Financial sector development - Sida

Source: A. Chhibber, Journal of Africa Economies - May 1995.
The impression gained from this picture, for instance the ranking order of the three
countries, can be reinforced by looking at a number of other variables, such as income
per capita, relative prevalance of poverty etc. Tanzania, Uganda, Zambia and other
countries of interest in the Swedish aid context, would show a pattern similar to that of
Ghana in this picture.
The focus here is on the financial aspects of development in Africa and East Asia. The
financial systems in most countries in Sub-Saharan Africa have a number of
characteristics in common. They are part and parcel of, and to some extent a cause of
the stagnation in the African economies. By contrast, the East Asian economies have on
the whole created financial environments which have been conducive to economic
progress -- although there are substantial differences between the countries.
In Africa, as well as in East Asia, banks and other financial institutions operate in a policy
environment which is largely determined by the countries' governments, including central
banks and regulatory agencies. It may be useful to divide the "policy environment" into
two spheres. One has to do with fiscal and monetary policies, including the modes of
financing government deficits. These policies largely determine the growth and stability of
the economy. The second sphere of the "policy environment" relates more specifically to
the legislative and regulatory rules and frameworks surrounding the operations of
financial institutions and markets.
The most notable differences between the financial systems in African and East Asian
economies concern the first aspect of policies, i.e. those that define the macro-economic
frameworks and, specifically, the degree of stability of the economies. Table 3 below
illustrates some of the relevant differences in the "stability record" between Sub-Saharan
African and East Asia.
Table 3. Some macroeconomic indicators for Africa and East Asia
(1960-1992)
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Budget Inflation Black market Real interest
balance 1 rate 2 exchange rate rates 3
premium
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Africa (SSA) -5.5 26.9 76.6 -67.0
East Asia -1.8 16.4 7.6 +2.0
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1 Including foreign grants.
2 GDP deflators.
3 Banks’ deposit rates deflated by consumer price indices. Data cover only the period 1986-1993.
Main source: Collins and Bosworth, "Economic Growth in East Asia", in Brookings Papers on Economic Activity,
1996:2.
Source for real interest rates: IMF, Sub-Saharan Africa, Growth, Savings and Investment, 1986-93.
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The effects of the macroeconomic and financial instability in African economies on
financial markets have been compounded by some other features, common to most
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