Financial sector development - Sida

countries in Sub-Saharan Africa. The prevalence of large budget deficits in African
economies has led governments to absorb a major part of the limited financial resources
in their economies to finance these public deficits. As a result, credit to the private sector
has been "crowded out". In many East Asian economies, by contrast, governments have
been net savers during certain periods; on average and for the region as a whole, the
public sector deficits have been very modest, leaving large and increasing financial
resources for the private sector. Chart 2, comparing the record of Ghana with that of
Thailand illustrates this point.
Chart 2.
-----------------------------
Figure 2 (from Chhibber, p 102)
--------------------------
Source: A. Chhibber, Journal of Africa Economies - May 1995
Publicly owned and run banks are common not only in Africa, but also in East Asia. The
political intentions behind this have been largely similar in the two groups of countries,
namely to exert control on the economy through the allocation of finance. In both groups,
such banks have also been misused as a source of political funds and private wealth.
Nevertheless, there are important differences. Publicly owned banks in Africa have been
instructed to finance primarily the public sector, including loss-making parastatals; they
have also been allowed to run large deficit for long periods. Their East Asian counterparts
have financed primarily the export industry and have seldom been allowed to run deficits
and, particularly, not to fail.
In both regions, there have been policies to limit new entrants into the financial sector.
This, together with large state-run banks, has reduced competition. However, in the
generally more competitive environment in East Asia, this has had less detrimental
effects on transaction costs (spreads betweeen lending and deposit rates) than in Africa.
In contrast to most African countries, East Asia has a long tradition of trade and finance,
particularly as regards formal financial arrangements. As a result, experience and
competence in arranging financial contracts is more deeply embedded in the East Asian
culture than in the African. The prevalence in many East Asian countries of long-term
financial arrangements, such as life insurance and pensions, may be seen as a result of
38