Effective state-business relations, industrial policy and economic growth

Research reports and studies
September 2010
Dirk Willem te Velde (ed.), Abla Abdel-Latif, Tilman Altenburg, Massimiliano Cali, Karen Ellis, Justin Yifu Lin, Hubert Schmitz and Kunal Sen

This collection of essays by internationally distinguished scholars discusses the nature of state-business relations (SBRs) and the links between SBRs and economic performance. It is generally accepted that economic growth directly depends on economic fundamentals such as skills and capital formation as well as the efficiency through which factors of production are put together. But beyond this, the briefings in this publication all bring out that the nature of state-business relations is a crucial factor behind efficient skills development, capital formation and ultimately higher productivity and incomes. But there is considerable debate about how the effects work, whether current state-business relations are conducive to or hamper economic performance, and about how the nature of state-business relations conditions the conduct of more active policies encouraging economic growth.

This study is the result of the work of researchers linked through the Research Programme Consortium for Improving Institutions for Pro-Poor Growth (IPPG) which conducted research from 2005-2010. The study of state-business relations (SBRs) was at the heart of the Consortium. Relationships between states and business are usefully understood as giving rise to and reflecting both economic and political institutions. Economic, because SBRs embody formal and informal rules and regulations that are designed to perform economic functions, such as solving information-related market and coordination failures, and hence will affect the allocative and dynamic efficiency of the economy. Political, because SBRs reflect the way in which power among different agents, elites and coalitions of interest is 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). IPPG devoted one of three clusters of work to the study of SBRs covering sub-Saharan Africa and India.

This publication consists of three main parts. Part A introduces theoretical aspects of the study of SBRs. Part B examines two technical and methodological aspects that have been at the forefront of the study of SBRs: how to measure SBRs and how to deal with endogeneity concerns in the relationship between SBRs and economic performance. This part is designed specifically for quantitative specialists. Part C discusses the findings, evidence and policy suggestions of IPPG research on SBRs and major work related to SBRs. A set of conclusions follows.

The report can be downloaded as a single publication or as individual briefings,