This paper investigates the factors responsible for the emergence of different arrangements of state–society relations. Being concerned with the relations related to the industrial sector, this study focuses more on state–business–labor relations (SBLRs), especially on power dynamics between the main actors in these relations, namely, the state, tycoons, entrepreneurs and labor.
Based on power dynamics, four SBLR modes are identified and differentiated according to state power vis-à-vis non-state actors and tycoon power vis-à-vis the other non-state actors. The balanced mode is characterized by balanced power relations among the four considered actors. In the capture mode, tycoons are more powerful than other actors, including the state, although other nonsocial actors have organizational rights. The crony mode has powerful state, subservient tycoons who enjoy high levels of favoritism and low organizational power for the other social actors. Finally, the state-dominance mode has powerful state, low levels of favoritism to tycoons and low organizational power for all social actors. The paper then explores the factors responsible for the emergence of each of these modes by investigating the factors’ effects on state power and favoritism to tycoons. The investigated factors include historical political–economic, geographical, legal and cultural factors. The hypothesized effects of these factors are then tested using a random-effects probit regression model, investigating how the different factors affect the probability of the existence of the studied SBLR modes.
The results support much of the hypothesized relations and place more emphasis on some of the investigated factors. Earlier development is clearly responsible for the emergence of either the balanced or the state-capture SBLR mode. Geographical conditions favorable for development, such as latitude and metal richness, also lead to the emergence of either mode. The communist heritage, and more accurately the post-communist economic and incomplete political liberalism of the transition stage, contributed to the emergence of the state-capture SBLR mode. The British legal system, with the power it provides to non-state actors through the independence of judges and other measures, contributes to the emergence of the balanced SBLR mode. Cultural factors are largely responsible for the emergence of the crony SBLR mode, especially hierarchical and collectivist cultures, as well as ethnic fractionalization. On the other hand, the culture of Confucians has the strongest influence on the emergence of state dominance, while other cultures play a marginal role in its rise, and ethnic fractionalization marginally defuses the ability of the state to dominate without resorting to favoritism. Finally, access to rich natural resources, by enriching the state independently from social actors’ financial resources (e.g. taxation), marginally increases the probability of the emergence of the state-dominance mode.
There is room for path dependency to explain the emergence of different SBLR modes in many countries. Unfortunately, the introduced regression model and any quantitative empirical work would not be able to effectively investigate such a process. Instead, an approach depending on case studies and a deeper investigation of country-specific historical political development is needed to complement the research done here. Conducting such an additional quest would help in reaching a more comprehensive understanding of why different countries have different SBLR modes. This should ultimately help in answering an equally important question: How to reverse engineer the emergence of favorable SBLR modes?
Although this paper did not investigate the economic merits or mischiefs of each of the studied modes, it is plausible to think of the balanced SBLR as the best mode. This is supported not only by the fact that most of the countries of this mode are developed countries but also by the attractiveness of the power dynamics governing this mode—a more balanced power among different SBLR actors. While some factors are almost impossible to replicate, for example, geographical factors, reform could target the factors that could be changed or mitigated. This is true for legal reform, especially for fostering the independence of judges. Culture is often regarded as a sticky institution. However, this is not always true, even though the change happens in the long run. A sort of dynamism should always be considered when referring to culture through time and space. Institutional reform could be instrumental in the long run in this regard. Conducting such reform with the help of such “exogenous” institutions should always consider the match between these institutions and “endogenous” institutions, such as culture. That is to say, the connection between democratization, fostering accountability and curbing favoritism and cultural values leaning toward these principles should be firmly established. Finally, a point of optimism is that—based on the results of this paper—reaching a high state of development could increase the chances of realizing a more balanced SBLR mode in the long run.
This paper represents a novel contribution to a topic that has hardly been addressed in the literature. The methodology that is used identifies different state–society relation modes and focuses on power relations in SBLRs is another important contribution to the present literature in many fields, such as institutional economics, socioeconomics and political economy.
Emerald Publishing Limited
Copyright © 2022, Mohamed Ismail Sabry
Published in Fulbright Review of Economics and Policy. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/ legalcode
In our contemporary world, industrialization is led by various state–society arrangements, with varying degrees of success in achieving the envisaged objectives. This applies not only to developing countries that still struggle to proceed in their path to economically catch up with the advanced world but also to the developed world that has discovered a way to maximize its benefit from the Fourth Industrial Revolution (Industry 4.0). State–society relations guide industrial policy choices, ultimately leading to different economic outcomes related to the industrial sector, affecting its growth, efficiency, competitiveness and the distribution of its yields. State–society arrangements vary from collaborative means in reaching policy consensus among state and non-state actors to the most extreme case where the state dominates society and policy formulation. Between the two, other forms exist in which some non-state players are more powerful than others, at times even more than the state.
Which factors led to such different institutional arrangements? The serious implications of such arrangements on industrial development call for investigating such a research question. Without a good understanding of entrenched state–society relations, general policy reform recommendations that are often prescribed by international organizations could be doomed to failure. Understanding the characteristics and development of different forms—or as referred to here as modes—of state–society relations is of utmost importance. Institutional arrangements usually evolve in response to unique conditions—historical, geographical and cultural. Understanding which factors are more decisive in shaping these arrangements helps in designing better institutional reform that goes deeper than simple policy recommendations. It is often suggested that some societies are destined for dictatorial rule, favoritism and cronyism, high levels of inequality and distribution of chances. Yet, knowing the factors that led to the emergence of these state–society relations, which are in turn responsible for lasting institutional socioeconomic and political-economic conditions, is the first step to reversing, reinforcing or improving these conditions.
This paper conducts such an investigation. It represents a novel contribution to a topic that has hardly been addressed in the literature. It dwells on the literature on institutional economics, state–business relations, industrial relations and corporatism to construct its theoretical framework. The methodology used is another important dimension contributing to the uniqueness of the research done in this paper. Given the focus on the industrial sector, the theoretical framework focuses on state–business–labor relations (SBLRs) as the core of state–society relations. Such relations are governed by power dynamics among the major actors, here identified as the state, tycoons (big enterprises’ businesspeople), entrepreneurs (businesspeople of small and medium enterprises [SMEs]) and labor. Two main dimensions determine the resultant SBLR mode: the relative power of the state vis-à-vis non-state actors and tycoons’ ability to secure favorite allocation of resources to their favor and at the expense of other non-state actors. The paper suggests that different historical political-economic, geographical, legal and cultural factors are responsible for the emergence of different SBLR modes. These factors affect the power dynamics within SBLRs, namely, the two highlighted dimensions of the relative power of the state and that of tycoons.
