State-market relations have become of increasing importance for governance in recent years. No less an advocate of the "invisible hand" of the market than Adam Smith acknowledged that the state is necessary to perform certain economic functions. Most important of these is to deal with "market failures", i.e. situations when the market fails to aggregate private choices in an optimal fashion. State institutions, therefore, are often created and called upon to regulate the economy. This arena is sometimes referred to as "economic society".
One assumption that is often made is that when private firms have an opportunity to influence the way rules are formulated and implemented, this regulatory dimension is more effectively managed. It helps making policy better and it also enhances regime legitimacy among key economic actors. The norms and institutions that are put in place to regulate how corporations operate, how property is owned and protected as well as how capital may be transferred and trade conducted are all important aspects of governance.
This arena is of special interest given that economic liberalization and political democratization are seen by many as complementary processes. Studies to date indicate that the relationship between the two is complex and certainly not linear, as the collapse of the Argentinian economy at the end of 2001 indicates. This dimension is also important because it features in significant ways in the strategies of many development agencies, for which economic liberalization is viewed as a precondition for political democracy.
