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

The Potential of Pro-Market Activism for Finance in Africa: A Political Economy Perspective 205
Previous research on the politics of finance suggests that policy change is
determined by external financial connections, pointing to the importance
of the state’s revenue base. Large and relatively stable inflows of financial
resources from external sources (for instance, through international capital
markets, exports of natural resources, or, arguably, foreign aid) make
the government more independent from the domestic private sector and
reduce the need to seek private sector support for particular policies
(Haggard, Lee, and Maxfield 1993; Lukauskas and Minushkin 2000;
Moore and Schmitz 2008, 36–41). 18 Activist, business-friendly policies
seem, therefore, more likely to succeed when governments rely substantially
on the domestic private sector as a source of government income
and economic prosperity than when governments rely primarily on alternative
sources of revenue (Brownbridge 1998b; Lewis and Stein 1997;
Winters 1996).
However, this is not to suggest that access to external financial revenues
has adverse effects in all circumstances. It seems plausible that, in
the context of a concentrated and autonomous private sector, access to
revenues from external sources (such as foreign credit, income from natural
resources, or aid) reduces the vulnerability of governments to pressures
from incumbent private firms. Such a reduction of vulnerability
might increase the policy space for governments and diminish the likelihood
of the political capture of activist policies (Maxfield 1994, 587;
Moore and Schmitz 2008, 37; Rajan and Zingales 2003).
This discussion of the coalitional approach to explaining or predicting
policy choices suggests that a framework to weigh the empirical
support for using activism as a tool to increase access to finance for
productive private investment could usefully take into account the role
of the historically determined organizational structure of relevant private
sector institutions and the revenue base of the state. Both factors
have important impacts on the structural dependence of governments
on domestic capital, and on where authority resides within the government
(Winters 1994). 19 As a result, both factors influence government
discretion over policy making and determine which particular public
sector entities gain the upper hand in the process of policy making. Both
factors also determine whether the domestic private sector (and which
sections) constitutes a powerful ally in the design of activist policies.
The added value of developing a coalitional approach to understanding
financial policy choices is likely to be high, as few researchers have taken
up this challenge (Boone 2005; Lukauskas and Minushkin 2000;
Maxfield 1990).