The rest of the paper is organized as follows. Section 2 first identifies various modes of state–society relations, more specifically SBLRs. It then investigates the possible geographical, historical political-economic, legal and cultural factors responsible for the emergence and sustenance of the identified SBLR modes. Section 3 then introduces proxies for the different SBLR modes, before conducting regression analysis—using the random-effects probit model, to test the effects of the earlier identified factors on the existence of these modes. Section 4 provides the results and discussion. Section 5 summarizes the obtained results and offers policy recommendations.
2. Theoretical perspectives
2.1 Power and SBLRs
State–society relations are regarded from the angle of the power dynamics governing the relation between the main social collective actors in the relation. Since the focus is on the industrial sector, the actors are considered at the center of industrial relations.
Industrialization has brought new social actors to the forefront, reshaped the role of some and diminished the power of yet other actors. Industrial relations have developed based on the relations between businesspeople and labor, which have shaped the socioeconomic development of the industrialized world. Yet, a third distinctive key player has always been present. This is none by the state. Despite the exaggerated terminologies that often refer to some states as “the agent of capitalist enterprise” (see Cardoso, 1978, p. 14) or a representative of the Marxist–Leninist “dictatorship of the proletariat,” states have always maintained a degree of autonomy and stayed a distinctive, if not the most dominant, actor. Thus, the three key collective social players following industrialization have always been the state, businesspeople and labor. This is more evident when discussing state–society relations in the industrial sector, placing SBLR at the center of these relations.
The state refers here to public officials, bureaucrats and ruling party politicians. Labor refers to blue-collar workers, whether skilled or unskilled. Concerning businesspeople, an important distinction should be made. Big businesspeople—the owners and managers of big enterprises—are referred to as capitalists or tycoons, while owners and managers of SMEs are referred to as entrepreneurs. This distinction is based on market share or the number of employees. Differentiating between the two groups of businesspeople is often disregarded in the literature on state–business relations (SBRs), despite its importance in investigating inter-actor power relations. The four main players in SBLRs are the state, tycoons, entrepreneurs and labor.
The power relations between these actors shape the resultant SBLR. An important point is that power here refers to the relative power of an actor vis-à-vis other actors in SBLRs. It does not refer to the absolute capability of an actor to effectively perform its work. Thus, a powerful state is not one that is capable of enforcing the rule of law, political stability, market efficiency, etc. Similarly, powerful tycoons do not refer to those who could produce efficiently and acquire shares of the foreign market. Instead, a powerful state is one that dominates non-state actors, and powerful tycoons are the ones that dominate the other non-state actors and the state. Following this logic, in a developed country where non-state actors actively participate in decision-making, a state is here considered non-powerful, despite its ability to enforce law, order and stability. The opposite could be said about the state in a developing country with poor governance but where non-state actors are subservient.
Each of the three non-state collective actors has two sources of power within SBLRs. The first is each actor’s power vis-à-vis the other two non-state actors, while the second is its power vis-à-vis the state. The power of a non-state actor vis-à-vis the state is reflected in its ability to influence or force the state to formulate and implement policies, regulations and legislations that promote this actor’s interests. Its power vis-à-vis other non-state actors is reflected in its ability to secure privileged access to resources—whether physical, legislative or regulatory—at the expense of these actors. While entrepreneurs and labor's power depend on their ability to organize independently from the state in the form of business associations and labor unions, respectively, tycoons’ power could be strengthened and exercised individualistically by other means. As pointed out by Schneider (2005, 2009, 2015), in many countries, tycoons often assume leading official positions, offer significant share-holding positions in their firms to officials and/or are allowed to finance presidential and parliamentary election campaigns.
In the 21st century, the fall of Marxist–Leninist regimes ruled out the possibility of the presence of SBLRs characterized by either dominance of or favoritism to labor. The only two actors who are able to dominate SBLRs are either the state or tycoons, and tycoons are the only collective actors who are able to secure favorite treatment from the state. This limits the number of possible SBLR modes to four. These are identified here as balanced, capture, crony and state-dominance SBLRs.
Balanced SBLRs refer here to balanced power relations between the four SBLR actors. None of the actors dominate the relationship, and none among the non-state actors secures a significant favorite treatment from the state. As is the case in Germany, labor and entrepreneurs are well organized in less fragmented unions and broad-based associations (Traub-Merz & Zhang, 2010). Public–private dialogs (PPDs) that are well-represented by the four actors or businesspeople–labor dialogs, as is the case in the Netherlands (Nauta, 2015; Trampusch, 2006), moderate inter-actors' power relations and build consensus. Balanced SBLRs could be linked to Acemoglu and Robinson’s (2019) concept of “shackled Leviathan,” where both society and the state balance one another, and cooperate rather than only compete. A mobilized and strong society is necessary to control a powerful state. Cooperation fosters states’ effectiveness in meeting the needs of society and supports society’s ability to monitor state performance (Acemoglu & Robinson, 2019; Wang, 2021, pp. 185–187).
As in the literature on state capture, capture SBLRs refer to a situation where tycoons dominate the state and direct policies to their benefit at the expense of other actors (Adly, 2010; Enderwick, 2005). Tycoons benefit from a relatively open political system to capture the state through various means, including funding election campaigns (Hellman, Jones, & Kaufmann, 2003; Innes, 2014). Despite the open political system, entrepreneurs and labor lack adequate and effective organizational power to challenge tycoons’ power. For instance, labor organizations could be weakened by labor market segmentation (Reich, Gordon, & Edwards, 1973; Streeck, 2009), the decentralization of collective bargaining and diminishing unions’ membership numbers (Eurofound, 2016; Glassner & Keune, 2012, p. 368). The presence of a significant informal sector could be an additional factor in weakening labor unions in developing countries (Schneider, 2009).
