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Neoliberalism in the Middle East and Africa: Divergent banking reform trajectories, 1980s to 2000

2004; Taylor & Francis; Volume: 42; Issue: 3 Linguagem: Inglês

10.1080/1466204042000326181

1743-9094

Catherine Boone, Clement Henry,

Banking stability, regulation, efficiency

Abstract This study aims at a better understanding of the politics of economic reform in countries that have remained on the margins of the globalising economy. The article identifies cross-national differences in patterns of financial sector reform in the Middle East and North Africa (MENA) region and sub-Saharan Africa (SSA) in the 1980s and 1990s. We argue that these differences are traceable, in part, to variations in the strength and autonomy of private capital in each country. These social-structural differences are registered, albeit imperfectly, in measures of concentration and ownership structure in the commercial banking sector. Using these measures, we propose a typology of variation in banking structure in the MENA and SSA, and argue that each type tends to be associated with a characteristic pattern of financial sector reform (or non-reform). We find that the biggest struggles over banking reform occurred in countries with a history of antagonistic relations between a relatively strong domestic private sector and the state. Acknowledgements The authors would like to acknowledge the contributions to this project made by Ms. Ji-Hyang Jang, a doctoral candidate in the Department of Government at the University of Texas at Austin, whose research assistance was made possible by financial support from University of Texas Special Research Grants and the department's Public Policy Institute. We also thank the organizers of, and participants in the seminar on "Las Implicaciones Políticas de la Nueva Estructura Financiera en América Latina: Concentraciones y Participación Extranjera," Centro de Investigation y Docencia Economica (CIDE), La División de Estudios Internacionales, Mexico City, 14 May 2001, where some of this work was first presented. The comments of Susan Minushkin, Lawrence Broz, Howard Stein, and CCP reviewers and editors also improved the paper. Notes Exceptions are Clement M. Henry and Robert Springborg, Globalization and the Politics of Development in the Middle East (Cambridge University Press, 2001), and Edward J. Kane and Tara Rice, 'Bank Runs and Banking Policies: Lessons for African Policymakers,' National Bureau of Economic Research (NBER) Working Paper n. 8003 (November, 2000). The latter find a correlation between levels of government corruption and the variegated pattern of response to banking crises in Africa (quick/effective response vs. ineffective and prolonged crisis). We believe that we can develop Kane and Rice's intuition into more refined propositions about how the nature of government and state-society relations can affect patterns of reform. Ted Moss (in Adventure Capitalism: Globalisation and the Political Economy of Stock Markets in Africa, Hampshire, UK: Ashgate, 2003, 60–64, inter alia) recognises the possibility of such an analysis, as do Philip Arestis, Michiko Nissanke, and Howard Stein, 'Finance and Development: Policy Alternatives to Financial Liberalisation,' Levy Economics Institute of Bard College, Working Paper No. 377, (April, 2003). See Stephan Haggard, The Political Economy of the Asian Financial Crisis (Washington, D.C.: Institute for International Economics, 2000), 141 for a similar inventory of the policy dimensions of financial restructuring. See also Alexei Kireyev, Financial Reforms in Sudan: Streamlining the Financial Sector, IMF Working Paper WP/01/53 (May, 2001), 30. The cases were not selected randomly from all countries in each region. These methodological strategies are normal in a partly inductive, case-based process of theory-building. See Andrew Bennett and Alexander L. George, 'Developing and Using Typological Theories in Case Study Research', a Paper presented at the 38th Annual Convention of the International Studies Association in Toronto, 18–22 March 1997, and Alexander L. George and Andrew Bennett, Case Studies and Theory Development in the Social Sciences (Cambridge, MA: MIT Press, 2004). For example, see Stephan Haggard, Chung H. Lee, and Sylvia Maxfield, eds., The Politics of Finance in Developing Countries (Cornell U. Press, 1993); Paul D. Hutchcroft, Booty Capitalism: The Politics of Banking in the Philippines (Cornell 1998); and Sofia A. Pérez, 'Systemic Explanations, Divergent Outcomes: The Politics of Financial Liberalisation in France and Spain', International Studies Quarterly, 42 (1998): 755–784. Kane and Rice, 'Bank Runs and Banking Policies'. See Paul A. Popiel, Financial Systems in Sub-Saharan Africa: A comparative study, World Bank Discussion Paper #260, Africa Technical Draft Series (August 1994), 52–4; Clement M. Henry, The Mediterranean Debt Crescent: Money and Power in Algeria, Egypt, Morocco, Tunisia, and Turkey (University of Florida Press, 1996); Machiko Nissanke