Business and the Business and the State in Developing State in Developing

CountriesCountries-Sylvia Maxfield and Ben -Sylvia Maxfield and Ben

SchneiderSchneider

By: Claire StokerBy: Claire Stoker

IntroductionIntroduction

The Common Suspicion: If the Businesses and the State are The Common Suspicion: If the Businesses and the State are close, then democracy, economic efficiency and social welfare close, then democracy, economic efficiency and social welfare will suffer.will suffer.

Rent-Seekers or D.U.P. (Directly Unproductive Profit-Seeking): Rent-Seekers or D.U.P. (Directly Unproductive Profit-Seeking): tariff evasion, premium seeking, revenue seeking, tariff tariff evasion, premium seeking, revenue seeking, tariff seeking…wasteful, squander the resources of society for seeking…wasteful, squander the resources of society for personal gain. (Example)personal gain. (Example)

““The Iron Law” of Rent Seeking: wherever a rent can be found a The Iron Law” of Rent Seeking: wherever a rent can be found a rent seeker will be there trying to get it.rent seeker will be there trying to get it.

Answer: Market-Oriented Reform (US policy in the 80’s towards Answer: Market-Oriented Reform (US policy in the 80’s towards Latin America)Latin America)

But Problems Still Result…privatization of state firms, isolated But Problems Still Result…privatization of state firms, isolated reforms, opportunities for unbound capitalists to abuse their reforms, opportunities for unbound capitalists to abuse their market powers, and market failures (ie. natural monopolies in market powers, and market failures (ie. natural monopolies in pub. Utilities)pub. Utilities)

Institutionalist Perspective: Business and Government can have Institutionalist Perspective: Business and Government can have close collaboration and still produce economic close collaboration and still produce economic growth/developmentgrowth/development

So, overall purpose of this book: To examine the conditions that So, overall purpose of this book: To examine the conditions that keep business-state relations from degenerating into collusion keep business-state relations from degenerating into collusion and rent-seekingand rent-seeking

Ch. 1: “Business, the State, Ch. 1: “Business, the State, and Economic Performance”and Economic Performance”

UNPACKING COLLABORATIONUNPACKING COLLABORATION Information Exchange-an increased flow of accurate, Information Exchange-an increased flow of accurate,

reliable info.=crucial to economic growth.reliable info.=crucial to economic growth. Dependent upon technical capacity within the state to Dependent upon technical capacity within the state to

compile/analyze date & willingness of businesses to compile/analyze date & willingness of businesses to share it. Being well informed helps the state make share it. Being well informed helps the state make effective policies and helps the businesses accurately effective policies and helps the businesses accurately assess the market.assess the market.

Complications: Incentives on both sides to manipulate Complications: Incentives on both sides to manipulate the information to gain a strategic advantage.the information to gain a strategic advantage.

The more this information affects government The more this information affects government benefits, the more likely it will be benefits, the more likely it will be distorted/manipulted.distorted/manipulted.

Reciprocity: In exchange for subsidies the Reciprocity: In exchange for subsidies the State exacts certain performance standards State exacts certain performance standards from the firmsfrom the firms

Therefore: the State actors must have the Therefore: the State actors must have the necessary autonomy and capacity to require necessary autonomy and capacity to require this improved performance…they must have this improved performance…they must have the power to sanctions businesses that do the power to sanctions businesses that do not comply with state-set standards.not comply with state-set standards.

If they cannot, their threats are empty and If they cannot, their threats are empty and collaboration will degenerate into collaboration will degenerate into corruption.corruption.

Also, they will lose all credibility…Also, they will lose all credibility…

Credibility: reduces the cost of Credibility: reduces the cost of political uncertaintypolitical uncertainty

Assures businesses that the Assures businesses that the government will not manipulate government will not manipulate information for personal gain.information for personal gain.

Depends on numerous factors- the Depends on numerous factors- the type of policy, information flows, the type of policy, information flows, the reputations of the officials involved, reputations of the officials involved, and government backingand government backing

Drawbacks: ties the hands of Drawbacks: ties the hands of policymakers, limits their flexibilitypolicymakers, limits their flexibility

Trust: implies extensive mutual Trust: implies extensive mutual dependence and vulnerability which dependence and vulnerability which does not come all at once in the does not come all at once in the beginning.beginning.

Positively effects economic Positively effects economic performance because it greatly performance because it greatly improves economic efficiency and improves economic efficiency and reduces transaction and monitoring reduces transaction and monitoring costs as well as uncertainty. costs as well as uncertainty.

CONDITIONS FOR CONDITIONS FOR COLLABORATIONCOLLABORATION

The State should insulate policymakers from societal The State should insulate policymakers from societal pressures so that institutional goals replace self pressures so that institutional goals replace self interests and bind their behavior to common goals.interests and bind their behavior to common goals.

But most developing countries do not have the privilege But most developing countries do not have the privilege of having a merit-based, politically-insulated of having a merit-based, politically-insulated bureaucracy…most=authoritarian regimes.bureaucracy…most=authoritarian regimes.

DEMOCRATIZATION…DEMOCRATIZATION… Democracy affects most of the conditions for Democracy affects most of the conditions for

establishing collaborative relations by bringing labor establishing collaborative relations by bringing labor and politicians back into the picture.and politicians back into the picture.

The changing strength and strategy of organized labor-The changing strength and strategy of organized labor-alters business strategies for collective action.alters business strategies for collective action.