Again, following the literature, crony SBLRs refer to crony relations where a relatively dominant state does not permit much independent organizational power for non-state actors and engages in providing a favorite allocation of resources to subservient tycoons (Adly, 2010; Begley, Khatri, & Tsang, 2010; Desai & Olofsgård, 2011).
Finally, an SBLR mode where the state is dominant but none among the three non-state actors receives significant favorite treatment is referred to here as state-dominance SBLRs.
2.2 Factors shaping state–society relations
The previous discussion highlighted two broad dimensions for differentiating different SBLR modes based on power dynamics. The first is the level of state power vis-à-vis non-state actors. The second is the favoritism that tycoons could secure at the expense of other collective non-state actors. Hence, while discussing the factors that lead to the witnessed different power relations shaping SBLR, what is discussed below is rather two questions. The first is which factors foster the power of the state vis-à-vis non-state actors. Second, which factors lead to higher favoritism to tycoons? The effects of a group of historical political-economic, geographical, legal and cultural factors are explored in order to answer these two questions, which would ultimately guide the inquiry on the factors leading to the development of the introduced four SBLR modes.
2.2.1 Political-economic factors
In the early stages of industrialization, the role of the state was more dominant. This was even true in what is referred to as the “bourgeois” political order of the early industrializers of the 18th and 19th centuries (in the First and Second Industrial Revolutions), Western Europe and the United States (Organski, 1967). The state promoted capitalists’ interests by protecting property rights and freedom of work and contracts, preserving low wages and crushing labor activism (Organski, 1967, pp. 66–83, 97). The bourgeoisie eventually secured a share of political power through the democratization of the political system, which was further deepened following the growing power of industrial workers and labor activism (Huber & Stephens, 1999). The corporatist literature referred to the subsequent political orders that followed the democratization of these countries as “pluralism” and “social corporatism” (Schmitter, 1974). The experience of these early industrializers followed a more organic development, where, according to the Marxist historical materialist perspective, a change in the productive forces led to a change in the modes of production and, ultimately, a change in the superstructure. Such a historical development allowed the bourgeoisie, especially industrial capitalists, to grow powerful to the extent that the Marxist perspective regarded the resultant state as an agent of the capitalist class (see Marx, 1992). In terms of the framework introduced in this paper, such perception leans toward identifying such SBLR settings as state-capture SBLRs, with higher levels of favoritism to powerful tycoons who dominate the state. Arguably, the later process of democratization and extension of civil rights led to more balanced power relations in many Western countries. Thus, historically, early industrializers are expected to have either the state-capture or the balanced SBLR mode.
The role of the state became more evident for late industrializers who were trying to catch up (Gerschkron, 2015). Not only was the state more dominant, but the capitalist class was also rather underdeveloped. This was the case, for instance, in Czarist Russia. With the establishment of a Marxist–Leninist state in Russia, a more dominant state, claiming the representation of the interests of labor, liquidated capitalists’ power and largely marginalized businesspeople, without allowing much independent labor organizational power (Organski, 1967, pp. 94–117; Sabry, 2017). Stalinist industrialization placed the state at the forefront and led the process of creating the industrial proletariat (see Sabry, 2009, 2017). The Stalinist model was then copied in many Marxist–Leninist states that sought rapid industrialization without having a mature capitalist class. It was also inspirational to many non-Marxist developing countries.
The state also assumed an active role in industrialization in the late-industrializer state-corporatist regimes. State corporatism represented another variant, where the state was authoritarian, illiberal and more autonomous from social actors to the extent of creating and controlling interest representative organizations (Schmitter, 1974). State-corporatist political orders included populist-corporatist, fascist (Ayubi, 2001, p. 217; Cerny, 1990, pp. 168–170) and crony capitalist orders (Munger & Villarreal-Diaz, 2019; Zywicki, 2015). “Transitional politics” and the early stages of import substitution industrialization (ISI) induced the emergence of populism (Germani, 2019; Huber & Stephens, 1999), especially when the capitalist class was weak and there was no substantial organized industrial labor threat (Ayubi, 2001, p. 217). The balanced power relations among non-state actors and state dominance over these actors suggest the presence of a more state-dominance SBLR in the Cold War populist-corporatist political order. On the contrary, in crony capitalist orders, the state-dominated business associations and labor unions, yet tycoons were still highly privileged in comparison to other interest groups, as was the case in South Korea in most of the second half of the 20th century (Kyu Park, 1987, pp. 911, 915, 917). As the name of the order suggests, these countries were most likely to have the crony SBLR mode. With the post-Washington Consensus and the large-scale privatization of state-owned enterprises (SOEs) in many formerly populist-corporatists, chances for creating crony networks benefited from privatized assets, for instance in the Middle East (Adly, 2010; Cammett, Diwan, Richards, & Waterbury, 2018). So, generally, many late industrialized developed or ended up with a crony SBLR mode.
The colonial legacy could also lead to the emergence of a relatively powerful state and weaker social actors in newly independent countries. The colonial powers were often interested in establishing a strong bureaucracy to help them with administrative tasks in their colonies. This happened at a time when the rest of the colonized society and its social actors were underdeveloped (Ayubi, 2001, pp. 12–13). Moreover, the long political struggle for independence and/or nation creation is often responsible for high national sentiments in newly created countries (Sabry, 2017, 2018). Such strong nationalist sentiments could be responsible for the emergence of nationalist and often radical regimes that place the state in a much dominant position vis-à-vis social actors. Hence, it is likely that state power is stronger in newly created or independent nations, and thus the emergence of state-dominance or crony SBLRs in these countries is more likely.
