Readings: Government-Business Relationship
Government is a complex network of organizations; whose major
components include not only ministerial positions but also those
commonly categorized governs/ direct (regional & local).
The role of the government
As service provider of law and order, stable property rights, key public
goods and welfares re-distributions or Social transformer from
traditional production systems to a capitalist economy.
The three theoretical component of liberal market economy are:
1. Efficient markets are rent-free and have stable property rights.
2. Rent-Seeking creates rent and destabilizes property rights.
3. The absence of democracy and a weak bureaucracy allows rent-seeking to continue.
The state failure according to the liberal market consensus
We can deal with this failure through institutional (governance) reforms:
 Economic reforms: Rent-free markets
 Political reforms :Democracy-Decentralization-Civil society
 Institutional reforms: Right size – Judiciary independence – Raise salaries
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Fighting corruption
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Readings: Government-Business Relationship
Social and Economic Change.
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The economic power and violence potential of the state is inevitably deployed for
better or for worse.
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The state is an instrument in the hands of contending classes, groups and political
entrepreneurs each attempting to capture resources and steer the transformation in
specific directions.
The state failure in capitalist economy
The absence of a dominating feedback loop from the performance of the capitalist sector to
the political process allows a much greater range of variation in policies and institutions, and
makes it possible for there to be sustained state failure in ensuring a dynamic
transformation.
State intervention in social transformation
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A tax system that is efficient in raising resources for delivery of democratically
agreed upon public goods
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Well-defined rights would help efficient re-allocations only if transaction costs were
low.
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The outcomes of transfer and destruction of property rights depend not on the
stability of prior property rights structures but on who is capturing resources and the
institutional structure imposing discipline.
The stability which distinguishes high- growth states is not a stability of property rights but
rather a more subtle stability of commitment to growth, which means that dynamic
entrepreneurs could have stable expectations that if they remained dynamic, they were
unlikely to be touched.
Dynamic State
Managing growth-enhancing rents.
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Institutions for managing information rents.
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Schumpeterian rents are essential for innovation.
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Readings: Government-Business Relationship
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Creating learning rents to enhance the usage of advanced technologies.
Destroy growth-reducing rents.
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Competition policy.
 Regulation.
 Organizing ring-fenced transfers to maintain political stability.
In reality, transfers often cause serious economic damage if the only way in which
fragmented groups can capture resources is by creating or capturing a large number of
uncoordinated value-reducing rents, like inferior public good provision or by capturing
subsidies for industrial learners. It is necessary to have set of institutions with the
regulatory capacity to make distinctions between different kinds of rents and with the
political capacity to manage these rents to generate growth and rapid transformation.
The Effectiveness of Institutional Enforcement.
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Enforce industrial policy regimes.
Enforce any growth-generating institution, including property rights for potentially
productive users.
Effective enforcement requires both institutional capacity and a compatibility of
institutions with the interests of powerful social groups.
Institutional capacity means the ability of the state to do (positive) things. It
requires:
 Staffed court system.
 Effective political capacity to:
 Neutralize unproductive groups.
 Creation of political organization of productive groups.
Compatibility means construct a compatible package of institutional reform and
political restructuring of organized power which may allow better enforcement of a
dynamic transformation strategy in the future.
The lesson is that in poorly performing countries, much more deliberate steps have to be
taken to construct compatible packages of institutions and political settlements to achieve
even second-best transformation success.
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Readings: Government-Business Relationship
Critical success factors for growth-enhancing institutional
transition
1. Political will and democracy,
2. Wisdom of leaders,
3.
The institutions through which the change is organized, and
4.
Distribution of power between groups.
The changing role of government in the Chinese Economy
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Considering the fact that China is the most populous country in the world – having
roughly 1.3 billion inhabitants, that is 20 or so percent of the global population –
remarkable economic expansion of its economy and fast growth of output and
standards of living of Chinese people over the last quarter of a century should be
considered as one of the greatest economic achievements in the mankind’s history.
Some Chinese economists suggest that the role of the state should be restricted to
providing defense, defining property rights, enacting and implementing a system of
laws, enforcing contracts, and maintaining the value of the currency.
Even in mature market economies, state involvements are necessary for improving
market and organizing efficient.
Especially, China faces many challenges, which cannot be settled through voluntary
transactions.
The Chinese market transition is a conflict process; it also has its ethical and moral
basis, and also redistribution of resources and power such as "iron rice bowl"
(lifetime employment) and "everyone eating from the same pot" (equal income
distribution regardless of effort)
It was possible for the Chinese government to strengthen its extractive capacity
under two conditions:
1. The ratios of total government to GDP stop falling
2. The central share of total government revenue begins to increase.
China's 1994 fiscal reform was an attempt to replace the old discretion-based
system with a rule-based system.
In addition to enhancing state capacity, therefore, another set of changes is also
imperative:
 In the 1980s and early 1990s, the goal of development for Chinese policymakers was to place the top priority on rapid collective growth.
 Environment protection was avoided, and the construction of new social
safety net delayed. Although the government paid a great deal of lip service
to education and R&D, investment in them remained very low as a
percentage of GDP.
 The expansion of GDP of course is an important means for achieving other
objectives, but it is after all a means. The end of development is to improve
human welfare
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Readings: Government-Business Relationship
 Rapid economic growth failed to translate into improvements in the lives of
ordinary citizens
 To make development sustainable and equitable, the Chinese government
certainly has to change its development strategy.
State Business Relations (SBRs)
Is a set of highly institutionalised, responsive and public interactions between the state and
the business elite.
The importance of (SBR) to the economic growth.
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Lead to a more optimal allocation of resources in the economy.
Increased effectiveness of government involvement in supporting private sector
activities and removing obstacles.
Characteristics of governance
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The rule of law, Predictability, Transparency and Accountability.
Conclusion
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Effective SBRs drive a more optimal allocation of resources, including an increased
effectiveness of government involvement in supporting private sector activities and
removing obstacles.
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Effective SBRs are linked to the literature on good governance.
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The key factors associated with effective SBRs are based on theory and practice: an
organized private sector, an organized public sector, an institutionalized mechanism
of SBR, and absence of harmful collusive behavior.
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We need to measure the impact of the variable SBR on economic performance using
macro and micro level data, taking into account other causes of growth.
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Readings: Government-Business Relationship
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