Business Associations: Good for businesses, bad for taxpayers and consumers?

In The Rise and Decline of Nations, Mancur Olson argued that interest groups like business associations (BAs) always pursue distributive objectives, seeking unproductive rents rather than benefitting the public. Subsequent work on collective action culminating in the New Institutional Economics continued to adopt this negative view of BAs.

Nevertheless, examples of BAs working toward more productive goals keep showing up in various studies. For example, Doner and Schneider (2000) point out that the Kuwait Chamber of Commerce and Industry played a key role in pushing for customs reforms during the 1980s; inter-industry associations in the state of Punjab, Pakistan, forced the state government to improve power supply and the Colombian Coffee association, Federacafe, helped provide better transportation infrastructure, port facilities and warehouses to its members.

The key question is how widespread is the productive role of BAs? I provide some evidence on this issue using data from Business Environment and Enterprise Performance Survey (Enterprise Surveys – BEEPS, 2005). The survey was conducted in 27 countries in Eastern Europe and Central Asia covering close to 10,000 firms. The survey asked firms if they were a member of a BA and if so, what benefit they derived from the BAs.

Over 40 percent of the firms surveyed belonged to one or more BAs. The figure below shows how these firms benefit from being a member of a BA. Close to 52 percent of the members benefit from lobbying activities of the BAs. This is an upper end estimate of the rent seeking activity of the BAs since not all lobbying need be unproductive or distributive (consider lobbying for customs reforms, etc.). Even so, a much larger percentage of members benefit from clearly productive activities of the BA such as supply of information on domestic markets (77 percent) and government regulations (75 percent). In a nutshell, BAs appear to be a mixed bag, at least in Eastern Europe and Central Asia.

Source: Enterprise Surveys (BEEPS, 2005)