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

The Potential of Pro-Market Activism for Finance in Africa: A Political Economy Perspective 219
in rich countries, such as efficient courts, private property rights,
or bankruptcy laws. The key assumption is that the kind of institutions
reformers should build should be contingent on the economic constraints
and political realities of a specific country at a particular stage
of development (Adler, Sage, and Woolock 2009; Gerschenkron 1962;
Rodrik 2008). Since developing countries face different constraints
and different political environments than rich countries, this may
require adopting better-fitting second-best institutions, which differ
from those prevailing in rich countries, as a transitional device. Secondbest
institutions might offer a more pragmatic way forward because
they fit better with the economic and political realities in developing
countries in the short term. In light of the difficulties African states face
in implementing best-practice institutions, exploring the potential of
second-best institutions such as relationship-lending, as opposed to
rules-based lending, seems highly policy relevant (Biggs and Shah
2006). However, second-best institutions might involve social costs,
arising in the case of relationship-lending for instance, from the provision
of credit within exclusive credit networks. Therefore, determining
the conditions under which second-best institutions can help build
more inclusive financial systems in Sub-Saharan Africa remains an
important question for research.
Figure 6.1 summarizes the reform strategies suggested for promoting
access to finance in different political environments.
Figure 6.1
Strategies for Reform
Does the analysis suggest that the political-economic environment is favorable to activism?
Yes
No
Consider activism as
complementary, time-bound
tool in financial reform
Source: Author.
Change power
relationships within
society, for example,
through political
entrepreneurship
Work within existing
power relationships, for
example, to improve
second-best institutions
such as relationship-lending