and Ernest Aryeetey, Financial Integration and Development: Liberalisation and Reform in Sub-Saharan Africa (London and New York: Routledge, 1998), 41; World Bank, World Development Indicators 2003 (Washington, D.C.: The World Bank, 2003); and Moss, Adventure Capitalism. In 2000, the Johannesburg stock exchange accounted for 90% of all SSA's market capitalisation - $240 billion compared to about $30 billion for the rest of SSA. Most of the small SSA stock markets were created in the 1990s; there were 13 in 2000. Most of these have low turn-over; their activity is dominated by one or a very few stocks. They have been used mostly as vehicles for privatizating state-owned companies. See Moss, Adventure Capitalism, 18, 35–9 inter alia; Kathryn C. Lavelle, 'Architecture of Equity Markets: The Abidjan Regional Bourse', International Organization, 55/3 (2001), 717–42. See also Roger Tangri, The Politics of Patronage in Africa: Parastatals, Privatisation, and Private Enterprise (Oxford: James Currey, 1999). Moss writes that for governments, creating stock markets has been easier than bank restructuring, since bank reform is complicated by the presence of entrenched interests. In the MENA, too, even the Algerians and the Palestinian Authority created stock markets in the l990s, but only the Turkish bourse combined substantial capitalisation and turnover. Bahrain, Jordan, Kuwait, Morocco, Qatar, Saudi Arabia) had stock markets worth 30% or more of GDP, but they were relatively closed and inactive. See also note 13. Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, 'Government Ownership of Banks', National Bureau of Economic Research (NBER) Working Paper No. 7620, 2000. Concentration ratios tend to be much higher and display greater variation in the MENA and SSA than in Latin America, North America, or Europe. While we recognize that concentration may not be a good indicator of competition in some of these other regional settings, it seems to capture significant differences in even the possibility of competition in the financial backwaters we are studying. The banking sources that supplied the primary data used here are: Europa Publications, The Europa World Year Book (London: Europa Publications Ltd., 1999 and 2000); 'The Top 100 Arab Banks', The Banker, November 1997 and November 1998; The Banks Association of Turkey, Banks in Turkey (Ankara: The Banks Association of Turkey, 1997, 1998); Thomson Financial Publishing, Thomson/Polk Bank Directory, December 1998 to May 1999 (Skokie, Illinois: Thomson Financial Publishing, 2000); and Thomson Financial Publishing, Thomson Bank Directory, June-November 2000 (Skokie, Illinois: Thomson Financial Publishing, 2000). Thorsten Beck et al., 'Finance and the sources of growth', Journal of Financial Economics, 58 (2000), 261–300. CIM is all of the M2 money supply, consisting of reserve money and demand, time, savings and foreign currency deposits, excluding currency circulating outside the domestic banking system (IMF, International Financial Statistics, line 14a), divided by the M2 money supply (lines 34 and 35). It is the part of the money supply that is held in banks rather than in people's pockets or under their mattresses. Snider argues that "[t]he adequacy of institutions [to protect property rights and to guarantee contracts and the rule of law] can be approximated by the relative use of currency in comparison to 'contract-intensive money.' See Lewis W. Snider, Growth, Debt, and Politics: Economic Adjustment and the Political performance of Developing Countries (Boulder: Westview, 2000), 8–9. Were Israel to be included, it would fit the high GB20 high HHI 'statist' quadrant. This might be expected, given its socialist past. Yet private capital is not as weak in Israel as in the other MENA statist regimes we describe here. High levels of banking concentration and government ownership also reflect the residue of that country's bail out of its banking system in 1983. In Botswana, central bank assets are huge compared to those of the commercial banking system. Brownbridge and Harvey report that in 1995, government lending accounted for 57% of total lending in Botswana. They count lending by parastatal financial institutions, and government lending to the 'commercial parastatals', two categories of lending that our analysis does not register (Martin Brownbridge and Charles Harvey, Banking in Africa: The Impact of Financial Sector Reform Since Independence (Trenton, NJ, and Oxford: Africa World Press and James Currey Ltd., 1998), 17–19, 27, 31. Averages for stock market capitalisation as a proportion of GDP also vary by category. The category averages for 2000 are 3.1 for the statists, 15.7 for the government-dominated systems, 35.6 for the oligopolistic systems, and 58.7 for the more competitive, private-sector dominant systems (World Bank, World Development Indicators 2003). Haggard, 'The Political Economy'; Charles Lindblom, Politics and Markets: The World's Political Economic Systems (New York: Basic Books, 1977). See Henry and Springborg, Globalization