The Potential of Pro-Market Activism for Finance in Africa: A Political Economy Perspective
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have “strong incentives to govern the financial system so as to facilitate its own political survival at the expense of the development of a banking system that can finance the private economyâ€? (Haber, North, and Weingast 2008, 2). The major shortcoming of this approach is that it does not consider the possibility that the revenue imperative (the necessity of governments to generate income) might also provide incentives for governments to introduce universal business-friendly policies to increase tax income (Moore and Schmitz 2008; Tilly 1992; Winters 1996). Governing finance might consist of more than financing government, and the relationships between those controlling capital and those with political power are characterized by both conflict and cooperation. The assumption of causality running from political institutions to financial policy choices also appears to be problematic. One reason for this is the endogeneity of institutions. An explanation of policy choices based on institutions automatically raises the question of why some states have democratic institutions and govern their financial sector well but others do not. Although it seems plausible that in the long run political institutions have the presumed positive effect, it is likely that, particularly in the short run, there are other factors at work that determine both financial reform processes and the transition to democracy. The increasing empirical evidence that democracy has not always had the expected positive effect on economic development and reform in the developing world also suggests that a broader set of variables than those related to political institutions might be needed to explain or predict financial development and policy patterns (see, for instance, Bräutigam, Rakner, and Taylor 2002; Collier and Rohner 2008). As highlighted previously, historically those developing countries that were most successful in intervening in financial markets, such as Korea or Taiwan, China, were not electoral democracies (Kang 2003; Stiglitz and Uy 1996). Quantitative evidence also indicates that electoral competition alone does not cause financial development (Keefer 2007; Rajan and Zingales 2003).20 In light of the shortcomings of state-centered and society-centered explanations for financial policy choices, the added value of elaborating a framework to weigh the empirical support for activism using a coalitional approach to explain or predict financial policy is likely to be high. Few researchers have taken up this challenge. Those who have, have mostly focused on Latin American and East Asian middle-income countries (Lukauskas and Minushkin 2000; Maxfield 1990). Table 6.2 provides an overview of approaches in the existing literature that studies financial policy patterns. The review of society-centered,