Financial Sector Development in Africa: Opportunities ... - World Bank

The Potential of Pro-Market Activism for Finance in Africa: A Political Economy Perspective 181
This chapter makes three main arguments.
• First, it argues that although the current view on the role of government
in the promotion of access to finance offers a realistic way forward
toward making finance work for Africa, the associated policy implications
remain unclear. This is because of the lack of a fully developed
positive approach to government activism that provides a framework
helping to evaluate ex ante whether a government has the political will
and capacity for efficiently playing an activist role. This chapter seeks
to contribute toward developing such a framework, because it would
help development practitioners assess whether activist government
interventions have a chance to succeed in a particular country.
• The second argument is that political economy could provide the theoretical
foundation for such a framework, because political economy
allows for the modeling of policy choices as the outcome of a bargaining
process between interest groups that cut across state and society.
• The third argument is that a political economy framework would not
only help in evaluating the chances of efficient government interventions
but could also inform policy making in countries that currently
lack the conditions to govern finance through activist policies.
These arguments build upon two strands of literature: the welfare economics
argument in favor of government interventions to address market
failures and an interest group model of political economy focusing on the
role of state–private sector relationships. Empirically the arguments are
based on experiences with activism in the developing world both within
and outside of Africa. Thus, the chapter focuses on the role of government
in banking and not in the securities market, because banks still account
for the vast majority of financial sector assets in poor countries (excluding
central bank assets) (Demirgüç-Kunt, Beck, and Honohan 2008, 10).
The chapter is organized as follows: the next section examines in more
detail the current consensus on the potential of activist government interventions
to increase access to finance for private productive investment.
It begins by presenting the welfare economics argument in favor of activism
and proceeds with an overview of developing-countries’ experience
with activism and of the new, more political perspective on government
activism. The following section discusses the problems that development
practitioners currently face when it comes to prioritizing reforms without