State-Business Relations and Economic Development in Africa and India

Kunal Sen, Kunal Sen

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135129064
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

When the state and business interact effectively they can promote a more efficient allocation of scarce resources, appropriate industrial policy and a more effective and prioritised removal of key obstacles to growth, than when the two sides fail to co-operate or engage in harmful collusion. This book, based on original empirical research undertaken in Africa and India, addresses what constitutes the effectiveness of state-business relations, what explains their formation and evolution over time and whether effective state-business relations matter for economic performance.

Analysing the effects of state-business relations on economic performance at both the macro and micro levels, the book concludes that where effective state-business relations are established – either through formal or informal institutional patterns and relationships – the growth effects are generally positive. Establishing, sustaining and renewing effective state-business relations are political processes. The better organized the business community and the government are for purposes of such relations, the more effective state-business relations will be in negotiating growth enhancing policies. The book is of interest to researchers in the fields of development studies, management, economics and political science.

1 State—business relations and economic development in Africa and India

The analytical issues

Kunal Sen

Introduction

The nature of the relationship between the state and business lies at the heart of the big debates on economic development. The dominant view in African and Indian economic policy, during the immediate post-independence period, was that the state needed to play an overarching role in the economy. Therefore, while most African countries and India chose a mixed economy development path, where the private sector had a considerable presence, most African countries and India chose a development strategy where the state would shape the investment and productions decisions of the private sector, and the public sector would occupy the ‘commanding heights’ of the economy. Thus, in this view, the state would need to be the dominant player and the private sector would be subservient to the latter. This then changed during the onset of structural adjustment programmes when there was a withdrawal of the state from most core areas of economic activity, and the market took centre stage. However, in recent years, and especially in the aftermath of the global financial crisis, there has been a new questioning on whether markets by themselves can bring about economic prosperity, and whether there needs to be a return to the state as the primary player in economic development both in Africa and India, and globally (Rajan 2010; Stiglitz 2010).

The debate on the role of the state versus the market in economic development is a futile debate in large part. No developing country has been able to make the transition to developed country status without the state providing key public goods such as security of property, law and order and infrastructure and in playing a catalytic role in private sector development. Nor has any society been successful in the long arduous journey to economic prosperity without the fundamental role that the market can play in allocating scarce resources to their most productive use and in providing a facilitating environment for entrepreneurs to take risks, innovate and be rewarded for their creativity and dynamism. The debate, then, should not be about whether the state or the market is more important in promoting economic development, both are crucial and it is not an either/or question. The debate should really be about how societies can transform the collusive and rent-seeking arrangements that often characterise the relations between the state and business to collaborative and synergistic relations between the two. As we have witnessed in many parts of the developing world such as Africa, Latin America and South Asia, collusive relations between the state and business, or where the state and business mutually distrust each other, is the norm and not the exception. In contrast, it is widely acknowledged that economic growth has occurred in East Asia as there were strong collaborative relations between political and economic elites (Amsden 1989; Evans 1995), and the relations between the state and the business sector was growth enhancing, and not growth reducing as have been observed in Africa and India in the first few decades since independence.

While there is a large literature on how effective state—business relations (SBRs) have evolved in East Asia and Latin America, and how they mattered for economic development in these regions (e.g. Johnson 1987; Maxfield and Schneider 1997), we know surprisingly little about the nature of SBRs, how effective they were, how they evolved, and whether they mattered for economic performance in the two regions of the world which matter most from the viewpoint of economic development — sub-Saharan Africa and South Asia. This volume is a collection of papers based on original empirical research undertaken in Africa and India that address this important gap in the literature.¹ The volume addresses three core research questions that have been previously less studied in the literature. First, what characterises effective SBRs and how have they evolved over time across Africa and India? Second, what are the implications of effective SBRs for economic performance in Africa and India? In particular, how do effective SBRs affect economic performance at the micro, meso and macro levels? Finally, how do effective SBRs emerge? What political factors explain their provenance, and why do collusive SBRs that are not growth enhancing persist over time?

