotal for overcoming collective action problems and distributive conflicts, the literature drew from the examples of early liberalizers and their insulated technocratic teams. The ‘Chicago boys’ in Chile, tecnoburócratas in Mexico, ‘change teams’ in Egypt and ‘Özal’s princes’ in Turkey were pinpointed as examples of technocratic elites who implemented drastic market reforms with little input from business or society. This vein of analysis generally underlined the role of autonomous technocrats and IFIs in market reforms, along with state leadership, while largely disregarding societal actors who would potentially resist the reforms (Nelson 1990; Waterbury 1993). Haggard and Kaufman (1995: 9) argue that the successful initiation of reform depended on rulers who had personal control over economic decision making, a cohesive ‘reform team’, and the political authority to override bureaucratic and political opposition to policy change. Domestic business, predominantly the industrialists as the main beneficiaries of the previous development strategy, was considered to adapt to the new policies after they were implemented. Yet its potential influence in policy-making was neglected, or worse, seen as an obstacle to reform (Haggard and Kaufman 1992). Considering societal actors as largely pliant, state-centric models often assumed resistance on the part of business and then emphasized the need to concentrate power by forming an autonomous technocratic team to overcome that resistance to reform.

Such state-centric models of the first wave of the market reform literature have been subject to extensive criticism (Remmer 1998). Building on this critical stance, the second wave of the literature suggests that a subtle balance of government, bureaucracy, and business determine the outcomes of market liberalization. As opposed to top-down state-centric approaches, this perspective emphasizes the crucial role of societal actors, especially business, and their necessary cooperation in the reform process (Durand and Silva 1998; Thacker 2000; Kingstone 1999; Maxfield and Schneider 1997; Silva 1996). Schneider (1998) asserts that business–state relations determine the variation in economic performance among developing countries, and successful cooperation between the two results in successfully implemented reforms. This newer wave speaks to the literature on developmental states by underscoring the important role of interactions between domestic business and state elites in the reform process.

Mainly drawing from East Asia’s ‘miraculous’ development trajectory, the literature on developmental states emphasizes the importance of state capacity to intervene, control, and orchestrate societal interests, emphasizing the role of ‘Weberesque’ meritocratic bureaucracy and its close ties with business (Amsden 1989; Deyo 1987; Evans 1995; Johnson 1982; Kohli 2004; Wade 1990). It has shown in detail that the strategic and selective use of protectionism, selective provision of government subsidies, design and implementation of incentives for industrial production and exports, and generation of synergies between industry, finance and the state were all part and parcel of the good developmental outcomes between the 1950s and 1990s (Amsden 1989; Akyüz 2005; Chang 1993; Evans 1995; Johnson 1982; Wade 1990; Waldner 1999; Woo-Cummings 1999). In fact, most of these instruments were utilized by many states, including Mexico and Turkey along with MENA countries, a trend which to some extent continued even after the launching of sweeping market reforms in the 1980s. But in most of these countries informal networks between the state and business, which tend to be eulogized in East Asian cases, aggravated patrimonialism and expanded clientelistic networks, rather than bringing about productive synergies.

In fact, earlier approaches to the developmental state were largely contingent to a specific time and context determined by a few players and limited fluidity (Wade 1990: 320), thus they cannot easily be applied to the new dynamics marked by fluidity in increasingly globalized markets. The industrial policy of the old regimes can no longer suffice, however selective and strategic it may be, given the increasing weight of services over manufacturing, mobile vs. fixed assets, financial vs. the real sector. The small contingents of coordination between the state and a few business actors, a determining characteristic of the former developmental states, are not apt in the new era marked by complex transnationalized links. A central authority facilitating coordination between a few state and non-state actors is too narrow for an era where an upper hand of the state over businesses to control, orchestrate and discipline often fails to serve today’s complexities (Evans 1995; Kohli 2004; Chibber 2003; Wade 1990). Instead, this highly diversified and fluid era requires branched-out synergies between the state and non-state actors, with a reach beyond the narrow elites, a characteristic trait of the developmental states. Due to the increasing diversity of key actors, including domestic and transnational businesses and at times international organizations, old forms of coordination are unlikely to operate effectively. Hence, one can witness the broader incorporation of business actors into flexible platforms operating at multiple levels in order to respond to the shuffling needs of increasingly financialized and transnationalized forms in emerging economies. The state’s mediating between local and global networks in a model of flexible developmental state seems to be more apt for the current context (O’Riain 2000).

Emphasizing the necessity of the new-developmental states incorporating diverse actors, this book suggests that the broader inclusion of actors—at times in transnationalized coordination platforms installed in multiple layers—increases the likelihood of effective coordination and the sustainability of institutional structures, as such structures operate as a filter against conversion and drifting. Despite the flexibility regarding the profile of the participants, these platforms still require relatively strict designs delineating the particular tasks, targets, and monitoring instruments for all actors included. This book also underscores that multi-layered and flexible coordination with the broader inclusion of actors still necessitates capacity on the part of the state and society, the capacity to build and sustain institutions, and the capacity to negotiate.

