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

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in the 1980s and 1990s were conditioned by pre-existing patterns of
state-society interaction, as registered in the concentration and ownership
structure of the banking sector and in political alliances between the state
and the banking sector. The stronger, more diverse, and more autonomous
the private banking sector was in relation to the government, the further
and deeper went the process of reform. Boone’s findings are in line with
other works on the determinants of economic policy making in the developing
world. Bräutigam, Rakner, and Taylor (2002), for instance, examine
the emergence of growth coalitions in Africa and find that, in countries
where the private sector does not constitute a powerful partner in economic
reform processes, government policies are less successful in
economic restructuring. There is also evidence that in developing countries
with highly concentrated, oligopolistic banking sectors, financial
reforms are not as far-reaching and the privileges of banks are maintained,
because governments try to preserve the political alliances established
with these banks in pre-reform periods (Boone 2005; Haggard, Lee, and
Maxfield 1993).
In light of these findings on the role of the organization of the private
sector, it seems plausible that activist policies are more likely to succeed
in African countries where the state is complemented by a diverse and
autonomous private (banking) sector. There are at least two reasons for
this. First, governments find it more difficult to exploit the private banking
sector as a source of finance for government entities, patronage, or
elections when it is stronger and more autonomous. Governments also
have fewer incentives to do so if a developed private sector provides
stable and substantial tax revenues. Second, the political capture of activist
policies by powerful economic interests is less likely when the banking
system is diverse and competitive. Thus, the structure of the banking
sector might at least partly explain why activist policies in Kenya, which
has a vibrant and competitive private banking sector, have been more
successful than in Uganda, where the banking sector is still shallow, or
Nigeria, where banking has only recently started to become more
competitive.
However, while the analysis of historically determined state–private
sector relationships carries substantial weight in explaining or predicting
long-term policy patterns, it seems less suited to explain policy change. In
a model where the power of different policy coalitions is entirely determined
by internal, historically produced, and thus relatively static institutional
structures, policy is path-dependent. This makes it difficult to
account for genuine financial reform and institutional innovation.