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The Economics and Politics of State-Business Relations in Africa: Preliminary Findings

Research report

Written by Dirk Willem te Velde

Research report

The study of state-business relations (SBRs) lies at the heart of the Research Programme Consortium on IPPG. The relations 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 co-ordination failures and hence will affect the allocative and dynamic efficiency of the economy. 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 organized farmer groups) and the public sector (e.g. different ministries or departments of state, politicians and bureaucrats). This volume contains a series of four papers highlighting economic and political approaches toward studying state-business relations.

The first paper, by Te Velde, suggests that so far we know actually very little about the growth effects of effective state-business relationships and suggests this is in part because it is hard to measure. Nonetheless, it is suggested that the effective SBRs can lead to a more optimal allocation of resources in the economy, including an increased effectiveness of government involvement in supporting private sector activities and removing obstacles. While SBRs are part of government literature, effective SBRs may also lead to and prioritize governance reforms. In-depth discussions of state-business relations have so far been largely limited to Asian countries such as Korea, Taiwan, Japan, Malaysia, Bangladesh and Thailand although there are political accounts in the case of Africa. Measurement, in particular, of state-business relations for sub-Saharan African countries has been patchy or absent, and the paper tries to address this question at the macro level by developing an index of SBRs.

The paper by Sen and Te Velde uses the macro index developed on the basis of measuring SBR (as detailed above) and estimates standard growth regressions in dynamic panel form for twenty African countries over the period 1970–2004, controlling for more conventionally measures of institutional quality in the empirical literature. They show, using sophisticated econometric techniques, how state-business relationships contribute significantly to economic growth in sub-Saharan Africa – countries which have shown improvements in state-business relationships have witnessed higher economic growth, controlling for other determinants of economic growth. The index of SBRs has advanced significantly and began to improve before the pick up in growth (though different conditions applied in different countries).

The paper by Qureshi and Te Velde provides a micro econometric approach to essentially the same questions. A micro level indicator of state-business relations associated with good SBRs is an organized private sector, measurable as firm membership of business associations. Business associations provide different services. The World Bank investment cliamte questionnaire asks firms which services are perceived to be most important. Lobbying government and information on government regulations are on average the two most important services provided by business associations to the firms covered in the sample. The least important services are resolution of disputes (with officials, works or other firms) and accrediting standards or quality of products. Research also shows that business membership varies by sector and firm size; but all sectors and sizes are covered to some extent. The econometric approach estimates a production function on the basis of firms in seven African countries to examine how SBRs affect firm level productivity.

The paper by Chingaipe and Leftwich offers a political perspective on state-business relations, in the case of Malawi, and focuses more on what creates and sustains SBRs. They examine both the state and business side and the direct links between them. They adopt an historical institutionalist approach and examine the factors that have shaped SBRs including the level of capitalist development, the dominance of the state, and the way in which informal institutions have blurred the distinction between public and private sectors.

Edited by Adrian Leftwich, Kunal Sen and Dirk Willem te Velde