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In sum, high transaction costs reduce the profitability of dealing with SMEs, especially in light of the small amounts of money involved in transactions with these clients. More attractive alternatives—such as serving large enterprises with tangible assets that can be used as collateral and that fit with the existing business model—tend to lower the banks’ incentives to reduce prices, compete for market shares in underserved segments, or innovate and find more inexpensive ways of serving SMEs. Moreover, the failures of the credit market in developing countries tend to reduce not only the supply but also the demand for credit. If the unit costs of provision are high, credit becomes less affordable for some smaller firms, such as SMEs, and this, in turn, reduces the demand for credit from the formal banking sector. These examples demonstrate how market failures can impede the development of inclusive financial systems. They provide an argument, based on welfare economic theory and information economics, that some form of government intervention going beyond financial regulation and supervision to remove market failures might increase social welfare.7 Thus, governments should choose their policy to mitigate a particular market failure depending on the nature of this market failure, in order to achieve the best possible economic outcome.8 For instance, if the major constraint on the operation of a payment system is a problem of scale and small market size, policies that spur regional financial integration might be appropriate. In cases where several ways of addressing a specific market failure are possible, welfare economic theory suggests that governments should seek to implement those policies that address the market failure most directly and provide the highest benefits at the lowest costs. Thus, normative economic theory does not only provide a basis for considering activism as a way to enhance social welfare, but it also offers some guiding principles for choosing and designing government interventions. However, contrasting these theoretical insights with actual experiences suggests that governments often lack the capacity or willingness to design activist policies in a way that achieves the positive outcome predicted by the theory.
The Experience with Activism Assessing the actual experience with activist policies is not straightforward. First, it is difficult to provide empirical evidence of whether economic growth or productive investment would have been higher or lower in the absence of interventions—the counterfactual. Second, convincing evidence on whether the government-supported expansion of financial