and the Politics of Development. Oligopolistic systems also encourage stock markets, but in these systems stock markets tend to remain under the de facto control of banks or government. See William W. Beach and Gerald P. O'Driscoll, Jr., 'Methodology: Factors of the Index of Economic Freedom,' in Gerald P. O'Driscoll, Jr., Kim R. Holmes, and Melanie Kirkpatrick, 2000 Index of Economic Freedom (Washington, DC: The Heritage Foundation, 2000), 71–89. The ten HF indicators are the openness of trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment policy, banking, wages and prices, property rights, regulation and licensing requirements, and the black market. To use the IEF, we have excluded the second indicator, the fiscal variable, and then constructed an average IEF score for each country. For instance, Egypt was ranked a relatively liberalized 2 in 1999, possibly reflecting the comfortable position won by foreign banks in Egypt but hardly the realities of domestic credit allocation. The Index correctly downgraded Egypt to a 4 the following year, but perhaps again for reasons relating to foreign rather than Egyptian business interests. Kane and Rice, 'Bank Runs and Banking Policies.' Kane and Rice, 'Bank Runs and Banking Policies', 33. Tanzania does, however, turn around at the end of the decade, and we discuss this case below. Kiren Aziz Chaudhry, The Price of Wealth: Economies and Institutions in the Middle East (Cornell, 1997); Terry Karl, The Paradox of Plenty: Oil Booms and Petro-States (Berkeley and Los Angeles: University of California Press, 1997); Michael L. Ross, 'The Political Economy of the Resource Curse', World Politics 51/2 (1999), 297–322. Karim Nashashibi et al., 'Algeria: Stabilization and Transition to the Market', IMF Occasional paper 165 (Washington, DC: IMF, 1998). Kiren Aziz Chaudhry, 'Economic Liberalisation in Oil-Exporting Countries', in Ilya Harik and Denis J. Sullivan, eds., Privatization and Liberalization in the Middle East, (Bloomington: Indiana University Press, 1992), 152–8. Chaudhry, 'Economic Liberalization in Oil-Exporting Countries'. Bradford Dillman, State and Private Sector in Algeria: The Politics of Rent-Seeking and Failed Development (Boulder: Westview, 2000). Khalifa Bank, the largest of the private sector banks, was placed under the control of an administrator appointed by the (Central) Bank of Algeria. The private sector's share in the market fell to about 5%. On Mozambique, where some elements of a once dirigiste regime have capitalised on banking sector reform, see Joseph Hanlon, 'Bank Corruption becomes Site of Struggle in Mozambique', Review of African Political Economy, 29/91 (March 2002): 53–92. See William Reno, Warlord Poiltics and African States (Boulder, CO: Lynne Reinner Press, 1998); Tony Hodges, Angola: From Afro-Stalinism to Petro-Diamond Capitalism (Oxford: Oxford University Press, 2001). International Monertary Fund (IMF), Angola – Recent Economic Developments, IMF Staff Country Report no. 97/112 (Washington, DC: IMF, 17 November 1997), 8. See also International Monetary Fund, Angola – Recent Economic Developments, IMF Staff Country Report no. 00/111, August 2000, which notes that the bankrupt state development bank ceased operations in 1998 and was being liquidated in 2000. Interest rate controls were lifed in mid-1999, but the central bank still maintained effective control over rates on local currency transactions and lending. See Nissanke and Aryeetey, writing apparently in 1992, observed that government ownership of the banking sector was near-total and that government 'interference in the day-to-day operation of formal financial institutions has been pervasive …' (Financial Integration and Development, 81–2). See also Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, 'Government Ownership of Banks', Journal of Finance, 57/1 (2002), 265–301. Kane and Rice, 'Bank Runs and Banking Policies'. Chaudhry, The Price of Wealth. We consider Israel to be an exception also (see note 11). On Mozambique, see Hanlon, 'Bank Corruption'. See Arvid Lukauskas and Susan Minushkin, 'Explaining Styles of Financial Market Opening in Chile, Mexico, South Korea, and Turkey', International Studies Quarterly, 44/4 (2000), 695–723; and Susan Minushkin, 'Opening the Floodgates: Explaining Financial Market Opening in Developing Countries', Ph.D. dissertation, Columbia University, October 2000. Henry and Springborg, The Politics of Economic Development. One of Tunisia's lesser public sector banks was nominally transferred to the private sector, albeit without a change of management. One of the smaller of Egypt's four state banks is perhaps to be privatised, but there are no such plans for the two largest ones, which manage 40% of the total assets of the commercial banking system. When Mansour Moallah, a former minister and previously a planning director, was perceived to be becoming too independent – and his privately owned bank too ambitious, representing the aspirations of many private entrepreneurs, especially from Sfax – the bank