Class 3-4Class 3-4 The context of business-

government relations

March 5

St-Petersburg State University Graduate School of Management

Master of International Business Program Business-government relations

The context of business-government relations:

the notions and concepts of the state, government and governance

The notions of state and government

A state is a political association with effective sovereignty over a geographic area. A state usually includes the set of institutions that claim the authority to make the rules that govern the exercise of coercive violence for the people of the society in that territory, though its status as a state often depends in part on being recognized by a number of other states as having internal and external sovereignty over it.

Government – is the organization, that is the governing authority of a political unit, the ruling power in a political society, and the apparatus through which a governing body functions and exercises authority.

Indications of the state

1. Tterritory2. Population3. Public authority4. The law5. Law-enforcement authorities6. Army7. Taxes8. Sovereignty (internal and external)

The state = power + population + territory

The notions of governance

The exercise of political authority and the use of institutional resources to manage society's problems and affairs. The use of institutions, structures of authority and even collaboration to allocate resources and coordinate or control activity in society or the economy. [World Bank]

An alternate definition sees governance as [UNDP]:

The rules of the political system to solve conflicts between actors and adopt decision (legality). Proper functioning of institutions and their acceptance by the public (legitimacy). The term is used to invoke the efficacy of government and the achievement of consensus by democratic means (participation).

Three ways in which governance occurs

• Through top-down methods that primarily involve governments and the state bureaucracy

• Through the use of market mechanisms whereby market principles of competition serve to allocate resources while operating under government regulation

• Through networks involving public-private partnerships (PPP) or with the collaboration of community organisations

Institutions of power

Society

Legislature

Justice

Executive power

Political market

PoliticiansPoliticians

State officials(bureaucracy)

State officials(bureaucracy)

ElectorateElectorate

Interest groups(also advocacy groups,

lobby groups, pressure groups

or special interest groups)

Interest groups(also advocacy groups,

lobby groups, pressure groups

or special interest groups)

Levels of political system

• Federal level (Ministries, Federal departments, Federal court, Parliament, Legislative Assembly, State Duma…)

• Regional (state) level (Executive committees, regional courts, Regional legislative Assemblies….)

• Local (municipal) level (Institutions of local government: Municipal counsel, administrations, etc.)

Ex. St.Petersburg city government

• St. Peterburg's Administration is composed of the Governor herself, of the City Government, headed by the Governor, and of the other Bodies of Executive Power in Saint-Petersburg.

• St. Petersburg's Legislative Assembly is a legislative body of St. Petersburg, a subject of the Russian Federation, a city of federal significance. Together with St. Petersburg's Administration and its judicial bodies it forms a system of state governmental bodies, based on the principles of democracy, division of state power, independence of individual governmental bodies and the division of authority between federal and city governments. 

Ex. St.Petersburg city government executive committees

• Committee for City Improvement and Roads • Committee for External Affairs • Committee for Housing Maintenance • Committee for Press and Public Relations • Committee for Science and Higher Education • Committee for Public Health • Committee for Transport • Committee for Labour and Social Protection • Committee for Tourism and Resort Development • Committee for Economy and Industrial Policy • Committee for Energy Supply and Engineering • Committee for State Control and Protection of Historical and Cultural Landmarks • Committee for Civil Engineering, City Planning and Architecture • Committee for Youth Policy and Cooperation with Public Organizations • Committee for Construction • Committee for Education • Committee for Culture • Committee for City Property Management • Committee for Physical Culture and Sports • Committee for Finance • Committee for Housing Policy

The context of business-government relations:

transformation of government’s role

Why should government participate in markets?

Establishment of the rules of the game Elimination and indemnification of market

failures: Public goods Externalities Monopoly Information asymmetry

Realization of state economic policy (struggle against macroeconomic instability, social inequality) Impact on allocation of resources, redistribution of income,

stabilization and economic growth

Main government functions

Regulation

Production

Redistribution

Private sector

The fundamental purpose of government - is the maintenance of basic security (economic, social, environmental) and public order

Transformation of the role of the state in economy

• At the beginning of XX century - the limited number of government functions

• I World war, The Great Depression - sharp increase in the public expenditure

• 50 - 70th: the concept of «dominating state», construction of the welfare state

• 80 - first half 90: «the minimalist state»• Since the middle 90 - idea of «the

effective state»

Basic parameters of the government intervention to market economy

• State ownership (a stock of the resources belonging to the state)

• Volumes of public revenues and expenditures (flows of collected and spent financial resources) – the share of public expenditures in GDP.