Democracy forces politicians back into dealings that Democracy forces politicians back into dealings that had become solely between capitalists and had become solely between capitalists and bureaucrats.bureaucrats.

COLLABORATING TO COLLABORATING TO SURVIVESURVIVE

Perceived Threats: Often times the Perceived Threats: Often times the economic elites will be hesitant to economic elites will be hesitant to invest in a collaborative system invest in a collaborative system because they feel threatened.because they feel threatened.

Vulnerability to International Vulnerability to International Competition provides one incentive Competition provides one incentive to cooperate to survive.to cooperate to survive.

Ch. 2: “Theories of Business”Ch. 2: “Theories of Business”5 Theoretical Approaches to the Political Economy of Business-5 Theoretical Approaches to the Political Economy of Business-

State Relations State Relations

1. BUSINESS AS CAPITAL: CONSTRAINING THE 1. BUSINESS AS CAPITAL: CONSTRAINING THE STATESTATE

-States are constrained by private control of -States are constrained by private control of physical and financial assets & capital mobility.physical and financial assets & capital mobility.

-takes a structural view of business influence-takes a structural view of business influence

-does not differentiate between different types of -does not differentiate between different types of economic activityeconomic activity

-ignores the political organization of business and -ignores the political organization of business and the institutions that mediate business intereststhe institutions that mediate business interests

2. BUSINESS AS SECTOR: STRUCTURAL 2. BUSINESS AS SECTOR: STRUCTURAL SOURCES OF DIVERGENT BUSINESS SOURCES OF DIVERGENT BUSINESS

INTERESTSINTERESTS-The distribution of economic activity and different -The distribution of economic activity and different

sectoral interests affect politics, policy, and growth.sectoral interests affect politics, policy, and growth.-Characteristics of economic activity (factor intensity, -Characteristics of economic activity (factor intensity,

asset specificity, & degree of industrial asset specificity, & degree of industrial concentration) shape business preferencesconcentration) shape business preferences

-which shapes the capacity for collective action-which shapes the capacity for collective action-which affects policy outcomes-which affects policy outcomes-State constraint in this model: contending interests -State constraint in this model: contending interests

of different sectors of different sectors

-(Also takes a structural view of business influence-(Also takes a structural view of business influence-Also ignores: political organization of business/ -Also ignores: political organization of business/

institutions)institutions)

3. BUSINESS AS FIRM: SIZE, 3. BUSINESS AS FIRM: SIZE, HORIZONTAL DIVERSIFICATION, AND HORIZONTAL DIVERSIFICATION, AND

PATTERNS OF FINANCINGPATTERNS OF FINANCING

-Examines political consequences of corporate -Examines political consequences of corporate organizationorganization

-Characteristics of corporate structure (size, internal -Characteristics of corporate structure (size, internal organization, ownerships, patterns of financing, organization, ownerships, patterns of financing, etc.) affect business preferencesetc.) affect business preferences

-which affect the pull that businesses have in relation -which affect the pull that businesses have in relation to government actorsto government actors

-For developing countries two factors in particular are -For developing countries two factors in particular are the most important: size, diversificationthe most important: size, diversification

-(Also takes a structural view of business influence-(Also takes a structural view of business influence-Also ignores: political organization of business/ -Also ignores: political organization of business/

institutions)institutions)

4. BUSINESS ASSOCIATIONS: 4. BUSINESS ASSOCIATIONS: COLLECTIVE ACTION AND SELF-COLLECTIVE ACTION AND SELF-

GOVERNANCEGOVERNANCE-Seeks to understand how business -Seeks to understand how business

associations affect business performance associations affect business performance through lobbyingthrough lobbying

-& how they affect policy implementation -& how they affect policy implementation (ie. Through private interest governance-(ie. Through private interest governance-businesses assuming govt. functions)businesses assuming govt. functions)

-Takes an instrumental rather than -Takes an instrumental rather than structural approach.structural approach.

-Takes into account the political -Takes into account the political organizations of businessorganizations of business

5. BUSINESS AS NETWORK: SOCIAL 5. BUSINESS AS NETWORK: SOCIAL CONSTRUCTIONS OF TRUST AND CONSTRUCTIONS OF TRUST AND

COLLABORATIONCOLLABORATION

-This is a more sociological view of business: -This is a more sociological view of business: broken up into individual managers and broken up into individual managers and owners.owners.

-Interaction with govt. is not through -Interaction with govt. is not through Institutional channels, but networks of Institutional channels, but networks of personal relationships and overlapping personal relationships and overlapping roles.roles.

-Attempts to see business as made up of -Attempts to see business as made up of people with varying interests and people with varying interests and relationship builing capabilities. relationship builing capabilities.

Questions for Discussion…Questions for Discussion… 1. What do Maxfield and Schneider say is the 1. What do Maxfield and Schneider say is the

main purpose for their book? What is it that they main purpose for their book? What is it that they would like to prove in detail?would like to prove in detail?

2. Why are trust and credibility between Business 2. Why are trust and credibility between Business and State so important for economic growth? and State so important for economic growth? What costs do they diminish?What costs do they diminish?

3. Which of the five theories seems to best 3. Which of the five theories seems to best explain business-state relations for developing explain business-state relations for developing countries? Do Maxfield and Schneider have a countries? Do Maxfield and Schneider have a favorite theory or do they see the value in each? favorite theory or do they see the value in each? Why do they present all five?Why do they present all five?