Understanding state business relations has become an increasingly important element in analysing the politics of economic growth and development. But what are state-business relations? Start here with IPPG’s two-minute guide.

What are state business relations (SBR)?

State business relations is the umbrella term used to describe the institutional arrangements, both the formal and informal, which shape the interactions between states and businesses. The study of SBRs also looks at how the institutions governing these arrangements evolve and the impact that they have.

Why are SBRs important?

The way in which state and business are organised and interact can have a considerable effect on economic performance – good or bad. They can also have a major political impact, and this can be benign or predatory.

Both the economic and political aspects of state business relations can influence pro-poor growth, which is why development specialists have become increasingly interested in them. As IPPG is multi-disciplinary it looks at both the economic and political aspects of SBRs.

How can you spot good and bad SBRs?

The litmus test is whether the effects are developmental (collaborative or joint activity, or generating a positive environment where enterprise feels it is supported by the state); or predatory (over-dominant influence of, and predation by, the state on the private sector); or collusive (encouraging rent seeking and patronage); or hostile (pervasive conflict between state and business).

For example, effective SBRs can:

• Provide an institutionalised arrangement for consultation and discussion between state and business
• Help to solve information-related market and co-ordination failures – for example, in skills development or infrastructure provision.
• Provide a ‘check and balance’ function on government policies and tax and expenditure plans.
• Help to reduce policy uncertainty and contribute to increases in private investment.

Other differences?

The institutions governing SBRS can be formal (for example, laws and regulations) or informal (social norms or cultural patterns). Informal institutions are important and cannot be overlooked – as IPPG found in its study of land rights in Malawi. What the institutions do (their function) is more important than their form.

How much of a difference can good SBRs make?

Effective SBRs have been shown to have a strong positive effect on economic growth in sub-Saharan Africa (an increase of around 3 per cent for a one unit change in the SBR index).  IPPG came up with a formula to estimate the effects of SBRs in different states across India. Although the measure is complex, the study found that a one per cent (i.e. positive) increase in the SBR measure leads to a three per cent increase in long-run growth.

Why do good SBRs emerge in some places and not others?

The jury is still out on that one. But there are clues. Contrasting studies in Africa (for example, in Malawi, South Africa, Ghana and Mauritius) are helping to highlight the provenance of different forms and functions of SBR. The evidence is clear that political processes are key. Understanding the interests and ideas of states and businesses, and their attitudes to each other, is a starting point for analysis.

Interesting – but difficult to pin down, surely?

It is possible to identify growth enhancing characteristics and functions of SBRs (at country level and perhaps beyond). It’s also possible to identify what drives effective SBRs, and to inform policy makers (in government, in business and donors) about effective SBRs (for example, in terms of growth or pro-poor growth).

How do you measure SBRs?

You can study how the public sector and private sectors are organised, the practice of SBRs and where collusive SBRs and negative factors exist, and give different weightings to all these factors to come up with an overall measure of SBR.  To understand how the pattern of SBRs has evolved, you can also analyse historically and politically how states and businesses (or sectors of each) have interacted over time and how the formal and informal institutional arrangements have been shaped by these interactions.

Examples of factors to consider might include: are there strong and representative business associations, how long have they been established and how proactive are they? What has been their attitude to the state? Equally, have states sought to court, co-operate with or dominate businesses? Do states have specific departments or Ministries dedicated to relations with businesses and business associations? How are they organised?

Whose name should I drop on SBRs?

Almost anyone’s! There’s nothing new about SBRs and everyone from Adam Smith and Karl Marx onwards has a view. But some of the key names in this area of development are: Charles Lindblom;  Sylvia Maxfield; Ben Ross Schneider; Scott D Taylor; Antoinette Handley; and Dirk Willem te Velde (who leads some of IPPG’s work on SBRs).

Who should be interested?

Anyone working in development. For example, donors need to consider business associations as agents for development, and states should support the emergence of strong and representative business associations.

I want to know more about state business relations – where do I start?

Download IPPG co-director Kunal Sen’s presentation, State Business Relations and Economic Performance.

IPPG leads a DFID-funded cluster of research in a number of African countries and in India. You can access the studies at IPPG’s state business relations portal.