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

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The degree of success, in turn, seems to depend on the political environment
in which financial policy making takes place.
Based on these experiences, the current consensus on the role of the
state in the financial sector takes it as a basic premise that the country’s
political realities have to be taken into account in the design of activist policies
(Beck, Fuchs, and Uy 2009; Honohan and Beck 2007, 12). Although it
is widely agreed that modernist approaches should be complemented
through some form of activism to correct market failures and increase
finance for private investment, it is not recommended that African policy
makers put themselves in the lead in implementing the activist agenda by
increasing their direct engagement in the provision of financial services
(Honohan and Beck, 2007, 12). Rather, they are advised to smooth the way
for private activists such as NGOs or social entrepreneurs. This view rests
on the assumption that many African governments lack adequate governance
structures (Demirgüç-Kunt, Beck, and Honohan 2008, 143; Honohan
and Beck 2007, 6, 11, 12; World Bank 1997). As table 6.1’s stylized comparison
between African and East Asian experiences with activism highlights,
appropriate governance structures seem to be the major precondition
for successful market interventions. Where activism was successful, policies
tended to be closely monitored and characterized by provisions that seek
to hinder the political capture of policies by a powerful economic elite and
the exploitation of the financial sector as a source of government finance
(De la Torre, Gozzi, and Schmukler 2007; Stiglitz and Uy 1996).
Assessing the Current Approach toward Activism
The consensus on the role of government today is distinct from the predominant
views of previous periods of market-replacing activism or
modernism in that it sees governments’ main role to be one of creating
an enabling environment for financial markets. As noted earlier, it is
increasingly acknowledged that sometimes this role might have to go
beyond competition policies and first-best institution-building toward
affirmative regulation and other more direct interventions, whereby good
governance is regarded as a key determinant of the effectiveness of such
policies (Honohan and Beck 2007, 12). For at least three reasons, this
view on activism offers a realistic and promising way forward toward
making finance work for Africa.
• First, the current consensus has the potential to spur on the development
of inclusive financial systems because it has overcome the dualism