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

The Potential of Pro-Market Activism for Finance in Africa: A Political Economy Perspective 221
also draws policy implications for those countries currently not likely to
have good enough governance to successfully pursue activist policies.
The existing literature on the political economy of finance suggests
that the assumption of interdependencies between private and public
agents should frame the political economy analysis. Existing work also
shows the value of an approach that seeks to explain or predict financial
policy choices through the analysis of coalitions of interests between
private and public agents. In this way, the nature of a particular policy
coalition and its power to determine financial policies seems to be particularly
shaped by the historically produced organization of the private
banking sector in relation to the state, and the revenue base of the state.
If the political economy analysis suggests that the political conditions
are favorable, there are convincing arguments for supporting welldesigned
activist policies such as subsidies or tax incentives as temporary
devices to complement modernist approaches. More often than not,
however, the political environment is likely to be unfavorable, so governments
must pursue strategies other than activism to encourage economic
development. Political economy suggests two main strategies for advisors
and policy makers in countries with an unfavorable environment. One
possibility is to try to change the power relationships within society, for
instance, through encouraging political entrepreneurship to empower
financially excluded groups. The alternative possibility is to work within
the political environment and, for example, improve the functioning of
second-best institutions, such as relationship-lending.
These arguments entail a new approach for making decisions about
spending resources to build inclusive financial systems by emphasizing
the need to focus on what drives development and what is politically
feasible. Taking such a pragmatic, but maybe more realistic, approach
requires greater openness to second-best policies. While globally deemed
first-best solutions such as property rights and efficient courts are crucial
for financial development, they might be difficult and slow to establish in
countries with an unfavorable political environment. In such countries a
focus on the low-hanging fruit, such as fostering relationship-lending
schemes or social entrepreneurship, might offer limited progress, but also
a more promising way forward. In addition, through their effect on the
political environment, second-best policies could increase the demand for
first-best policies in the longer term.
Translating both implications—to revise financial reform strategies in
accordance with the results of political economy analysis and also to be
open to time-bound second-best (including activist) solutions—into