The heirs of communist regimes should have inherited a much more powerful state that is dominant over non-state actors and subservient—if ever existing—business tycoons. China confirms this perception, where Chinese (SOEs still control the “commanding heights of industry,” while businesspeople are primarily entrepreneurs running SMEs (McNally, 2012, pp. 734–735, 751–752) with no prospects of success without links with officials (Cheng, 2018; Lin, 2012; McNally, 2012). Nevertheless, the literature refers to post-communist transition countries as being prone to state-capture (Hellman et al., 2003; Hellman & Kaufmann, 2001; Tudoroiu, 2015). The presence of a fragile state—weakened by the collapse of the ruling regime—and an inherited weak civil society (including business associations and labor unions) have allowed tycoons—who had benefited from large-scale privatization—to opt to capture the state (Hellman et al., 2003; Tudoroiu, 2015; Yakovlev, 2006). Former state-owned large firms used their relations with the state to influence its decisions; big new-entrants tried to compensate for their disadvantage by non-transparent and illicit payments to state officials, while small firms were left disadvantaged (Hellman et al., 2003). Tycoons’ purchase of influence included election contributions, as well as a direct payment to parliamentarians, state officials and judges (Tudoroiu, 2015, pp. 656–657).
2.2.2 Geographical factors
Various geographical variables could be responsible for the emergence of different SBLR settings. Following the institutional economics literature, the focus is on country location, size and resources.
The literature often uses the distance from the equator as a factor that influences political and economic outcomes. It leads to the development of different institutions that would ultimately affect state power vis-à-vis social actors and the level of favoritism. Rigobon and Rodrik (2005) found that the distance from the equator is positively correlated to more democratic rule and generally good institutions. Latitude is also often used as an instrumental variable for democracy (Chowdhury, 2004; Kalenborn & Lessmann, 2013). It is argued that the harsher living conditions near the equator discouraged colonial settlement and the establishment of the more advanced institutions of the colonial power in these areas (Miletkov & Wintoki, 2009) or that the similar weather conditions of the colonies far from the equator and their low population encouraged Western European colonization rather than in the colonies that were near the equator (Hall & Jones, 1999). Thus, the further we get from the equator, the more balanced power relations we should expect among SBLR actors.
The size of a country is argued to affect its democratic experience and hence the relation between the state and non-state actors. Higher population is negatively correlated to democratic rule (Rigobon & Rodrik, 2005), and having a small population leads to generally better institutions, especially on islands (Congdon Fors, 2014). Having a small population encourages more participative governance (Baldacchino, 2005). Hence, it is likely that the smaller the size of a country—in terms of population—the more participative and less power imbalances that exist in it. This would suggest having less state power vis-à-vis non-state actors, lower favoritism and a more balanced SBLR.
Resource endowment is another important factor that influences the power of the state and its ability to provide its favorite allocations. Fuel and mineral resources boost the revenue of exporting states. This should be translated into more power vis-à-vis non-state actors. This was witnessed, for instance, in the Arab Gulf region, where businesspeople became more dependent on the state after the flow of huge revenues from oil wealth (Almezaini, 2013, pp. 43–44; Azoulay, 2013, pp. 67–69; Valeri, 2013, pp. 19–20). Historically, extractive mineral industries contributed to the emergence of authoritarianism and state control in Latin America and the south of the United States, in contrast with the north-eastern parts of the United States (Engerman & Sokoloff, 2020; Frankel, 2011; Sokoloff & Engerman, 2000). Evidence is provided that oil richness, rather than other resources, decreases the chances of democratization (Gassebner, Lamla, & Vreeland, 2013) and strengthens and increases the durability of authoritarian regimes (Ross, 2015).
Resource richness also provides a good chance for the state to engage in rent seeking, corruption (Sala-i-Martin & Subramanian, 2013) and favorite allocation of resources. Karl (1999) estimated that between 65% and 75% of the post-1974 GDP of exporting countries were directed to subsidize connected social groups and political supporters. Abundant resources encourage the state to increase “patronage resources” (Doner, Ritchie, & Slater, 2005), but they also increase the provision of public goods, which should minimize dissent, especially concerning oil resource abundance (Ross, 2015). It is plausible, then, that oil resource abundance would facilitate the public provision to all non-state actors rather than the favorite allocation of resources to tycoons. Following this line of argument would suggest that resource richness, especially oil richness, is likely to lead to state-dominance SBLRs by strengthening the state and enabling it to provide resources to all non-state actors rather than being obliged to favor a few selected actors (i.e. tycoons).
2.2.3 Legal factors
An important distinction is made in the institutional economics literature between civil law and common law legal systems, especially between French civil law and British common law. Within the civil law family, a further distinction is made between the French, German and Scandinavian legal systems (La Porta, Lopez-De-Silanes, & Shleifer, 2008). The British legal system historically developed in a way that guaranteed more property rights and independence of the judiciary from the executive. On the contrary, the French legal system developed to strengthen state power, relatively free the state from property rights, and maintain its control over the judiciary, where judges are civil servants with less independence (Mahoney, 2001). This suggests that the French legal system empowers the state vis-à-vis social actors, while the opposite is true for the British common law. The French legal system centralizes the power in the hands of the state even more than other civil legal systems, such as the German system, while the British legal system is more market-oriented (Reitz, 2009, pp. 857–858). The French and British legal systems then spread with the colonial might of the two states and spread over the globe. It is suggested that countries adopting the British common law are more respectful of property rights and state power is more restrained in comparison to countries adopting the French civil law (Pellegrini & Gerlagh, 2008).
The independence of judges in the British common law minimizes corruption (Pellegrini & Gerlagh, 2008), and the same could be said about favoritism. Moreover, the higher independence of judges in the common law system should hinder the state from favoring connected tycoons (Sabry, 2013). Another dimension for distinguishing between legal systems is the level of fiscal decentralization in each system. The more centralized the state becomes because of its legal origins, the higher its capacity to provide privileges for connected tycoons. According to this literature, the French civil law is highly centralizing, British common law is highly decentralizing and between the two is the German civil legal system (Fisman & Gatti, 2002).
The legal origin classifications are often subject to heavy scholarly criticism. This is based on the simplification entailed in using quantitative methods to handle complex differences between legal systems (Reitz, 2009; Siems, 2005) and the perceived less valid distinction between civil and common law (Hadfield, 2008; Mattei, 1997; Reitz, 2009). Moreover, it is argued that, in continental Europe, legal rules were reshaped by social actors’ political alliances to cope with different post-Second World War political-economic crises (see La Porta et al., 2008). Nevertheless, as argued by Reitz (2009), the use of comparative legal systems in studying political–economic differences is still valid and valuable and some generalizations could still be made, despite the need to be cautious. Empirically, La Porta et al. (2008) showed the validity of legal origins as explanatory variables after accounting for various criticisms.