Trends in public sector development

1. On volumes of the state expenditure• USA. 20th years of XX century: a share public

expenditures in GNP was 20 %, in 2000 - 29 %• Great Britain: growth of public expenditures share in

GNP from 20 % in the beginning of a century up to 40 % in 2000.

• Russia. In 2000 public expenditures share in GNP was 28 %.

On the average a share cumulative state expenditures in gross national product of economically most advanced countries in XX century has grown from 10 % in 1913 up to 49 % in 2000.

Trends in public sector development

2. In sphere of manufacture of goods and services

• The highest rates public sector in sphere of manufacture: West countries in 50 - 70th years of XX century.

• In 80 – 90th under influence of privatization public sector in industrial sphere was reduced.

Trends in public sector development

Years

% GDP

Explanations of public expenditure growth

• Adolf Wagner: demand for the public goods and the services grows faster, than incomes

• The law of A. Director

• Bureaucracy

• Features of political decision making process

• Influence of interests groups

Imperfect government

Presence of government failures: Spillovers X-inefficiency of government agencies

(Unsatisfactory ratio of expenses and results) Own purposes of the government structures

(economic of bureaucracy)

And their impact on business behaviour: Rent-seeking Corruption

??? Do institutions matter

Types of countries according to the scale of public sector

Countries with big public sector

Countries with middle-size

public sector

Countries with small

public sector

The reasons and tendencies of administrative reforms

at the end of 20th century

Problems of public administration

• High costs of the state machinery maintenance

• Low efficiency

• Lack of transparency

• Corruption

• Problems of government - society relations

• Problems of democracy

Challenges at the end of 20th century

Political challenges

Economic challenges

Social challenges

Institutional challenges

Necessity of administrative

reforms

Concepts of reforms

Traditional “public administration”

New Public Management

Good Governance

E-governance

Principles of New Public Management

• Increase of productivity

• Use of market tools in public management

• Consumer orientation (citizen-centric approach)

• Decentralization

• Performance-based management

Principles of good governance

• Participation

• Consensus orientation

• Strategic vision

• Responsiveness

• Effectiveness and efficiency

• Accountability

• Transparency

• Equity and inclusiveness

• Rule of law

Evolution of approaches to government in the 20th century

1945-1955 1979-1990 1997 - …

Political leader K. Atlee M. Thatcher T. Blair

Theorist Keynes F. Hayek/M. Freedman

M. Castells

Approach Bureaucratic New Public

ManagementE-government

Mechanism Nationalization Privatization Various

Power shift State centralization Market freedom Technological

innovation, decentralization

Purpose Social security Enterprise creationPublic services

reform

Why e-government?

E-government: a host of versions

Information-communication infrastructure and network supporting and improving government performance.

Electronic or e-government means providing public access via the Internet to information about all the services offered by government departments and their agencies; and enabling the public to conduct and conclude transactions for all those services for example paying tax, claiming and receiving benefits, getting a passport. It is also about departments harnessing new technology to transform the internal efficiency of government departments.

24*7*365 concept

Government performance and its’ impact on economic

development

Issues on government performance:

corruption

Governance and corruption

The manner in which the statestateacquires and exercises its authority to provide public goods & services

Improper use of administrative power for private gain.

GovernanceGovernance

CorruptionCorruption

Corruption is an outcome – a consequence of the failure of accountability relationships in the governance system

Corruption is an outcome – a consequence of the failure of accountability relationships in the governance system

Governance problems: some examples

• Grand Corruption: State Capture - Leaders plundering state assets (Mobutu, Abacha) - Powerful “oligarchs” buying state officials (CIS)- Corrupt leaders colluding with corrupt investors: non-competitive, non-transparent award of contracts (oil & gas)

• Nepotism and Patronage in Public Service- Political pressure for award of contracts, appointments- Politicized transfers (South Asia)

• Administrative (Petty) Corruption & Inefficiency:- Bribes for licenses, permits, government services- Diversion of funds for public programs- Inefficient and ineffective service delivery

Governance can be measured – control of corruption

Corruption is present in all countries in the world: TI 2007 Corruption perception index

Types of corruption

• Grand corruption

• Political corruption

• Corporate corruption

• Administrative corruption

• Petty corruption

• Systematic corruption

Causes of corruption

• Ambiguous laws and regulations

• Opportunity to abuse power

• Relatively low income per capita

• Poor enforcement of property rights and the rule of law

• Closed economic and political systems

• Historical and cultural factors

Consequences of corruption

• Corruption undermines trust in institutions

• Corruption reduce the effectiveness • Corruption affects the personal lives

of citizens and hurts the poor the most

• Loss of tax revenue• Adverse budgetary consequences • Lower quality of infrastructure and

public services• Corruption distort the composition of

government expenditure

Exporting corruption

Corruption by type of foreign bribery

Corruption by sector

Source: Transparency International Bribe Payers Survey 2008.Possible scores range from 0 to 10, with 0 representing the view that ‘bribes are almost always paid’ and 10 that ‘bribes are never paid’ by a sector.

