Business and the State in Developing Countries -Sylvia Maxfield and Ben Schneider By: Claire Stoker

Introduction The Common Suspicion: If the Businesses and the State are close, then democracy, economic efficiency and social welfare will suffer. The Common Suspicion: If the Businesses and the State are close, then democracy, economic efficiency and social welfare will suffer. Rent-Seekers or D.U.P. (Directly Unproductive Profit-Seeking): tariff evasion, premium seeking, revenue seeking, tariff seeking…wasteful, squander the resources of society for personal gain. (Example) Rent-Seekers or D.U.P. (Directly Unproductive Profit-Seeking): tariff evasion, premium seeking, revenue seeking, tariff seeking…wasteful, squander the resources of society for personal gain. (Example) “The Iron Law” of Rent Seeking: wherever a rent can be found a rent seeker will be there trying to get it. “The Iron Law” of Rent Seeking: wherever a rent can be found a rent seeker will be there trying to get it. Answer: Market-Oriented Reform (US policy in the 80’s towards Latin America) Answer: Market-Oriented Reform (US policy in the 80’s towards Latin America) But Problems Still Result…privatization of state firms, isolated reforms, opportunities for unbound capitalists to abuse their market powers, and market failures (ie. natural monopolies in pub. Utilities) But Problems Still Result…privatization of state firms, isolated reforms, opportunities for unbound capitalists to abuse their market powers, and market failures (ie. natural monopolies in pub. Utilities) Institutionalist Perspective: Business and Government can have close collaboration and still produce economic growth/development Institutionalist Perspective: Business and Government can have close collaboration and still produce economic growth/development So, overall purpose of this book: To examine the conditions that keep business-state relations from degenerating into collusion and rent-seeking So, overall purpose of this book: To examine the conditions that keep business-state relations from degenerating into collusion and rent-seeking

Ch. 1: “Business, the State, and Economic Performance” UNPACKING COLLABORATION UNPACKING COLLABORATION Information Exchange-an increased flow of accurate, reliable info.=crucial to economic growth. Information Exchange-an increased flow of accurate, reliable info.=crucial to economic growth. Dependent upon technical capacity within the state to compile/analyze date & willingness of businesses to share it. Being well informed helps the state make effective policies and helps the businesses accurately assess the market. Dependent upon technical capacity within the state to compile/analyze date & willingness of businesses to share it. Being well informed helps the state make effective policies and helps the businesses accurately assess the market. Complications: Incentives on both sides to manipulate the information to gain a strategic advantage. Complications: Incentives on both sides to manipulate the information to gain a strategic advantage. The more this information affects government benefits, the more likely it will be distorted/manipulted. The more this information affects government benefits, the more likely it will be distorted/manipulted.

Reciprocity: In exchange for subsidies the State exacts certain performance standards from the firms Reciprocity: In exchange for subsidies the State exacts certain performance standards from the firms Therefore: the State actors must have the necessary autonomy and capacity to require this improved performance…they must have the power to sanctions businesses that do not comply with state-set standards. Therefore: the State actors must have the necessary autonomy and capacity to require this improved performance…they must have the power to sanctions businesses that do not comply with state-set standards. If they cannot, their threats are empty and collaboration will degenerate into corruption. If they cannot, their threats are empty and collaboration will degenerate into corruption. Also, they will lose all credibility… Also, they will lose all credibility…

Credibility: reduces the cost of political uncertainty Credibility: reduces the cost of political uncertainty Assures businesses that the government will not manipulate information for personal gain. Assures businesses that the government will not manipulate information for personal gain. Depends on numerous factors- the type of policy, information flows, the reputations of the officials involved, and government backing Depends on numerous factors- the type of policy, information flows, the reputations of the officials involved, and government backing Drawbacks: ties the hands of policymakers, limits their flexibility Drawbacks: ties the hands of policymakers, limits their flexibility

Trust: implies extensive mutual dependence and vulnerability which does not come all at once in the beginning. Trust: implies extensive mutual dependence and vulnerability which does not come all at once in the beginning. Positively effects economic performance because it greatly improves economic efficiency and reduces transaction and monitoring costs as well as uncertainty. Positively effects economic performance because it greatly improves economic efficiency and reduces transaction and monitoring costs as well as uncertainty.