Each of the contributions in this volume address one or more of these core research questions, combining quantitative and qualitative methods wherever appropriate, and using interdisciplinary perspectives drawn from economics and political science in the analysis of SBRs. Three features of the empirical analysis presented in this volume deserve special mention. First, the approach to measurement of SBRs in Africa and India is the same across both contexts, and provides a way of measuring effective SBRs that is innovative in its use of secondary data, and can be applied to other contexts and regions. Thus, the chapters on the measurement of SBRs in Africa and India (Chapters 2 and 3) present a methodological innovation to capturing the effectiveness of SBRs in a manner that can show the evolution of SBRs over time and across countries or regions. The second feature of the analysis presented in the volume is the common approach that authors use to examine the effects of SBRs on economic performance, where the relationship between effective SBRs and economic performance is examined at the macro (country/region), meso (industry) and micro (firm) levels. At the macro level, this involves the use of panel regressions or time-series methods to test for the effect of SBRs on economic growth. The papers that use this approach (Chapters 4, 7 and 9) explicitly address the possibility of reverse causality which is a recurrent problem in the literature on the determinants of economic growth — that if a positive association is found between effective SBRs and economic growth, it could be on account of the emergence of more positive SBRs as economic growth occurs in a given country. At the micro and meso levels, the contributors assess the impact of SBRs on productivity growth at the industry (meso) and firm (micro) levels, using state-of-the-art econometric methods that address the endogeneity problem in standard productivity estimations. The meso and micro estimates of the growth-enhancing effects of effective SBRs provide us with greater confidence on the reliability of the macro estimates, as the growth-enhancing effects of effective SBRs must be observed not only at the country or regional level, but also at the level of firms and industries. In other words, the macro estimates of the impact of effective SBRs on economic performance must be consistent with the micro and meso estimates, if indeed we are to believe that effective SBRs are growth inducing. The meso and micro studies also highlight the fact that the impact of SBRs on productivity growth depend on specific industry and firm specific attributes, and that all industries and firms may not necessarily benefit from an improvement in the overall environment on SBRs. Chapter 5 and 6 undertake firm level analysis for Zambia and Ghana while Chapter 10 undertakes a similar analysis for industries and firms in India.

The third feature of the volume is the use of a common approach — the ‘historical institutionalist’ approach — among the contributors to this volume in explaining the emergence of effective SBRs in some contexts and not in others. The ‘historical institutionalist’ approach involves the use of detailed and painstaking historical and analytical work, involving ‘thick description’ (Geertz 1973), and the contributors use this approach to trace the evolution of SBRs in Ghana (Chapter 6), Mauritius (Chapter 7), Malawi in sub-Saharan Africa (Chapter 8), and the states of West Bengal (Chapter 11) and Andhra Pradesh (Chapter 12) in India. The contributors identify specific ‘critical junctures’ — which are ‘moments when institutional innovation or change may be initiated or, at least, which create the opportunity for it to occur’ (Leftwich 2009: 9) in the evolution of SBRs. These ‘critical junctures’ may explain why there may have been a change from collusive to synergistic SBRs (or a return to collusive SBRs from collaborative SBRs) in a given historical context. However, the contributions also highlight the importance of path dependence — that is, when ‘an institutional choice/decision has been made or formed and sustained/consolidated over time, it sets the pattern and gets “locked in”’ (Leftwich 2009: 8) — which may explain why particular collusive SBRs which are clearly growth impeding may persist over time, if such relations benefit a narrow powerful economic and political elite who gain from the rents accruing from such a relationship.

In the rest of this introductory chapter, we first set out what we understand by the effectiveness of SBRs. Next, we provide an analytical account of why effective SBRs matter for economic growth. We then introduce the chapters in the volume. We first describe the approach used in this volume to measure effective SBRs and discuss its application to African countries in Chapter 2 and Indian states in Chapter 3. Next, we discuss the contributions of Chapters 4, 5, 6,7 and 8 in helping us understand the effects of SBRs on economic development in Africa. We follow this with a discussion of the effects of SBRs on economic development in Africa, as examined in Chapters 9, 10, 11 and 12. We end this chapter with some concluding remarks on the overall findings of this volume.

