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

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having a positive theory of activism. The next section sketches some starting
points for thinking about the determinants of efficient government
interventions in the financial sector and explores how such a framework
could inform policy making, and the final section draws conclusions from
the arguments presented in the whole chapter.
Activism in Financial Markets:
Theoretical Perspectives and Practical Experiences
This section discusses the current consensus on the potential of government
activism to promote greater outreach of financial systems to the
private sector. It begins by exploring the rationale for activist government
interventions and compares this welfare economics point of view to the
actual experiences with government activism over the past five decades.
Most examples are drawn from Africa, but some also refer to Asia or
Latin America, where the debate on the potential of activism has been
similar. The remainder of this section discusses the role attributed to politics
in the current view on activism.
Before delving into the arguments, it is necessary to offer a definition
of activism, a popular term in the current debate on access to finance. 4
Since the question behind this chapter is how African government officials
can intervene to increase finance for productive private investment,
the definition proposed here is very broad: a government is referred to as
activist when it deliberately intervenes in the financial sector to promote
the outreach of financial services to segments of the private sector that
have been underserved. The discussion focuses on SMEs in agriculture
and industry as examples for underserved segments. Although it is not
only governments that can play such an activist role but also elements of
the private sector—in particular nongovernmental organizations (NGOs)
and foreign donors—if not stated otherwise, the term activism in this
chapter refers to government activism.
The Welfare Economics Argument in Favor of Activism
From a welfare economics point of view, government intervention might
be called for when market failures need to be corrected. The financial
sector relies heavily on gathering and processing information, as well as
on the enforcement of contracts. This makes finance prone to a variety of
market failures that, if not corrected, limit the outreach of financial services
(Besley 1994; Stiglitz and Weiss 1981). The following examples
from the market for corporate lending in developing countries shed some