suddenly lost the deposits of important parastatal enterprises such as Tunis Air in 1993. Moallah was obliged to retire from the bank and from public life, so that the bank could recover. The legacy of British colonialism is visible in government-business relations and commercial banking structure in most of the cases that fit this category. In general, the British colonised parts of Africa with more developed indigenous business classes and deeper involvement in international trade, and/or better prospects for the growth of commercial agriculture and the mining industry. France, a weaker European power, colonised parts of Africa that offered less economically. In Kenya, Rhodesia, Zambia, and South Africa, the presence of European settlers helped drive the development of local institutions supportive of private (settler) accumulation (including primitive accumulation via coercive land expropriation and the establishment of labour repressive regimes). Government-business relations in the ex-British colonies bear the imprint of British legal inheritance, patterns of government-business relations that developed under British rule, the heavy presence of British banking and financial interests over the entire course of the twentieth century (Barclays and Standard Chartered are nearly ubiquitous), and British colonies' accession to formal political independence with more control over fiscal, monetary, and regulatory policies and institutions than was the case in the Francophone successor states. They were indeed structurally predisposed to become either bully states or more liberal, market-dominant systems. In the former French colonies, by contrast, government and banking were more closely imbricated in both structure and functioning (well set up to sustain oligopolies), and neocolonial ties were more extensive and better institutionalised, for better and for worse. See Guy Rocheteau, Pouvoir Financier et Indépendence Economique in Afrique: Le cas du Sénégal (Paris: Karthala, 1982); John Zysman, Governments, Markets, and Growth (Ithaca: Cornell, 1983); Nissanke and Aryeetey, Financial Integration and Development, 291–5. See also note 48. See Catherine Boone, Political Topographies of the African State (Cambridge and New York: Cambridge University Press, 2004). For discussions of financial sector politics under the Rawlings regime, see Kane and Rice, 'Bank Runs and Banking Policies', 23, and Moss, Adventure Capitalism, 58–60. See Tom Forrest, Politics and Economic Development in Nigeria (Boulder: Westview, 1993); and David Himbara, Kenyan Capitalists, the State, and Development (Boulder, CO: Lynne Reinner, 1994). Brownbridge and Harvey, Banking in Africa. Peter Lewis and Howard Stein, 'Shifting Fortunes: The Political Economy of Financial Liberalisation in Nigeria', World Development, 25/1 (1997), 5–22; The Banker, 'Sub-Sahara's Slippery Slope', 30 Dec. 1992; Financial Times, 'The Roller Coaster Ride', 2 June 1998. On institutional legacies and liberalisation, see footnote 38. The British legacy placed higher demands on the successor states to establish effective mechanisms for arm-length bank regulation and supervision (because in structure and functioning, private banks and the private banking sector could be more autonomous from government in the ex-British colonies). These demands were not met in many cases, including Nigeria and Kenya. For reasons mentioned in note 38, the Franc Zone countries were more resistant to the early and radical financial sector liberalisations pushed by the World Bank in the 1980s, and thus did not experience some of the highly disruptive effects of early liberalisation that were observed in Kenya and Nigeria. Lewis and Stein, 'Shifting Fortunes', 5. Lewis and Stein, 'Shifting Fortunes', 5. Financial Times (London) 21 May 1999: 22. Brownbridge and Harvey, Banking in Africa, 124–5. Eduardo Silva, The State and Capital in Chile: Business Elites, Technocrats, and Market Economics (Boulder, CO: Westview Press, 1996). English versus French legal traditions do not appear to explain much variation in banking structures in the MENA, despite the French tendencies described in footnote 38 toward oligopoly and/or state control. One consequence of the French invasions of Egypt in 1798 and Algeria in 1830 was that commercial legislation based on French civil law spread everywhere in the region except Bahrain, Israel, Saudi Arabia, and the United Emirates (where English-based common law predominated, see La Porta et al., 'Government Ownership of Banks,' NBER Working Paper, 36). The (late) timing and (limited) penetration of European influence seem more usefully to explain the survival of monarchy and oligopoly than whether the primary influence was British, French, Italian, German, or American. Saudi Arabia and the United Arab Emirates, however, both share an Anglo-American legacy and are borderline cases of oligopoly (but in Saudi Arabia the government allocates much of the credit through specialised agencies). Lebanon in a sense overcame its French origins in the halcyon days