What are effective state—business relations?

What type of SBRs are most conducive to economic growth? Such SBRs, which we term effective SBRs, are a set of highly institutionalised, responsive and public interactions between the state and the business elite (Harriss 2006). They are usually characterised by high levels of transparency between agencies of the state and the representatives of the business sector such as business associations (Leftwich 2009). The state is willing to share information on its current and future policies to all legitimate organisations of the business sector and not just to a few firms or individuals who the political class may be close to. Business associations, on the other hand, share the information they receive from the state that is relevant to the investment decisions of the private sector with all their members and that information flows are not confined to a privileged few. Effective SBRs are also characterised by reciprocity — if the state was to provide targeted subsidies to the private sector for research and development or for exporting, the private sector will respond by ensuring that these subsidies are not frittered away in unproductive activities, and these subsidies lead to clear increases in firm performance.

Effective SBRs are characterised by credible commitment on the government’s part that the policies it announces are maintained over time, and there are no policy reversals that cannot be justified on economic grounds, or that there are no ‘flip-flops’ on the part of the government because of political pressures or in its effort to be populist as a strategy for staying in power. The point here is that what the private sector is looking for from the government is the predictability of policies, and not a complete withdrawal of the state from economic activity. For example, if the government makes the private sector pay a high (but not unreasonably so) rate of corporate tax, and the private sector sees that the tax proceeds are being used for high quality public goods such as efficient administration and infrastructure, and the tax rates do not change for no good reason from time to time, such a tax policy can be seen as being an element of an effective SBR. Mutual trust between the state and business is also a crucial requirement for effective SBRs — an atmosphere of distrust where the state and business suspect each other’s true intentions is not conducive to a collaborative relationship between the state and the private sector. Finally, a synergistic relationship between the state and business can only occur if both agents of the state, such as ministries of economic affairs, and agents of business, such as apex and industry-specific business associations, are well organised and of high capacity. If business associations are weak, it is more likely that the state will not listen to the concerns of the private sector. If the state is weak or corrupt, or if public servants are not recruited and promoted along meritocratic lines, efficient public administration will be unlikely to occur, public goods will not be provided and rent-seeking will flourish.

Why should effective state—business relations matter for economic growth?

The conventional thinking on economic growth takes the latter to be determined by factors such as physical capital and human capital formation, and productivity growth. Yet it is not clear what drives the rate of investment and the productivity of the investment. Effective SBRs can have a positive impact on economic growth by increasing both the rate of investment and the productivity of investment. With respect to the rate of investment, irreversibility and the possibility of delay are important considerations in the investment decision (Pindyck 1991; Dixit and Pindyck 1994). Plant and equipment investment can be considered ‘sunk costs’ if capital, once installed, is firm- or industry-specific and cannot be put to productive use in a different activity or if secondary markets are not efficient. The decision to undertake an irreversible investment in an uncertain environment can be viewed as involving the exercising of an option — the option to wait for new information that might affect the desirability and timing of the investment. This opportunity cost can be substantial in most circumstances and a higher degree of uncertainty about the future can have a significant negative effect on investment. Effective SBRs that lead to credible commitment on the part of the government to certain policies can minimise uncertainties on future policy actions in the minds of investors, and by doing so, raise the rate of investment (Rodrik 1991; Ibarra 1995).

Effective SBRs can also lead to a higher rate of investment by creating an institutional environment where the state provides high quality public goods that matter to the private sector such as infrastructure, effective public administration (or the lack of corruption) and secure property rights. Public investment in infrastructure is highly complementary to private investment in developing countries, and has strong ‘crowding in’ effects (Blejer and Khan 1984).A well organised private sector can make clear to the state where the priorities are for public investment and can monitor the quality of such investment. Such high quality investments are more likely to be forthcoming with a well organised and responsive state. Effective public administration and lack of expropriation of property rights of the private sector is more likely to occur with professionally run and well organised government agencies and through the direct and indirect pressures that business associations can place on government officials.

Effective SBRs can also influence the productivity of investments. Apex...