The Political Economy of Reforming Domestic Financial Architectures

This chapter examines the political economy dimensions of building domestic financial architectures in developing countries which are more immune to recurrent crises and which contribute to high-quality and lower-volatility growth. One way of appreciating the importance of the issues is to note the effects of macroeconomic and financial crises on the incidence of poverty.1 Between 1993 and 1995, Nigeria went through an economic downturn associated with a banking crisis (see the study by Ajayi and Adenikinju, Chapter 13 in this volume). Per capita GDP declined every year by an average 1.3 per cent. In 1992, just before the crisis, the incidence of poverty had been estimated at 43 per cent, using a nationally defined consumption threshold. This level represented a reduction of three percentage points with respect to the previous available measure (1985). After the 1993–95 downturn the comparable headcount ratio was 66 per cent (UNDP, 2004). Taking the 1992 level as the benchmark, Nigeria would need to bring such ratio to less than 22 per cent by 2015 to meet the respective Millennium Development Goal; that is, poverty would have to fall by approximately 0.9 percentage points per year. In contrast, from the 1996 level, the required yearly reduction to achieve the same target would be 2.3 percentage points (two and a half times the pre-crisis speed of reduction). Or, put differently, at the pre-crisis speed, the MDG poverty incidence level would not be achieved until 2040.2