Following the above-stated arguments on legal origins, a more balanced SBLR should be expected in countries applying the British legal system, while the French legal system might be inducive for the emergence of more state-dominance or crony SBLR modes.
2.2.4 Cultural factors
Several cultural factors are responsible for the relative power of the state and favoritism. One of these factors is religion. The literature on hierarchical societies suggests that certain religion-based cultures, such as that of Catholics, Eastern Orthodox and Muslims, foster the establishment of hierarchical organizations, while others, such as the culture of Protestants, lead to the establishment of horizontal societies (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1997). Arguably, the more hierarchical a society is, the more it accepts the dominance of the state over social actors. Moreover, as argued by La Porta et al. (1997), the more hierarchical a society is, the less trust among people that it has and the less capable they are of working cooperatively. This is correlated with higher levels of corruption. Less hierarchical Protestants have lower levels of corruption (Pellegrini & Gerlagh, 2008). Arguably, the same could be said about favoritism. On the other hand, collectivist cultures—such as the culture of Confucians—with strong “in-group bias” and personal loyalty, low trust in outsiders and paternalism are more likely to have higher favoritism (particularly cronyism) (Khatri & Tsang, 2003). Thus, hierarchical and collectivist societies are more likely to have the state-dominance or the crony SBLR mode. Moreover, it is more likely that cultures that are both hierarchical and collectivist would be more prone to developing cronyism (Khatri, Tsang, & Begley, 2006), and thus crony SBLRs. Empirical evidence is provided, supporting the presence of positive correlations between each of the collectivist and hierarchical cultures and cronyism (Im & Chen, 2020).
Another cultural factor of relevance is ethnic heterogeneity. Ethnic heterogeneity is likely to produce conflicting social views on the provision of public goods (Alesina, Baqir, & Easterly, 1999). The ability of non-state actors to form broad-based organizations is limited in these conditions (Jensen & Skaaning, 2012). In Africa, which is tormented by ethnic heterogeneity, religious and tribal affiliations lead to the presence of social networks that influence decision-making, ultimately leading to tribalism and institutional weaknesses (Ackah, Aryeetey, Ayee, & Clottey, 2010). It is very likely, then, that heterogeneity leads to lower non-state actors' power vis-à-vis the state. Higher heterogeneity is also likely to lead to higher favoritism, where state officials are inclined to provide favors to their own ethnic groups (Pellegrini & Gerlagh, 2008). Cronyism is argued to blossom in ethnic heterogeneous societies ruled by dictatorship (Hallagan, 2010) and when a history of ethnic conflict exists (Carney, 2008). Higher heterogeneity is thus more inducive for the emergence of the crony SBLR mode.
2.2.5 Path dependency
Another interpretation that does not depend directly on the previous factors is path dependency. It refers to a development where contingent or minor events turn into “critical junctions” that shape subsequent events and changes. At these junctions, alternative choices are presented to different actors, but afterward, choices are greatly limited (Mahoney, 2001, pp. 111–113). The choices made by different actors at these junctions yield new institutions and policies that shape future incentives and resources, creating increasing returns that disincentivize the reversal of course (Greener, 2005, p. 62; Pierson, 2000). Path dependency acknowledges the presence of multiple equilibria with different possible outcomes (Pierson, 2000), and timing and sequencing play substantial roles in establishing institutional arrangements (Pierson, 2000; Thelen, 1999, p. 388). For instance, Stasavage (2020) presented a framework whereby state power resulted from the historical sequencing of events. Bureaucracy could complement democracy or substitute it, depending on how events are sequenced. In China, bureaucracy evolved first, and so autocracy emerged and was sustained. In Europe, however, democracy evolved first and with it collective action. The subsequent development of bureaucracy did not lead to autocracy, since the bureaucracy was constrained by mobilized social actors (Stasavage, 2020; Wang, 2021, pp. 183–185).
Although path dependency focuses on how outcomes result from the way different actors act according to their mutual expectations, there is still room to accommodate the effect of the previously stated factors on the emergence of SBLR modes from a path dependency perspective. Institutional, socioeconomic, and historical events are believed to furnish “antecedent conditions” that allocate varying power shares to different political actors and offer choice options and the selection criteria during critical junctions (Mahoney, 2001, pp. 113, 115). Nevertheless, the effect of these factors on outcomes is not deterministic; rather, different outcomes could be witnessed in different societies for the same factors. Thus, failing to find causality between the suggested factors and the emergence of an SBLR mode could be, to a great extent, attributed to path dependency and the uniqueness of the experience of different countries.
This section starts with finding proxies for the different variables discussed in the previous section and then conducts regression analysis to investigate the effect of various factors on the emergence of SBLR modes.
Finding proxies for the four SBLR modes is the first important step. As suggested by the theoretical discussion, the two main dimensions distinguishing between the four modes are state power vis-à-vis non-state actors and the level of favoritism offered by or acquired from the state to tycoons. The best proxy for the first is the voice and accountability (V&A) indicator obtained from the World Bank’s Worldwide Governance Indicators (WGI) (World Bank, n.d.b). Despite being often criticized for using country expert views that might be influenced by other (competing) empirical indicators, the WGI indicators are widely used in the literature (Williams & Siddique, 2008). The V&A indicator accounts for freedom of association besides other democratic measures, such as the ability to elect a government and freedom of expression and media. The higher the level of V&A, the more societal actors can organize, aggregate their power and place limits on state power. The opposite is also true, where a low level of V&A indicates a more dominant state. The best indicator for favoritism to tycoons is the favoritism indicator obtained from the Global Competitiveness Indicators (GCIs), which measure the level of government favoritism offered to connected firms and individuals in terms of policy formulation and allocating contracts (World Economic Forum, n.d.).
