The economics and politics of state-business relations and economic growth in Africa

2 May 2008 12:00 - 13:15 GMT+00
Public event

Speakers:

Dr Adrian Leftwich - Senior Lecturer in Politics at the University of York, and co-director of the Research Programme Consortium on Institutions and Pro-Poor Growth

Dr Dirk Willem te Velde - Research Fellow, International Economic Development Group, ODI

Henry Chingaipe - University of York

Chair:

Tony Killick - Senior Research Associate, International Economic Development Group (IEDG), ODI

Description

This meeting will launch a volume of essays, The economics and politics of state-business relations in Africa, edited by Adrian Leftwich, Kunal Sen and Dirk Willem te Velde.

The study of state-business relations (SBRs) lies at the heart of the Research Programme Consortium on Institutions and Pro-Poor Growth. The relations between states and business are usefully understood as giving rise to and reflecting both economic and political institutions. Political, because SBRs reflect the way in which power amongst different agents, elites and coalitions of interest are shared. This manifests itself in both formal and informal institutional arrangements between the private sector (e.g. business associations, including organised farmer groups) and the public sector (e.g. different ministries or departments of state, politicians and bureaucrats). Economic, because SBRs embody formal and informal rules and regulations that, when well designed, can perform economic functions such as solving information related market and co-ordination failures, promoting investment climate reform and reducing policy uncertainty all of which are crucial for economic growth.

This meeting aims to discuss the benefits, challenges, complexity of political and economic perspectives on state-business relations, with examples from Malawi, Zambia and other countries; the relationship amongst the perspectives; and options for further analysis on SBRs.

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Tony Killick chaired the meeting and introduced the speakers who are all part of the DFID-funded IPPG (Institution and Pro-Poor Growth) research programme consortium.

Adrian Leftwich set the stage of the discussion by outlining a political perspective on state-business relations (SBR), which is one of the key areas of the DFID funded IPPG research consortium. The consortium focuses on institutions which affect pro-poor growth looking at underlying political and social processes that shape these institutions. Such an approach requires a multi-disciplinary effort.

The study of SBRs is not a completely new area; social scientists such as Smith, Marx Schumpeter and Charles Lindblom already tried to analyse it. However, the IPPG approach is novel in that it is multi-disciplinary (at the intersection between politics and economics) and it is applied to developing countries’ context.

Although there are many approaches to defining SBRs, e.g. they are part of capitalist development, they concern democratic governance, or civil society, the focus of the analysis is on formal and informal rules that govern these relations. Some would argue that the most appropriate SBRs are those which are synergistic, where state and businesses are not in conflict with each other; but they could also be collusive, or based on a predatory state, or on some businesses able to capture the favour of state at the expense of others.

Leftwich stressed that the approach taken is cross-disciplinary in nature and needs to be more sophisticated than the simple political economy approach. The political analysis would identify the provenance and forms of SBRs, while the economic analysis would measure the effects of them on economic variables. The forms and politics of SBRs are shaped by a number of factors: development ideologies, the relative power of states vis-à-vis business; the way bureaucracy organises vis-à-vis the business; the form, the structure, the multiciplicity and representativeness of business associations (such as along ethnic lines)

Leftwich concluded by saying that the study of institutions also needs to consider the agents within those institutions, i.e. leaders, elites and coalitions

Henry Chingaipe characterised the politics of SBRs through the example of Malawi. He identified three phases in the evolution of SBRs in Malawi. During the Malawi Congress Party period, under Banda, there was little formal space for the private sector, with an exploitative public sector, and deeply insecure property rights. The rise of UDF coincided with economic liberalisation championed by the IMF, but the state had collusive relations with business, as the members of the party and the new government itself had very strong business connections and was, in effect, ‘born in the Chamber of Commerce. The third phase started with the Democratic progressive party in 2004: this period has been characterised by residual elements of mutual mistrust, but the attitudes between state and business are less confrontational.

The organisational features of SBRs in Malawi are pluralistic. On the state side, these involve a public sector with several departments dealing with businesses (but the main agency is MITPSD), and a private sector with several different actors, although MCCCI is regarded as the leader. This is not necessarily good news for the inclusiveness of SBRs as the scope of MCCCI representation is limited. At the moment a non institutionalised private-public dialogue has replaced the national action group. 

