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This paper investigates the effect of state-society relations on the industrially-related growth paths of developed countries.

It introduces a novel theoretical framework, the state-business-labor relations (SBLR) framework, where four main actors are identified: the state, big businesspersons or tycoons, owners and managers of small and medium enterprises (SMEs) or Entrepreneurs and labor. Different SBLR categories or modes are introduced depending on levels of coordination and power relations between the studied actors. The paper then investigates how these SBLR modes, through adopting various policies targeting the industrial sector, lead to different growth paths. Rather than focusing only on economic growth, this research regards a growth path as a matrix of the performance in long-run growth and equality of distribution.

Using regression analysis and statistical data, the results suggest that the Co-Balanced mode, having higher levels of coordination and lower favoritism, leads to the best growth path among the four introduced modes, especially with its emphasis on high levels of venture capital availability and easiness of starting business. while the Lib-Capture mode, characterized by lower coordination and higher favoritism, seems to have the worst growth path and the best implemented policy for this mode is suggested to be high profit taxes that seem to counter the negative impact of the existing high levels of favoritism.

Despite the important findings that this research has reached, this paper is mainly meant to open a further investigation into this topic and open this dimension that the research on VoC and political economy have under-researched. A deeper investigation of SBLR typologies that could only be possible by having richer datasets with more data on coordination for the whole world, rather than only the advanced economies, would further our understanding of the dynamics that shape the growth paths of different countries of the world.

To realize the best industrial growth path, fighting favoritism should be an important objective. The negative impact of favoritism on innovation could not be disregarded in the eve of the fourth industrial revolution, where innovation is increasingly pivotal to future industrial development. Actively engaging societal groups in the policymaking process is important in addressing their concerns and balancing them at the same time. This should lead to the double benefit of formulating better policies that should foster growth as well as provide better distribution of this growth. High levels of coordination should help in realizing this objective. Yet, this could only be possible if societal groups are free to associate and aggregate their power and when there are means of preventing one actor from gaining more favorite treatment and exclusive influence over policymakers. The presence of both powerful and broadly represented business associations and labor unions and the existence of a government interested in coordinating their efforts-rather than letting itself be controlled by one group at the expense of the others-should help in the realization of the best growth path. Thus, institutional reform that empowers societal groups and enables them to defend their interests as well as fights all forms of corruption should lead to the realization of a more prosperous and equitable industrial development, with the “re-industrialization” of the developed world being no exception. The technological and social challenges of intensive automation and digitalization accompanying the fourth industrial revolution make the envisaged institutional reform more urgent.

This paper is introducing a novel theoretical framework for studying the effect of state-society relations, particularly SBLR, on the industrial growth paths of developed countries. It integrates three important bodies of literature in order to build a more comprehensive understanding of the dynamics of state-society relations and their economic consequences. These are the Varieties of Capitalism (VoC), State-Business Relations (SBR) and Industrial Relations. The SBLR framework differentiates between tycoons and entrepreneurs, an important distinction that often goes unnoticed. Different SBLR categories or modes are introduced, depending on levels of coordination and power relations between the actors. It is proposed in this research that the effect on growth paths goes beyond the simple dichotomy between CMEs and LMEs usually present in the literature of VoC and that power relations provide an essential complementary dimension in explaining this causality.

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.

The purpose of this paper is to investigate whether formal State Business Relations (F-SBR) lead to economic growth and which institutional variables are responsible for their success in achieving this.

Following a theoretical analysis, several hypotheses are presented, and a number of different regression models are being used to test the hypotheses.

The paper finds that F-SBR with high government representation and business participation are likely to increase investment flows as well as help overcome some burdensome institutional settings. This could be done thanks to building trust, enhancing information exchange and better policy formulation. Despite of its suggested trust-building capacity, F-SBR seem to fail to function in cultures where trust in governments is low, since trust is a key issue for cooperation as that expected in F-SBR. On the other hand, collective but also non-hierarchical cultures that foster cooperation seem to help in the success of F-SBR. Accountability to the public and openness to various societal groups as well as good regulatory quality would help F-SBR in leading to better economic outcomes.

This paper, thus, suggests supporting the establishment of F-SBR with high official representation and business participation because of their positive economic value. It also suggests that voice and accountability and regulatory quality are important institutions for the realization of better economic outcomes from F-SBR.

The theoretical and empirical approaches used in this paper are what make it a novel endeavor in this field. Much of the suggested hypotheses were hardly discussed thoroughly elsewhere in the literature on F-SBR. Moreover, the proxy used for F-SBR, constructed by the interaction term of government official representation and the level of business representation, made it possible to conduct empirical testing on a global level, something barely done in works on F-SBR experiences worldwide. The obtained results supported some of the arguments uttered in the literature while raising questions on others, opening the field for future research on the matter.

Why are state business relations in Egypt characterized by widely acknowledged high levels of cronyism? The purpose of this paper is to investigate the institutional factors explaining this research question with a focus on pre-2011 Egypt.

Based on a general theoretical discussion, certain institutions were proposed as being responsible. A game theoretical model is then introduced. It explains why cronyism was the best strategy for various business players in contrast to aggregating and lobbying their efforts to obtain government available resources, whether these resources are energy subsidies, public banks’ credit or regulations. Then pre-2011 Egypt is discussed as a case study. This discussion is enriched by the available literature and empirical data.

Choosing cronyism was attributed to the presence of a weak and dependent private sector, where businesspeople are unable to aggregate their power; a relatively stronger government; poor governance performance; higher levels of regime legitimization practices, such as providing generous consumer subsidies; and economic growth caused by an increase in resources rather than by governance institutional improvement. A discussion of the available literature and empirical data on pre-2011 Egypt, going over the various proposed institutional factors, helped to support these arguments.

Further empirical evidence is needed to support and modify the suggestions of this paper. More detailed indicators would have further helped this research. Moreover, more case studies, other than the case of pre-2011 Egypt, are also needed. It is hoped that this paper would encourage further research endeavors that would cover these limitations.

Governance institutional reform is needed to minimize cronyism, especially institutions such as voice and accountability, rule of law, regulatory quality and control of corruption.

This paper can explain why high levels of cronyism are witnessed in many countries of the world, including the countries of the Middle East and North Africa (MENA). The region shares many institutional factors with Egypt. Governments in the MENA region have various sources of power with regard to their dependent private sectors added to the general poor performance in various governance indicators in the region.

The deep analysis conducted in this paper for the causes of Cronyism in Egypt has not been done elsewhere. This is also true for the whole MENA region. The introduced theoretical model is the first trial of this sort and should be important for future works on this topic in the MENA region and developing countries.