The two indicators are rescaled to an ascending scale between −50 and + 50. Based on the arguments made earlier, the four SBLR modes can be identified as follows:
State-dominance SBLR: high state power, low social actors' organizational and individual power, and low favoritism to tycoons. V&A < 0, favoritism < 0
Balanced SBLR: low state power, high social actors’ organizational and individual power, and low favoritism to tycoons. V&A > 0, favoritism < 0
State-capture SBLR: low state power, high social actors’ organizational and individual power and high favoritism to tycoons. V&A > 0, favoritism > 0
Crony SBLR: high state power, low social actors’ organizational and individual power and high favoritism. V&A < 0, favoritism > 0
Figure 1 categorizes countries into the four introduced SBLR modes based on their scores in V&A and favoritism indicators as described above. The data set used has information for 218 countries for the years extending between 2000 and 2018. Imputation is used for the values of the favoritism indicator between the years 2000 and 2006, which are not available from the GCI data set. The very high correlation in the whole sample (0.768) between the favoritism indicator (FAV) and the control of corruption indicator (CCORR) of the WGI data set encourages the use of the relation between the two indicators in estimating the missing values of the favoritism indicator. This is done using the following equation, where (for country (i) and time (t)):
Several proxies are used for the historical political–economic, geographical, legal and cultural factors discussed in the theoretical perspective section. The information used to construct these proxies is collected from different sources, as explained in Table 1. The table also provides information on how these different proxies are calculated. The proxies used are as follows:
Historical Political-Economic Factors: (Log.) Years Since Independence/Creation, Communist Heritage, Urban Population in the 1960s and Industry Value Added in the 1960s. The first is a proxy for how recent the creation of a state is. The second is a dummy variable for whether a country was ruled by a communist regime. The third and fourth variables are proxies for whether a country is a late modernizer/industrializer, where a higher share of urban population and industrial value added in the 1960s would indicate being an early industrializer. A point of caution, however, is that earlier industrializers had a significant share of their economies in the service sector in the 1960s.
Geographical Factors: (Log.) Country Size, Latitude, Oil Richness and Metal Richness. The first and second variables are proxies corresponding to the size of the population and the absolute distance from the equator, respectively. The other two variables are proxies for resource richness.
Legal Factors: British and French Legal Systems. Both proxies are dummy variables.
Cultural Factors: Protestants, Catholics, Orthodox, Muslims, Confucians, Buddhists and Ethnic Fractionalization. All the religion-based variables measure the percentage of each religion’s adherents in the population as proxies for the dominance of religion-based cultures in each studied country. Ethnic fractionalization is a proxy for ethnic heterogeneity in each studied country.
The next step is then setting the regression equations for the required investigation. The following regressions were conducted using the random-effects probit regression model. The random-effects specification of the probit model was used to account for the many time-invariant independent variables that the regression equations have. Dummy variables were constructed for the four SBLR modes, and each of them was used as a dependent variable for one regression. The different suggested factors were used as the independent variables. Accordingly, the regressions investigated whether these different factors affect the probability of having an SBLR mode and, if so, by how much. The general equation is as follows:
4. Results and discussion
The results of the conducted regressions are reported in Table A4 in appendix. Using the sequential elimination method managed to produce a better fit, and all of the reported results were statistically significant and mostly at the 1% level of significance. Table 2 reports the change in the probability of having a certain SBLR mode caused by a change in an independent variable—a change of one standard deviation in the case of continuous variables and the presence compared to the nonexistence of the variable in the case of dummy variables. The following analysis depends on the figures in Table 2. In the following lines, “significant” (or “insignificant”) is meant “economically significant” (or “insignificant”).
Many of the political-economic variables are responsible for the emergence of different SBLR modes. Historical levels of urban population (1960–1965) influence the emergence of different modes with varying levels of influence. The variable has its strongest effect on the emergence of the crony SBLR mode, where one standard deviation change in the variable is responsible for decreasing the probability of having a crony mode by 0.3117 or 31.17%. Such a change also decreases, yet marginally, the probability of having a state-dominance mode. It increases, however, the probability of having capture and balanced SBLR modes by 0.01% and 0.003%, respectively. Early urbanized or present-day developed countries are, thus, likely to have either the capture or the balanced mode, while late urbanizing countries have predominantly crony and sometimes dominance SBLR modes. Historical industry value added (VA) shows the opposite relation, where increasing the level of historical industrial VA increases the probability of having a crony SBLR mode by 2.68% and marginally decreases the probability of having either the balanced or the capture SBLR mode. This could be attributed to the share of the services sector in the advanced economies of the last two modes. No evidence is provided for the arguments on the power of the state in newly independent countries. Rather, the longer the time since independence, the less likely the presence of capture SBLR mode; that is to say, the capture SBLR mode is more likely to exist in newly independent/created countries, but the effect is rather marginal. The communist heritage is not responsible for higher state power but increases the probability of state-capture SBLRs by 0.01%, providing evidence to the literature on transition economies in relation to state capture. Communist heritage, however, reduces the probability of having crony SBLRs by 70.02% and of having state-dominance, but in a very insignificant way.
Concerning geographical variables, the further the distance from the equator, the more likely it is to have either the balanced or the capture SBLR mode, although the magnitude of the effect is marginal. This is in line with the literature on the relation between latitude and economic development since most of the countries of the first and many of the countries of the second modes are developed countries. The bigger the size of the country, as indicated by its population, the more likely it is to have the dominance SBLR mode, which is not surprising given the suggestions of the literature on the negative relation between country size and democratic rule. However, the effect is very marginal. Fuel richness also increases the chances of having state-dominance SBLR very marginally, but it insignificantly decreases the probability of having a state-capture SBLR. This provides evidence of how oil resources strengthen the state and weaken non-state actors. It also supports the argument that an oil-rich state feels itself less urged to provide favorite allocation to tycoons at the expense of the other non-state actors.
On the other hand, increasing metal richness marginally increases not only the probability of having state-dominance SBLRs but also the probability of having capture SBLRs and more significantly increases the probability of having balanced SBLRs (0.05%). Metal richness, however, significantly decreases the probability of having a crony SBLR mode (10.65%). Hence, metal richness, unlike oil richness, does not necessarily lead to the emergence of a more powerful state or weaken non-state actors.