Chingaipe illustrated a number of opportunities favourable to better SBRs in Malawi: there is a good rapport between state and businesses; a privatisation commission is developing various forms of Public-Private Partnerships (PPP), there is goodwill and donor support for these relations and a better state’s attitude towards collaboration.
Chingaipe considered also some threats to the evolution of healthy SBRs, including the fractionalisation of the private sector, the lack of trust on both sides, the heavy reliance on donors to fund meetings between business and the public sector, and the excessive informality of public-private dialogue.

His current work explores the role of politics of SBR in shaping the formation and institutional structure of development states comparing Botswana (success story) and Malawi (less successful case).

Dirk Willem te Velde discussed the economic dimension of SBRs. He argued that the key questions for economists are whether SBRs are good for economic growth and if so what types. But a major challenge of this task is how to measure the relations in a way suitable for measuring their impact.

Certain types of SBRs seem to be associated with substantial economic growth in Africa, but more country-specific work is needed to identify what economic functions of SBRs have worked.

Why are SBRs important? This is due to the presence of market and co-ordination failures that cannot be resolved via government interventions alone (government failures). Therefore these actors need to be brought together to solve market and government failures. But effective SBRs can also be important to prioritise investment climate reforms (such as by reducing the bureaucratic-related transaction costs faced by business), to improve the allocation of resources in the budget and to reduce policy uncertainty by locking in rules and regulations.

Te Velde argued that effective SBRs need transparent information, reciprocity in actions, credibility of statements (especially by the government), and trust between parties. However, too much trust may end up in collusive behaviour excluding certain groups from relations in favour of others.

Te Velde has tried to measure effective SBRs for 20 sub-Saharan African states over time along four dimensions: how well the private sector is organised vis-à-vis the state; how well the public sector is organised vis-à-vis the private sector; how effective the interface between the two is and how effective the avoidance of collusive behaviour is. The results show that SBRs are increasing over time, especially in recent years, which are also accompanied by substantial economic growth (the increase in growth of the SBR index occurred just before the recent growth turnaround).

More formal econometric analysis confirms the positive and robust impact of SBRs on real GDP per capita growth in those African countries between 1970 and 2004. These findings are confirmed by micro level analyses on the effects of business association membership on firms’ productivity in seven sub-Saharan African countries. The findings indicate that firms seem to value particularly the functions of lobbying and regulations by business associations.

Questions that emerged in the discussion included:

  1. Treating state as a whole and business as a whole prevents one from looking at the fractions within those actors; is the project taking this into account?
  2. How can we control for causality of the relation between good SBRs and growth in the quantitative analysis?
  3. What is the exact definition of states that the research is taking into account? For instance in Malawi half of the state is financed by donors.
  4. Can OECD countries be included in the sample as well?
  5. Are you looking at the informal sector as well?
  6. Best practice in SBRs may actually differ across sectors on the basis of different sectoral characteristics. Do you consider that?
  7. How do SBRs compare to traditional measures of governance? And aren’t SBRs just another version of the good governance definition?
  8. Could one incorporate the Douglas North-type of view on the dominance of the rule of law and contract enforcement?

The authors’ responses were, in summary:

  • Fractionalisation is a fundamental issue to look at and South Africa is actually a good example of that. The Black Economic Empowerment for instance has different implications for different businesses as well as within the state. This is also a good illustration of the importance of differentiating actors along social and cultural dimensions, such as ethnicity.
  • Endogeneity of the relationship between SBRs and growth still represents an important challenge. But there is some qualitative evidence, e.g. on firms’ motivation to join business association, which would support the causality of the relation
  • States can be differentiated from donors, although the latter have helped in shaping SBRs. This implies that sustainability of SBRs may become an issue if donors withdrew
  • It would be interesting to include OECD countries as well, but the idea of best practices in SBRs needs to be country-specific. However there are certain aspects that some countries got right e.g. Singapore, and the Dutch model of bringing together state, business and labour.
  • The SBR model is more linked to the ‘good enough governance’ agenda rather than the good governance one. Although SBRs correlate well with more traditional governance indicators (e.g. Kaufman indicators), they are not suggesting the traditional good governance as the model.
  • The analysis of the organisations needs to reflect an analysis of the elites in these organisations. However, the research still takes into account a Douglas North-type perspective by considering the primacy of formal institutions and rules.
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