The recent strands of the literature on market transitions point out a striking empirical puzzle that occurs when a domestic business supports market reforms: namely, it gives up the protection of the state and subjects itself to fierce international competition. Several studies assert that in a severe crisis, if big businesses can adjust to reforms and see the opportunities offered by the market, they may build an alliance with the state to implement reforms and become the new beneficiaries of export-oriented strategies (Kingstone 1999; Thacker 2000). Among this group, multi-sectoral conglomerates can adapt more easily as they have the capability to shift resources within their group from losing subsidiaries to winning ones (Silva 1996; Schneider 1998). Additionally, these giant entities can become the beneficiaries of financialization, which then fosters adjustment capabilities, a link inadequately examined in the respective literature.

Most typologies to classify business preferences—business-as-capital (the Stolper-Samuelson approach), business-as-sector (the Ricardo–Viner approach), business-as-firm, business-as-association, and business-as-personal-networks (Haggard and Kaufman 1997)—ignore multi-sector conglomerates, whose affiliated companies spread over many sectors, ranging across import-competing and export-oriented categories. Multi-sectoral conglomerates dominate in both Turkish and Mexican markets, as well as those of MENA. Their responses to market transitions challenge the common assumption that import-competing interests would oppose trade liberalization while exporting interests would support it (Frieden 1991). Such assumptions, based on the sectoral approach, are used in reference to cases including Mexico where export-oriented big business was allegedly supporting liberalization, while import-competing business opposed it (Puga and Tirado 1992). These claims often lack adequate empirical support: they appear to be based on post hoc observations, as the export orientation of Mexican big business (except for the foreign-owned maquiladoras) mostly emerged later in the 1980s (Heredia 1996: 185). Likewise, the Turkish big business also became exporters mostly in the 1980s and 1990s. In both cases, the same actors became both import competing and export oriented, sometimes in the same sectors. Thus, the assertion that the big business supported liberalization from the beginning is subject to question. As Heredia (1996: 95) asserts, all businesses, including big business, opposed opening in the beginning, and ‘more conservative and anti-statist in outlook, large industrial firms … tended to be as protectionist as the rest.’

Market transitions offered trade-offs between different policies and institutional changes, which involved ‘comprehensive policy bundles’ promising a wide range of benefits such as easing state regulation, maintaining a market-based price mechanism, and facilitating stabilization, besides the costs. Therefore, it is a challenging task to delineate business’s response to distinct components of the bundle. Decreasing public debt, alleviating inflationary pressures, creating new finance sources for the private sector (as state borrowing causes a crowding-out effect on private investment), and enhancing investment infrastructure were protracted demands of domestic businesses. Simultaneous implementation of these measures, including stabilization and liberalization, complicates the analysis of industrialists’ responses to independent components. In some instances, implementation of anti-inflationary measures was so urgent that, when liberalization of the import regime came along with those measures, industrialists’ response was supportive of the whole package—or at least they did not oppose it, perceiving liberalization as a necessary component of stabilization packages. Thus, certain benefits of transitions might compensate the cost of competition, or certain costs might be higher than others. Governments that were able to construct issue linkages to persuade businesses about the benefits proceeded with reforms more steadily than the others, and coordination-inducing institutions eased persuasion. This is what happened in Mexico: government’s issue linkages helped persuade business, as liberalization was justified and instrumentally used towards a larger goal of stabilization. Seizing the window of opportunity to access global markets, and collaboration with foreign capital, while bearing the cost of adjustment, became key to such persuasion.

The strategy through which industry adjusts to trade liberalization particularly has three central aspects, all contingent on the capabilities of domestic businesses and those of the states: adjusting to import; adjusting to compete; and room to adjust. The adjustment to import refers to the ease of importation through abolition of protectionist barriers. This challenging shift created benefits because businesses could import lower-cost inputs for manufacturing, highly important for countries like Turkey, where import dependency is higher. The adjustment to compete refers to the manufacturing sector’s ability to compete with imports through strategies including shifting resources from import competing to exporting sectors, as well as mergers, acquisitions, joint ventures, and sub-contracts. The conglomerates’ multi-sectoral structure gives them increased scope to implement such adjustment strategies, and in particular to shift resources between affiliates that are spread across both import-competing and export-oriented categories. This advantage allowed former beneficiaries of the ISI strategy to become the new beneficiaries of opening. Therefore, sector-based explanations become obsolete regarding the responses of big business, whose activities are not restricted to a particular sector. In cases like Turkey and Morocco, some SMEs have also benefited from opening; they have increasingly integrated into the global economy as sub-contractors and exporters.

Room to adjust is generated by the time lag between the initiation of liberalization and the threat of increasing imports. It may result from the inherently weak capacity to import of markets in the throes of severe debt and foreign exchange crises, and the concomitant scarcity of foreign exchange, as in the case of Turkey. Demand-restraint policies implemented under the surveillance of the IFIs contribute to this lag, constituting a natural barrier to imports. Governments’ deliberate policies and concessions may shape the room to adjust for businesses.