of British and American multinational influence prior to the 1975 outbreak of civil war, but seems now to be reverting to French form: despite a low HHI score, an oligarchy of multimillionaires in and out of government owns or controls most of the important banks. On some monarchical and dynastic features of Botswana's political system, see Pierre Englebert, State Legitimacy and Development in Africa (Boulder: Lynne Rienner Press, 2000), 112–3. See note 38. Henry and Springborg, Globalization and the Politics of Development, 92. Henry and Springborg, Globalization and the Politics of Development, 173. In West Africa, the Banque Nationale de Paris (which became France's biggest bank in 1999), generally operates as BICI (Banque Internationale du Commerce et de l'Industrie), as in BICIS [Senegal], BICICI [Côte d'Ivoire]). Its market share in the West African CFA zone countries averaged 30–50% at the end of the 1990s. See Zysman, Governments, Markets, and Growth; Rocheteau, Pouvoir Financier. Catherine Boone, Merchant Capital and the Roots of State Power in Senegal (Cambridge: Cambridge University Press, 1992); Catherine Boone, 'Trade, Taxes, and Tribute: Market Liberalisations and the New Importers in West Africa', World Development, 22/3 (1994). 'The Central Bank provided strong support for restructuring through the consolidation of loans at a subsidized rate of 3% over a 15 year period. Also, international French banks were asked to recapitalise the restructured banks. Governments were also asked to recapitalise banks… The BCEAO kept the failing banks liquid… injecting liquidity into failing banks through 'refinancing' and later consolidating short-term loans into long-term assets' (Popiel, Financial Systems in Sub-Saharan Africa, 58–9, 78). See also M. Zamaroczy, 'Reform of Senegal's Banking System', Finance and Development, 29/1 (1992), 14–5. Cote d'Ivoire's shares in the leading French banks by the late 1990s was about 20% each. International Monertary Fund, Senegal: Financial System Stability Assessment, IMF Country Report no. 01/189 (Washington, DC: IMF, October 2001. Popiel, Financial Systems in Sub-Saharan Africa, 61; Ann Joseph, 'La Réforme du Secteur Financier: Rapport préparé dans le cadre du projet Afrique Emergente du Centre de Développement de l'OCDE', Paris: Organisation de Coopération et de Développement Economiques, 2000). For press commentary and critique of the operations of the franc zone since 1994, see 'CFA-Euro: Thou shalt not rock the boat', New African, September 2002: 44; and 'CFA: The devil's in the details', New African, July–August 2002: 47–8. In Senegal, the rise of the Compagnie Bancaire de l'Afrique Occidentale (CBAO) does seem to be an exception. This bank is now well implanted in the retail banking sector. The Groupe Mimran, which has long ties to politically-nurtured business and to the Senegal ruling elite, acquired a majority share in the CBAO in November 1992. See Ibrahima Thioub, Momar Coumba Diop, and Catherine Boone, 'From Statism to Liberalism in Senegal: Shifting Politics of Indigenous Business Interests', African Studies Review, 41/2 (1998), 88. Average market capitalisation for the years 1999–2001 was 43% of GDP for Turkey, compared to South Africa's 146%, but turnover, the percentage of stocks traded on the exchange, was 157 for Turkey and only 35% for South Africa (World Bank, World Development Indicators 2003). World Bank, World Development Indicators 2003. African Business, Oct. 1996: 19. See also African Business, 'Banking in Africa', April 1999:17. The top four are ABSA, Standard Bank, First National, and Nedcor. Financial Times ('African Banking Survey: Deregulation's only part of the story', 2 June 1998, 2) reported that these four control 80% of the retail banking market. ABSA (Amalgamated Banks of South Africa) itself formed from the merger of four banks in 1991. In 1992 it swallowed up a fifth, Bankorp, the weakest of the country's top five banks. 'African Banking Survey: Deregulation's only part of the story', Financial Times, 2 June 1998, 2. Christopher Johnston and Martin Murray, 'The Structure and Organization of Large-Scale Business in Contemporary South Africa', unpublished paper presented at the Workshop for the Nigeria Project, American University, Washington DC, 8 Feb. 1997. Some ANC elements pressed for more dirigiste economic policies that can deliver jobs and higher lving standards to South Africa's majority. Perhaps partially in response, in 2002 South Africa's Banking Council, made up of CEOs of the five major banks, drafted an 'empowerment charter' outlining the banks' intention to make banking more responsive to majority needs. See Tom Nevin, 'Mining Charter Unlocks Empowerment Genie', African Business, no. 282, December, 2002; and Okechukwu C. Ideduru, 'Social Concertation, Labour Unions and the Creation of a Black Bourgeoisie in South Africa', Commonwealth and Comparative Politics, 40/2 (2002), 47–85. Henry and Springborg, Globalization and the Politics of Development, 186. Lewis and Stein, 'Shifting Fortunes', 6.