For legal variables, the British legal system significantly increases the probability of having a balanced SBLR mode (13.94%). The French legal system, on the contrary, increases the probability of having a state-dominance SBLR mode, but insignificantly. Both findings agree with the suggestions of the literature on legal systems and their effects on state power.
Finally, the studied cultural variables seem to play a greater role in the probability of having a crony SBLR mode in comparison to the other modes. The effect is mostly positive on the probability of having a crony or a state-dominance SBLR mode, but the effect is largely insignificant for the latter mode except for one variable, Confucians.
As suggested by the literature on hierarchical cultures, the probability of having a crony SBLR mode significantly increases the higher the percentage of Orthodox (3.48%), Muslims (3.02%) and Catholics (2.96%) in a country. Evidence on the relation between collective cultures and cronyism is also provided, where the highest the Confucians in a population, the higher the probability of having a Crony SBLR mode (2.69%). Yet, the highest the Buddhists' percentage in a population, the highest the probability of having the mode (1.55%). Most of these cultures are also responsible, but insignificantly, for the emergence of state-dominance SBLRs. This is true for the highest share of Catholics, Muslims and Buddhists. To these, we could add Protestants, whose higher share in the population leads to an increase in the probability of the emergence of this mode, but the effect is rather insignificant. The effect, however, is very strong for Confucians, where an increase of a standard deviation in their share in the population would lead to an increase of almost a 100% chance of having a state-dominance SBLR mode.
In contrast, the probability of the emergence of a capture SBLR mode is, insignificantly, negatively affected by a higher share of any of the followers of any of the studied religions. For balanced SBLRs, only the percentage of Confucians has an effect on the probability of the emergence of the mode, a negative and insignificant effect though.
As for ethnic fractionalization, increasing fractionalization increases the probability of having a crony SBLR mode (1.78%), confirming what is suggested by the literature. Fractionalization reduces the probability of having balanced and state-dominance SBLRs, providing additional evidence of how lower levels of favoritism are unlikely at higher levels of fractionalization. However, the effect on the probability of the emergence of the last two modes is largely insignificant.
A set of political-economic, geographical, legal and cultural factors are largely responsible for the emergence of different SBLR modes. The research in this paper has provided empirical evidence supporting this claim and the suggestions of the relevant literature. The theoretical perspective identified state power vis-à-vis non-state actors and favoritism to tycoons as the two determining dimensions for SBLRs based on power relations. Using the institutional economics literature on the determinants of state power and favoritism, the relations between various factors and the emergence of different SBLR modes were theoretically explored, and relevant hypotheses were made. The empirical results greatly supported these hypotheses but placed more emphasis on some factors, downplayed others, and at times contradicted the hypotheses.
Earlier development is clearly responsible for the emergence of either the balanced or the state-capture SBLR mode. Geographical conditions favorable for development, such as latitude and metal richness, also led to the emergence of either mode. The communist heritage, and more accurately the post-communist economic and incomplete political liberalism of the transition stage, contributed to the emergence of the state-capture SBLR mode. The British legal system, providing power to non-state actors through the independence of judges and other measures, contributes to the emergence of the balanced SBLR mode.
Many cultural factors are largely responsible for the emergence of the crony SBLR mode, especially hierarchical and collectivist cultures, as well as ethnic fractionalization. On the other hand, the culture of the Confucians has the strongest influence on the emergence of state dominance, while other cultures play a marginal role in its rise, and ethnic fractionalization marginally defuses the ability of the state to dominate without resorting to favoritism. Finally, access to rich natural resources, by enriching the state independently from social actors’ financial resources (e.g. taxation), marginally increases the probability of the emergence of the state-dominance mode.
There is still room for path dependency to explain the emergence of different SBLR modes in many countries. Unfortunately, the introduced regression model and any quantitative empirical work would not be able to effectively investigate such a process. Rather, an approach depending on case studies and a deeper investigation of country-specific historical political development is needed to complement the research done here. Conducting such an additional quest would help reach a more comprehensive understanding of why different countries have different SBLR modes. This should ultimately help answer an equally important question: how to reverse engineer the emergence of favorable SBLR modes?
Although this paper did not investigate the economic merits or mischiefs of each of the studied modes, it is plausible to think of the balanced SBLR as the best mode. This is supported not only by the fact that most of the countries of this mode are developed countries but also by the attractiveness of the power dynamics governing this mode—a more balanced power among different SBLR actors. While some factors are almost impossible to replicate, for example, geographical factors, reform could target the factors that could be changed or mitigated. It is true that changing the legal system could be impractical, but favorable aspects of the British legal system—as suggested by the literature—could be incorporated into existing legal systems. The independence of judges is an example in this regard.
Culture is often regarded as a sticky institution. However, this is not always true, even though the change happens in the long run (Inglehart & Baker, 2000). For this reason, this paper used Catholics, Muslims, Buddhists, and Confucians rather than Catholicism, Islam, Buddhism and Confucianism to refer to cultural factors. A sort of dynamism should always be considered when referring to culture through time and space (see Bednar & Page, 2007). Institutional reform, and especially good governance, could be instrumental in the long run in this regard. If collectivist cultures tend to call for an (benevolent) autocratic ruler (Hofstede, Hofstede, & Minkov, 2010) and paternalistic relationships where a leader is expected to play a parental role (Erez & Earley, 2011), which together with particularism and group bias create the ultimate conditions for cronyism (Khatri & Tsang, 2003), democratization, empowering civil society and social actors and decentralization of decision-making and access to resources could all be means for getting over these cultural determinants. Moreover, a more competitive business environment would curb cronyism (Khatri & Tsang, 2003), and deregulation would limit government capacity for providing favoritism (see Djankov, 2009). Nevertheless, conducting such reform with the help of such “exogenous” institutions should always consider the match between these institutions and “endogenous” institutions, such as culture (Boettke, Coyne, & Leeson, 2008). That is to say, the connection between democratization, fostering accountability, and balanced state–society relations, on the one hand, and cultural values leaning toward these principles, on the other, should be firmly established. Institutional reform should not mean dismantling close cultural-based inter-group relations. As pointed out by Khatri et al. (2006), strong connections—or as they referred to using the Chinese term guanxi—should not necessarily mean favoritism and should not be done at the expense of other social actors. This explains why China with a collectivist culture leans toward state-dominance with more balanced relations among social actors rather than crony SBLR, where connected tycoons gain and other social actors lose. Democratization can further bring more balance in power relations among all the actors in state–society relations, including the state.