Some recent studies point out the essential importance of cooperation between business and state actors through consultative mechanisms or the means by which business has ‘access’ to policy-making (Kingstone 1999; Schneider 2004; Thacker 2000). Access is definitely important, but in addition to the sheer existence of access, ‘how to access’ and ‘whose access’ equally matter in shaping the dynamics and outcomes of coordination. Where there is narrow access by a few, the alliances adopt an exclusionary format that reproduces the arrangements of political and economic institutions, generating ‘limited access social orders’ (North et al. 2013).

Although the adjustment capacity of big business has mostly held true, in most countries business’s stance towards reforms has oscillated between support and opposition, at times manifesting itself with extreme resistance. Such fluctuating behavior is also reflected in the attitude of state elites toward the reforms, even during the tenure of a single government. Thus, preference and policy shifts have been more common than the steady preferences and accompanying linear progression of reforms assumed in much of the literature.

The literature on state–business interactions in market transitions partially explains the formation of alliances. Although these studies have offered compelling accounts on state–business interactions and alliances in market reforms, they mostly treat alliances as stable formations, generally focusing on their initial establishment (Durand and Silva 1998; Thacker 2000; Kingstone 1999; Maxfield and Schneider 1997; Schneider 1998). In reality, alliances are not stable formations; they are vulnerable and subject to erosion unless the necessary institutional arrangements exist. Reform alliances in general are vulnerable to electoral pressures in a protracted crisis (Waterbury 1993; Buğra 1994; Haggard and Webb 1994). Increasing electoral pressure leads to the political insecurity of the incumbent, hence higher discount rates. Inherent political costs of reforms make distributive strategies that undermine reform a likely option for state officials seeking to retain office (Geddes 1994). Political cost and alliance erosion may aggravate such backlash, causing even greater electoral pressure on incumbents, and leading to further degradation of state–business ties: a vicious, degenerative cycle. In short, the picture is incomplete without a frame tracing the dynamics of state–business alliances in the long term, which has been often neglected in the literature. This book hopes to fill this gap through examining the institutional underpinnings of state–business interactions and scrutinizing the formation and evolution of institutions that facilitate state–business coordination. Thirty years into their market reforms, Mexico and Turkey provide good cases to explore cross-case and cross-temporal variations in respect of these questions.

This book conceptualizes reform alliances through two distinct—yet related—sets of alliances: electoral alliances in which business and the state coalesce behind a party or candidate; and governing alliances in which they coalesce through actions aimed at supporting specific policies.¹ A good indicator for alliances is business’s mobilization to show its support for the reform process in general and reforming governments in particular. The existence or absence of such mobilization can be analyzed by examining business’s lobbying for or against the reforms or reforming governments. Alliance sustainability refers to the continuity of business’s support for reforming governments (the same or different). Businesses’ preferences are not static and are not simply direct reflections of market positioning; they are continuously shaped by exigent political institutions and the conflict these might engender. They are molded by particular institutional arrangements that often go through endogenous changes (Thelen 1997).

Adjusting in coordination: actors and institutions

Market transitions are inherently costly processes for business actors, who are more likely to invest in adjustment once they perceive others’ commitments as credible (Kingstone 1999; Rodrik 1989). Where there are credible commitments, reform alliances are more likely to be formed and sustained, but they are difficult to materialize due to prevalent uncertainties. Institutions that reduce uncertainties and provide actors with instruments to exchange information and monitor others’ behavior would enhance the ability of actors to make such commitments (Ostrom 1990). Such institutions which facilitate information exchange and monitoring have been mostly studied in the context of old-school corporatist platforms, both by the literature on market reforms (Schneider 1998; Thacker 2000) and that on neo-corporatism (Streeck and Kenworthy 2005; Schmitter and Lehmbruch 1992). Taking institutions at face value, most studies gloss over the discrepancy between de jure constellation and de facto operation of institutions, thus dismissing effectiveness in neo-corporatist arrangements (Culpepper 2003). Furthermore, in the new era of state–business interactions, information flow and coordination may be facilitated by platforms other than the neo-corporatist arrangements.

Coordination with the state tends to be a common demand across businesses in emerging countries. But it is difficult to attain, ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• List of abbreviations
• Acknowledgements
• Introduction
• 1 Market transitions, business, and the state in emerging countries
• 2 Diverging pioneers: trajectories of Mexico and Turkey in the first phases of market transitions
• 3 Increasing fragmentation and weak coordination in Turkey
• 4 Increasing cohesiveness and coordination in Mexico in the first phase of the transitions
• 5 Tamed by crises, eager to build institutions: the second phase of market transitions in Mexico and Turkey
• 6 Increasing cohesiveness and a big spurt in Turkey
• 7 Increasing fragmentation, institutional change, and slowdown in the second phase of transitions in Mexico
• 8 Market transitions and state‖business alliances in selected MENA countries
• 9 Concluding remarks
• Appendix: list of interviewees
• Bibliography
• Index