While the relative economic success of the United States appears to have been
important in this respect, the global financial crisis may have changed perceptions
about finance in particular. Similarly, the rapid and sustained growth of China,
achieved in a far from laissez-faire way, may also be provoking a reassess ment of
the merits of different development trajectories.
The final mechanism in the literature is emulation. This constructivist strand
explores why some policies become accepted while others do not, based on the
subjective understanding of policy-makers. The question is why they come to think
the way they do:
Policymakers are constrained by bounded rationality, meaning that they are
unable to envision the full range of policy alternatives and unable to assess
the costs and benefits of each. In consequence it is often the rhetorical power
of a new policy approach, rather than hard evidence . . . that matters.
(Simmons et al., 2008, p33)
As with the coercion, powerful countries and institutions are often those with the
greatest ‘rhetorical power’. A key difference in the emulation literature, however,
is that policy-makers ‘choose’ to adopt the policies they genuinely believe will be
most effective.
While it is undeniable that private financiers have a disproportionate influence,
they are not the only influence. Borrowers may prefer short-term finance in some
cases, and politicians have strong incentives to foster economic booms. The power
of industrial interests is also important. In developing countries, we would expect
different patterns of influential groups. The ‘new political economy’ school has
undertaken empirical work on how the balance of power between different
interest groups affects the regulation of the financial system, and its resultant
structure.
27
While there may have been too much financial sector development (FSD) in
some developed countries,
28 this is not true in most of the developing world. In
many countries, financial systems are dominated by a few large banks, which provide
too little (expensive) credit to the private sector. Financial exclusion is also the
norm in many countries: only 24 per cent of adults in sub-Saharan Africa have a
bank account.
29 For Rajan and Zingales (2003) low FSD in developing countries
results from collusion between government and incumbent financial institutions,
both of whom are incentivized to restrict competition: incumbent institutions
because this allows them to maintain market share and monopolistic profits;
governments because they can use the financial sector for their own ends.
A related school attributes the growth of financial systems to the emergence of
political institutions to check the power of government. Without such institutions,
governments face strong incentives to use the financial system to support their own
survival, rather than develop into an effective mechanism for financing broad-based
economic activity (Haber et al., 2008).
166 Stephen Spratt
important in this respect, the global financial crisis may have changed perceptions
about finance in particular. Similarly, the rapid and sustained growth of China,
achieved in a far from laissez-faire way, may also be provoking a reassess ment of
the merits of different development trajectories.
The final mechanism in the literature is emulation. This constructivist strand
explores why some policies become accepted while others do not, based on the
subjective understanding of policy-makers. The question is why they come to think
the way they do:
Policymakers are constrained by bounded rationality, meaning that they are
unable to envision the full range of policy alternatives and unable to assess
the costs and benefits of each. In consequence it is often the rhetorical power
of a new policy approach, rather than hard evidence . . . that matters.
(Simmons et al., 2008, p33)
As with the coercion, powerful countries and institutions are often those with the
greatest ‘rhetorical power’. A key difference in the emulation literature, however,
is that policy-makers ‘choose’ to adopt the policies they genuinely believe will be
most effective.
While it is undeniable that private financiers have a disproportionate influence,
they are not the only influence. Borrowers may prefer short-term finance in some
cases, and politicians have strong incentives to foster economic booms. The power
of industrial interests is also important. In developing countries, we would expect
different patterns of influential groups. The ‘new political economy’ school has
undertaken empirical work on how the balance of power between different
interest groups affects the regulation of the financial system, and its resultant
structure.
27
While there may have been too much financial sector development (FSD) in
some developed countries,
28 this is not true in most of the developing world. In
many countries, financial systems are dominated by a few large banks, which provide
too little (expensive) credit to the private sector. Financial exclusion is also the
norm in many countries: only 24 per cent of adults in sub-Saharan Africa have a
bank account.
29 For Rajan and Zingales (2003) low FSD in developing countries
results from collusion between government and incumbent financial institutions,
both of whom are incentivized to restrict competition: incumbent institutions
because this allows them to maintain market share and monopolistic profits;
governments because they can use the financial sector for their own ends.
A related school attributes the growth of financial systems to the emergence of
political institutions to check the power of government. Without such institutions,
governments face strong incentives to use the financial system to support their own
survival, rather than develop into an effective mechanism for financing broad-based
economic activity (Haber et al., 2008).
166 Stephen Spratt