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

188 Dafe
institutions of the industrialized economies. Policies of this “modernist”
approach sought to transplant these institutions to the developing world
(Honohan and Beck 2007, 7–12). 9 As a result, developing countries
around the world started liberalizing and privatizing their financial systems
in the 1980s and 1990s.
The evidence for the effectiveness of modernism has been mixed. By
the end of the 1990s, countries in Sub-Saharan Africa, as in other regions,
had made significant progress in macroeconomic stability and bank
restructuring, usually including the reentry of foreign capital and the
privatization of banks (Beck, Fuchs, and Uy 2009, 14–15). Yet in many
African countries the institutional mechanisms needed to supervise and
regulate banking in the modernist system were absent when reforms
started. Thus, the first decade of financial liberalization was accompanied
by macroeconomic instability, and liberalization often had devastating
effects on the real economy, as evident in the growing disintermediation
in the 1980s and early 1990s. 10
The success of the modernist approach in building inclusive financial
systems has fallen short of expectations. By the end of the 1990s, access
to finance in Sub-Saharan Africa was still limited for those groups that
had been traditionally shut out of the market, such as lower-income
households or SMEs. The operations of the newly licensed domestic and
foreign commercial banks have concentrated on government lending
and international assets, avoiding lending to the domestic private sector
and in particular to agriculture (Chang 2009, 494–97; Honohan and Beck
2007, 29–34). The experience has been similar in other world regions
(Hanson 2003). In response to the overall disappointing record of both
market-replacing activist and modernist approaches, the debate has
shifted again, back toward more government involvement but this time
emphasizing the need for pro-market orientation (De la Torre, Gozzi, and
Schmukler 2007; World Bank 2007, 145–46).
Pro-market activism. Over the past decade a consensus has emerged
that the role of government needs to go beyond ensuring macroeconomic
stability, toward building the necessary institutions for an inclusive,
efficient, and stable financial system, in a form of activity termed
pro-market activism. 11 This view is informed by a more recent body of
literature that provides strong empirical evidence for the key role of
institutions for economic development and the removal of market failures
(Acemoglu, Johnson, and Robinson 2001; Rodrik, Subramanian,
and Trebbi 2004).