International actions to combat corruption: agreements

• UNCAC: 133 signed; 30 ratifications to enter into force reached on Sept. 15, 2005—preventive measures, criminalization and law enforcement, international cooperation, asset recovery

• OECD Convention Against Bribery: all 30 OECD members and 6 non-members have complied with making it a punishable offense to bribe an official in a host country;

• FATF: national and international policies vs money laundering and terrorist financing;

Business sector initiatives

• International Accounting Standards: 10 countries in 1974 to over 70 countries to date

• International Chamber of Commerce: published Rules of Conduct to Combat Extortion and Bribery in 1977 (revised in 1999)

• Publish What You Pay (George Soros, 2002): now a coalition of over 280 NGOs worldwide

• Partnership Against Corruption Initiative: WEF in 2004• Global Compact: 10th principle against corruption added

in 2004—hundreds of companies have committed to the compact which urges them to lobby for ratification and implementation of the UNCAC and collaborate with other anticorruption efforts

Issues on government performance:

transition economies

Transition economies

• “Form plan to market” (World Bank, 1996)

• The replacement of one set of institutions governing economic activity by different one

• Setting of “new rules of the game”

• Path dependency, historical evolution, underlying cultures

Countries under transition Country GNI per capita / US $ DB 09 DB 08Southeastern Europe

Albania

Bosnia and Herzegovina

Croatia

Macedonia, FYR

3,290.00

3,580.00

10,460.00

3,460.00

86

119

106

71

135

117

107

79

EU countries

Estonia

Latvia

Lithuania

Bulgaria

Czech Republic

Hungary

Poland

Romania

Slovakia

Slovenia

13,200.00

9,930.00

9,920.00

4,590.00

14,450.00

11,570.00

9,840.00

6,150

11,730.00

20,960.00

22

29

28

45

75

41

76

47

36

54

18

26

28

44

65

50

72

47

37

64

Countries under transition Country GNI per capita / US $ DB 09 DB 08

Armenia

Azerbaijan

Belarus

Georgia

Kazakhstan

Kyrgyz Republic

Moldova

Russia

Tajikistan

Ukraine

Uzbekistan

2,640.00

2,550.00

4,220.00

2,120.00

5,060.00

590.00

1,260.00

7,560.00

460.00

2,550.00

730.00

44

33

85

15

70

68

103

120

159

145

138

41

97

115

21

80

99

92

112

156

144

140

Asia

Cambodia

China

Lao P.D.R.

Mongolia

Vietnam

540.00

2,360.00

580.00

1,290.00

790.00

135

83

165

58

92

150

90

162

55

87

Transition policies

Eastern Europe’s transition• Poland, Hungary, and Czech Republic (to a lesser extent)

underwent serious pain in early years but have begun to recover economically

• Each European country in transition differs in terms of how it approached transition and what its starting point was

China’s transition• Chinese growth has been far stronger than for other

countries in transition• China maintained totalitarian political control while

loosening the economy• A major challenge is privatizing state-owned enterprises

Problems during transition

• Institutional underdevelopment• Inflation and hyperinflation, Inflation tax• Budget crises (main source of budget

incomes before transition– turnover tax on state enterprises)

• Additional spike in government expenditures: international (Armenia and Azerbaijan in 1992 – 93) or civil (Tajikistan in 1992 – 94 and Georgia 1992 – 93) wars.

• Implementing new tax systems took time and was resisted

Problems of privatization

• The choice of the form of privatization• Value assessment• Ownership distribution problems: who

should receive the vouchers? Fairness concerns

• Should trading in vouchers be permitted?• Asymmetric information and management

control• Lack of the management experience• Incomplete markets • Political influence

Attractiveness of transition economies

• Factor costs advantages

• Low cost of locally extracted raw materials

• Markets and expected demand growth– Consumers had previously little or no access

to consumer goods and brands– MNEs can sustain and enhance their global

strategic position– Re-establishment of several underdeveloped

sectors of industry (inviting foreign investors)

Tasks

• Discuss in groups:– What are the features of

• Issues• Interests• Institutions• Information

In transition economies?

– How does it influence corporate strategies?