The same is also true for countries that have undergone post-communist transition, where incomplete political liberalization has led them toward a capture SBLR mode (see Krasnozhon, 2013). As suggested by Hellman and Kaufmann (2001), favoritism in these countries could be curbed by introducing more transparency to the democratic institutions already present in state-captured states, more data availability and liberalizing market entry. Canen and Wantchekon (2022), while discussing state capture in Sub-Saharan African countries, suggested policies such as placing restrictions on funding election campaigns, technological upgrading and digitalization of government services that would curb policy implementation distortions, and bureaucratic insulation from political control through, for example, a ban on discretionary appointments. However, arguably the most important suggestions were offered by Hellman and Kaufmann (2001) when they spoke about strengthening SMEs, trade unions and civil society’s collective action to balance the process of policy influence. Generally speaking, this is the approach that should be taken in countries dominated by capture-state SBLRs while trying to move them more toward a balanced SBLR.
Finally, a point of optimism is that—based on the results of this paper—reaching a high state of development could increase the chances of realizing a more balanced SBLR mode in the long run. The dilemma remains how to reach high levels of economic development with the institutional impediments imposed in non-balanced SBLR modes.
Proxies for the suggested factors, the sources from where information on them was obtained and how they are calculated
|Political–economic||Log. Years Since Independence||Log. (Time − years of independence)||CIA Factbook (CIA, n.d.)|
|Communist Heritage||A dummy variable for whether a country was ruled by a Communist regime||Kailitz (2013) and Sabry (2009) with some modifications|
|Urban Population in the 1960s||Average of urban population (% of total population) between 1960 and 1965||World Development Indicators (WDI) (World Bank, n.d.a)|
|Industry Value Added in the 1960s||Average of industry (including construction) value added (% of GDP) between 1960 and 1965||Google Developers (Google Developers, n.d.)|
|Geographical||Country Size||Log. (Population, total)||WDI|
|Latitude||Absolute of distance from the equator||Google Developers (Google Developers, n.d.)|
|Fuel Richness||5-year average of the following calculation: [Fuel exports (% of merchandise exports) * Merchandise exports (current US$)] * [GDP (current US$)/GDP (constant 2015 US$)] * [1/Population, total]||WDI|
|Metal Richness||5-year average of the following calculation: [Ores and metals exports (% of merchandise exports) * Merchandise exports (current US$)] * [GDP (current US$)/GDP (constant 2015 US$)]* [1/Population, total]||WDI|
|Legal||Legal Variables||British, French and German Legal Systems dummy variables||La Porta et al. (2008)|
|Cultural||Religious Adherence||Protestant, Catholic, Orthodox, Muslim, Buddhist and Confucian||Sabry (2013) depending on data from the UN “Ethnocultural characteristics” (United Nations, n.d.), CIA Factbook, and the “Association of Religion Data Archives” (ARDA) (The Association of Religion Data Archives (ARDA), n.d.)|
|Ethnic Fractionalization||The Quality of Government Dataset (University of Gothenburg, n.d.) and Alesina, Devleeschauwer, Easterly, Kurlat, and Wacziarg (2003)|
The effects of a change in a dummy or one standard deviation of a continuous independent variable on the probability of the emergence of an SBLR modea
|Urban pop. (1960–1965)||0.00003||0.0001||−0.3117||−3.85e−61|
|Industry VA (%GDP) (1960–1965)||−9.60e−09||−1.56e−08||0.0268|
|Log. years of independence||−1.33e−08|
Note(s): aAssuming that the three dummy variables were zero before the change in the variable
|Variable||Mean||Median||Minimum||Maximum||Std. Dev||Skewness||Ex. Kurtosis|
|Log. years of independence||4.228||3.989||0||7.894||1.106||0.764||1.254|
|Urban pop. (1960–1965)||38.874||35.392||2.178||100||24.913||0.624||−0.333|
|Industry VA per GDP (1960–1965)||22.014||20.662||3.590||58.216||10.126||0.829||1.545|
Variance inflation factor (VIF)
|Without legal French system||Without legal British system|
|Log. years of independence||2.686||2.715|
|Urban pop. (1960–1965)||2.077||2.077|
|Industry VA per GDP (1960–1965)||1.815||1.824|
Note(s): Values of >10.0 may indicate a collinearity problem
Sequential elimination of insignificant variables
|Dependent variable||Omitted variables||F-test|
|Balanced SBLR||Log. Population, Log. French, Protestant, Catholic, Orthodox, Islam, Buddhist, Fuel Richness, Communist Heritage, Log. Years of Independence||F(10, 917) = 0.365, p-value 0.961|
|Capture SBLR||Log. Population, Legal British, Legal French, Ethnic Frac||F(4, 917) = 0.615, p-value 0.652|
|Crony SBLR||Log. Population, Legal British, Legal French, Protestant, Latitude, Fuel Richness, Log. Years of Independence||F(7, 917) = 0.764, p-value 0.618|
|State-dominance SBLR||Legal British, Orthodox, Latitude, Industry VA per GDP (1960–1965), Log. Years of Independence||F(5, 917) = 1.356, p-value 0.239|
The conducted regression using the random-effects probit model
|Dependent variable||Balanced||Capture||Crony||State dominance|
|Urban pop. (1960–1965)||0.064||***||0.074||***||−0.057||***||−0.397||***|
|Industry VA (%GDP) (1960–1965)||−0.096||***||−0.049||***||0.059||***|
|Log. years of independence||−0.256||**|
|Mean dependent var||0.034||0.335||0.559||0.072|
Note(s): Standard errors in parentheses, ***p < 0.01, **p < 0.05, *p < 0.1
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