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

The Potential of Pro-Market Activism for Finance in Africa: A Political Economy Perspective 215
practitioners to support well-designed, time-bound activist policies to
complement modernist approaches.
But what if the political economy analysis suggests that the preconditions
are not in place and governments are not likely to pursue activist
policies successfully? The political economy framework drawn up in the
last section emphasizes that policy choices are, at least to some extent,
outcomes of the historical development path of a country. These historical
foundations do not lend themselves to simple policy proposals
because they suggest that there is some element of path-dependency in
policy making. However, by taking the political economy framework as a
starting point, it is possible to propose strategies for economic change in
the short and longer terms, and also to draw policy implications for those
African countries with a political environment unfavorable to activism.
The political economy perspective suggests that policy makers and advisors
in these countries seeking to promote access to finance need to pursue
alternative strategies. In countries where activism is unlikely to work
effectively, there are two main strategies to align the interests and incentives
of the political and economic elites with those of the wider society.
The first is to change the power balance in society to expand the space
for reform policies; the second is to work within this power balance.
Changing the power relationships within society. If the political economy
analysis suggests that the political environment is not favorable to effective
activist policy making, then one of the two main options is to implement
policies that focus on changing the balance of power in society in a
direction that is more favorable to inclusive financial systems. Such a
strategy is clearly a complex, mid- to long-term, politically sensitive task.
However, some donors, in concert with reform-oriented domestic constituencies
and in some cases the diaspora, are already implementing
strategies for strengthening the political power of those groups with an
interest in a greater and more sustainable outreach of financial services.
There is a large body of work (Przeworski 2000; Wittman 1989) that
argues that one potential way to change the power balance within society
is to change the political institutions and to try to induce greater political
competition because this would stimulate more socially efficient policies.
This argument is in line with the political institutions view of financial
sector development, which explains the cross-country variation in financial
development by variation in the degree of access to political institutions
(Haber, North, and Weingast 2008). However, as outlined in
previous sections, democracy has been a poor predictor for successful