Transcript STATE BUSINESS RELATIONS AND ECONOMIC …

STATE BUSINESS
RELATIONS AND
ECONOMIC DEVELOPMENT
IN INDIA
KUNAL SEN
IDPM, UNIVERSITY OF MANCHESTER AND JOINT
RESEARCH DIRECTOR, EFFECTIVE STATES AND
INCLUSIVE DEVELOPMENT (ESID) RESEARCH
CENTRE
WHAT WE TRY TO DO IN THE BOOK
• We addressed three core research questions that have been
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previously less studied in the literature.
Firstly, what characterises effective state-business relations and how
have they evolved over time in Indian states?
Secondly, what are the implications of effective state-business
relations for economic performance?
Finally, how do effective state-business relations emerge? What
political factors explain their provenance, and why do collusive statebusiness relations that are not growth enhancing persist over time?
Both quantitative and qualitative methods, and contributions by
political scientists and economists
Based on original empirical research undertaken in India (and Africa),
as part of work done in the IPPG research consortium
(www.ippg.org.uk)
What do we understand by effective State
Business Relations (SBRs)
• “a set of highly institutionalised,
responsive and public interactions
between the state and the
business elite”
What characterises effective SBRs?
• Transparency in information
• Reciprocity in actions
• Credibility in statements
• Trust
• Absence of collusive behaviour between business
and states
Which (Economic) Institutions Matter?
• The earlier Northian view of ‘good’ institutions was
focused on well defined and secure private property
rights. Influenced WDR 2002 and the De Soto agenda.
Shaped most of the empirical work that followed (AJR,
Rodrik et. al., Hall and Jones,…).
• The Williamsonian emphasis was on transactions costs –
the WB interpreted this narrowly in their Doing Business
surveys to mean any regulatory/legal and extra-legal
impediments to the investment activities of firms.
• More recent theoretical literature allows a broader view of
institutions – as coordination mechanisms and recognise
that informal institutions may dominate formal institutions
as a means of governance in certain contexts (Bardhan
2005, Dixit2009).
SBRs as coordination mechanisms
‘The rules of the game and the players of the game’
• SBRs embody both formal and informal institutionsboth rule and relationship based governance.
• They help solve information related market and coordination failures and collective action problems(e.g,
business associations monitoring their members and
ensuring compliance).
• Help address credible commitment issues.
• The players: Organisations – business associations,
trade unions, ministries, public sector agencies.
• Subsumes property rights and transactions costs,
but allows a more nuanced and wider lens through
which to look at institutional questions.
How do effective SBRs matter for
economic growth in Indian states?
• To causally establish the effects of SBRs on growth, we
need to measure the effectiveness (quality) of SBRs.
• We wanted to go as far as back in time as possible (to the
1970s) as the relation between state and capital had
started changing both nationally and sub-nationally in the
late 1970s/early 1980s.
• So we needed a measure that was time-varying and
across Indian states to capture the effects of SBRs both
over time and across geographical space.
• This also avoided some of the problems with crosssectional empirical work on institutions and growth.
• We also needed a measure which was based on the
observable features of effective SBRs, mostly relying on
secondary data.
Measuring SBRs
 How is the private sector is organised vis-à-vis the public
sector?
 How is the government is organised vis-à-vis the private
sector?
 How are SBRs practiced and institutionalised?
 What mechanisms are there for the avoidance of harmful
collusive behaviour?
Explaining regional growth in Indian
States
• While economic growth in India has been strong since the
mid 1980s, not all regions in India have benefited equally
from the improvement in overall economic performance.
• The significant political autonomy and independence in
legislative powers enjoyed by state governments, along
with regional variations in the collective strength of the
economic and political elite, has led to strong variations in
SBRs across states in India (Sinha 2003).
Measuring SBR In Indian States
• 1. How is the private sector organised?
• 2. How is the public sector organised?
