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

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Alternative Approaches to Explaining or Predicting Financial
Policy Choices
The coalitional approach, which builds on historical institutionalist and
fiscal economy literature to explain or predict financial policy making, differs
significantly from state- or society-centered explanations as major
alternative approaches in the literature on the political economy of finance.
Society-centered approaches. Society-centered approaches perceive policy
as the outcome of struggles among societal interest groups such as sectors
or classes (Frieden 1991; Pagano and Volpin 2001; Rajan and Zingales
2003). Policy is conceived as an exchange where politicians provide policies
favorable to those interested constituencies on which their power
depends. In this analysis, state interests and the state’s capacity to implement
policies are conceived as perfectly flexible in responding to societal
preferences.
The major shortcoming of society-centered approaches is their vision
of the state. In this view, the state is treated as a “black box” where the
economic bureaucracy is essentially just reacting to private demands. This
premise denies states an independent role as agenda setters proactively
seeking to create alliances to gain support for their preferred policies.
Successful examples of activism—such as the introduction of the Mzansi
account in South Africa as a result of moral suasion, or the advent of
mandatory information sharing with the credit bureau in Uganda—are
difficult to explain with society-centered approaches. Moreover, societycentered
analyses of activism neglect the role of state capacity as a precondition
for effective government action. In particular, the translation of
private sector preferences into policy choices is particularly problematic
in poor countries not only because states might lack the political will, but
also because they might not have the organizational, financial, or knowledge
resources to implement the preferred policies of private sector
groups effectively (Evans, Rueschemeyer, and Skocpol 1985; Skocpol
1985; Thomas and Grindle 1990; Winters 1996).
State-centered explanations: the political institutions view. In the realm
of finance, state-centered explanations for financial policy choices predominantly
focus on the role of political institutions such as electoral
democracy for checks and balances (Girma and Shortland 2008; Haber,
North, and Weingast 2008; Huang 2010). The key underlying assumption
of this so-called political institutions view is that—in the absence of selfenforcing
political institutions that limit government discretion—
governments, relying on banks to provide them with a source of finance,