While many factors contribute to economic growth in a measurable way, this paper suggests that an effective state-business relationship (SBR) is one important underlying factor whose contribution has so far been difficult to measure. Effective SBRs lead to a more optimal allocation of resources in the economy, including an increased effectiveness of government involvement in supporting private sector activities and removing obstacles. SBRs are linked to the literature on good governance and while being part of governance literature, effective SBRs may also lead to and prioritize governance reforms. The aim of this paper is to measure the key factors associated with effective SBRs for 20 sub-Saharan African (SSA) countries over the period 1970-2005. The key factors were based on theory and practice: an organized private sector vis-à-vis the public sector, an organized public sector vis-à-vis the private sector, an institutionalized mechanism of SBR, and absence of harmful collusive behaviour. We scored the twenty SSA countries over time on the basis of these factors and calculated a composite SBR time series for each country. The new measure of SBR seems plausible; first, higher scores are associated with faster growth (though more precise regression work will be done in a second phase); secondly, the new measures correlate well with other governance indicators; and thirdly, they correlate with more operational investment climate data, such as fewer procedures when trading goods and services. We suggest two ways forward: first, we need to measure the impact of SBR on economic performance using macro- and micro-level data, taking into account other causes of growth; we will undertake this in the next stage. Secondly, we need further detailed descriptions of state-business relations across African countries - for instance, there does not seem to be a simple correlation between a high SBR score and perceived effectiveness of the association (based on micro-level data), so this needs further attention. Going into further detail will enable us to measure more specificities of state-business relations and therefore evaluate which specific circumstances are associated with effective SBRs.
IPPG Discussion Paper Series Number Four, DFID, London, UK, 35 pp.