CONDITIONS FOR COLLABORATION The State should insulate policymakers from societal pressures so that institutional goals replace self interests and bind their behavior to common goals. But most developing countries do not have the privilege of having a merit-based, politically-insulated bureaucracy…most=authoritarian regimes. But most developing countries do not have the privilege of having a merit-based, politically-insulated bureaucracy…most=authoritarian regimes.DEMOCRATIZATION… Democracy affects most of the conditions for establishing collaborative relations by bringing labor and politicians back into the picture. Democracy affects most of the conditions for establishing collaborative relations by bringing labor and politicians back into the picture. The changing strength and strategy of organized labor-alters business strategies for collective action. The changing strength and strategy of organized labor-alters business strategies for collective action. Democracy forces politicians back into dealings that had become solely between capitalists and bureaucrats. Democracy forces politicians back into dealings that had become solely between capitalists and bureaucrats.

COLLABORATING TO SURVIVE Perceived Threats: Often times the economic elites will be hesitant to invest in a collaborative system because they feel threatened. Perceived Threats: Often times the economic elites will be hesitant to invest in a collaborative system because they feel threatened. Vulnerability to International Competition provides one incentive to cooperate to survive. Vulnerability to International Competition provides one incentive to cooperate to survive.

Ch. 2: “Theories of Business” 5 Theoretical Approaches to the Political Economy of Business-State Relations 1. BUSINESS AS CAPITAL: CONSTRAINING THE STATE 1. BUSINESS AS CAPITAL: CONSTRAINING THE STATE -States are constrained by private control of physical and financial assets & capital mobility. -takes a structural view of business influence -does not differentiate between different types of economic activity -ignores the political organization of business and the institutions that mediate business interests

2. BUSINESS AS SECTOR: STRUCTURAL SOURCES OF DIVERGENT BUSINESS INTERESTS -The distribution of economic activity and different sectoral interests affect politics, policy, and growth. -Characteristics of economic activity (factor intensity, asset specificity, & degree of industrial concentration) shape business preferences -which shapes the capacity for collective action -which affects policy outcomes -State constraint in this model: contending interests of different sectors -(Also takes a structural view of business influence -Also ignores: political organization of business/ institutions)

3. BUSINESS AS FIRM: SIZE, HORIZONTAL DIVERSIFICATION, AND PATTERNS OF FINANCING -Examines political consequences of corporate organization -Characteristics of corporate structure (size, internal organization, ownerships, patterns of financing, etc.) affect business preferences -which affect the pull that businesses have in relation to government actors -For developing countries two factors in particular are the most important: size, diversification -(Also takes a structural view of business influence -Also ignores: political organization of business/ institutions)

4. BUSINESS ASSOCIATIONS: COLLECTIVE ACTION AND SELF-GOVERNANCE -Seeks to understand how business associations affect business performance through lobbying -& how they affect policy implementation (ie. Through private interest governance-businesses assuming govt. functions) -Takes an instrumental rather than structural approach. -Takes into account the political organizations of business

5. BUSINESS AS NETWORK: SOCIAL CONSTRUCTIONS OF TRUST AND COLLABORATION -This is a more sociological view of business: broken up into individual managers and owners. -Interaction with govt. is not through Institutional channels, but networks of personal relationships and overlapping roles. -Attempts to see business as made up of people with varying interests and relationship builing capabilities.

Questions for Discussion… 1. What do Maxfield and Schneider say is the main purpose for their book? What is it that they would like to prove in detail? 1. What do Maxfield and Schneider say is the main purpose for their book? What is it that they would like to prove in detail? 2. Why are trust and credibility between Business and State so important for economic growth? What costs do they diminish? 2. Why are trust and credibility between Business and State so important for economic growth? What costs do they diminish? 3. Which of the five theories seems to best explain business-state relations for developing countries? Do Maxfield and Schneider have a favorite theory or do they see the value in each? Why do they present all five? 3. Which of the five theories seems to best explain business-state relations for developing countries? Do Maxfield and Schneider have a favorite theory or do they see the value in each? Why do they present all five?