• 3. Practice of SBRs
• 4. Presence of Collusive SBRs
Each given equal weight; coded from 0 to 1; and
aggregated to form an overall measure of SBR (which
varies from 0 to 1)
How is the private sector organised?
• Is there an umbrella business association and when did
it come into being?
• Indicators of activity/reach of business associations that
are time-varying.
• Indicators of fragmentation of the private sector in the
state.
• We look at the main private sector assoc for the state, and
the two leading industry assocs.
How is the public sector organised?
• The presence of state owned or state
participated productive corporations, which
are investment promotion agencies, Financial,
Infrastructure Development and Tourism
Development Corporations.
• The governments’ signalling of their relative
priorities through the allocation of public
resources to productive sectors– share of
economic services in total govt expenditures.
How is SBR practised?
• Stamp duty as a measure of the attitude of the
state governments towards business
establishments and their expansion.
• Labour regulation, as an indicator of the govt’s
signal to the capitalist class in the state.
What are the mechanisms to avoid
collusive behaviour?
• Transparency of the BAs (regular publications for
its members, frequency of publications, etc.).
• De-licensing changes in the 1980s and 1990s.
Figure 1: Evolution of the Effectiveness of State Business Relation measure in Indian States, 1985-2006
Assam
Bihar
Gujarat
Haryana
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Orissa
Punjab
Rajasthan
Tamil Nadu
Uttar Pradesh
Uttarakhand
West Bengal
.3 .4 .5 .6 .7
.3 .4 .5 .6 .7
.3 .4 .5 .6 .7
SBR index
.3 .4 .5 .6 .7
Andhra Pradesh
1980
1990
2000
2010 1980
1990
2000
2010 1980
Year
Graphs by statenm
1990
2000
2010 1980
1990
2000
2010
Do effective SBRs matter for State-level
Growth in India?
• We estimated dynamic panel data regressions, with 15
states and period: 1985-2004 (two stage to handle
endogeneity concerns).
• Range of controls (year and state specific effects, regional
effects, demographic, literacy, weather shocks, etc.)
• We found strong evidence of the impact of effective SBRs
on growth, with a one per cent increase in our measure
leading to a three per cent increase in long-run state-level
growth.
Counter-factuals
Functioning matters, not the form
• The results suggest that the key dimensions of SBRs that
stimulate economic growth seem to be those related to
the actual operations of the interactions between states
and businesses.
• Confirms the arguments made by Kohli, Rodrik and
Subramanian and De Long on the role of the ‘attitudinal
shift’ of the state in explaining India’s growth acceleration
at the national level. Our findings suggest a similar story
at the sub-national level.
• Sinha (2005) and Kochanek (1996) has documented the
transformation of FICCI and the emergence of CII as
developmental business associations. Some evidence of
this at the sub-national level.
• On the other hand the formal organisations (both public
and private) in place to favour such interactions seem to
be even counterproductive for economic growth.
Limitations of our work
• Quantifying the effectiveness of state-business relations
using objective/observable indicators essentially captures
formal dimensions, not informal dimensions (similar
problem with any de jure measure of state
capacity/governance/institutions).
• Going back in time meant a reliance on secondary data,
and limited the scope of the study – future work could be
more reliant on primary data, and based on perceptions,
rather than objective measures.
• However, our measure of institutional quality more
credible than other measures out there – e.g World
Bank’s Doing Business indicators.
What explains the emergence of effective SBRs in
some contexts and not in others?
Two state case-studies (WB- Deepita
Chakravarty/Indranil Bose, AP – Srinivasulu et al.)
• Development ideologies and goals of dominant political
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and economic elites
Relative power of state vis a vis that of business elite/s
Organization of the bureaucracy and bureaucratic
organizations
Form, structure, multiplicity and representatives of
Business Associations (BAs).
Formal and informal institutional arrangements linking
State and Business
Leadership / human agency.
Establishing, sustaining and renewing effective statebusiness relations are political processes, and cannot
be had to order.