Informal state–business connections, institutions, and economic growth

Abstract

In today’s world, continuous interactions between government officials and business people in market transactions are inevitable, opening the way for state–business cooperation and, consequently, various forms of state–business relations (SBR). This paper discusses informal SBR and their effect on economic growth. It does so while accounting for various institutional settings, arguing that studying the interaction between informal SBR and existing institutions is important in this regard. This is done both theoretically and empirically. Two questions are being tackled. The first is: which institutions—specifically governance institutions—help informal SBR in realizing higher levels of economic growth? The second is: can informal SBR correct the institutional deficiencies of some institutions and lead to better economic outcomes? After a theoretical discussion, an OLS cross-sectional regression model is used to answer the research question. The obtained results suggest that informal SBR do have a positive effect on investment (and ultimately economic growth) when good institutions are established. In this paper, those institutions are suggested to be voice and accountability, control of corruption/cronyism, and government effectiveness. The results also suggest that informal SBR, by building trust, can overcome some institutional impediments such as ethnic fractionalization and (with less certainty) some hierarchical cultures, leading ultimately to more investment and economic growth.