The debate on whether the state should play an active role in broadening access to finance or not is one that has lingered for decades. A recent book (de la Torre, Gozzi, and Schmukler, 2017) argues that a new a view has gained traction and is worth considering.
Two highly contrasting views have traditionally dominated the debate regarding the role of the state. The interventionist view argues that market forces alone cannot overcome market failures that result in problems of access to finance. If the government wants to expand finance, it has to assume a direct role in addressing market failures and allocating financial resources. This could be done, for example, through state-owned banks, imposing direct lending requirements to private banks, or capping interest rates.
On the other hand, the laissez-faire view argues that, due to incentive issues and governance problems, direct government intervention in the allocation of financial resources would do more harm than good. As a result, the state should refrain from intervening in the financial sector and limit its role only to improve the enabling environment. This view contends that, under an adequate environment, private agents would be able to address problems of access on their own.
Despite dominating the debate, these two views have not been fully satisfying. In particular, important costs have accompanied their implementation. Direct state involvement in the financial sector under the interventionist view has been vulnerable to corruption and inefficiency, leading to lower financial development, slower growth, and less fiscal discipline, among other things. Liberalization under the laissez-faire view has led to higher volatility and financial fragility.
The new third view, a middle-ground view called pro-market activism, argues that the state’s main focus is to improve the enabling environment but, in some cases, direct state intervention might be warranted. The idea is to address market failures in the short-run while institutional reforms are still ongoing and, hopefully, yield the desired payoffs in terms of access to finance. In contrast to the laissez-faire view, this third view recognizes that direct state intervention might be beneficial to address market failures that cause problems of access. But, opposing the interventionist view, it sustains that state interventions should be highly selective. Rather than increasing the use of financial services per se, interventions should target the market failures behind the problems of access. In addition, interventions should be cost-effective and should not displace the private sector, but rather work with it.
This new view derives from experiences with innovative development policies, and accompanies new approaches on the role of the state in other areas (e.g., industries and exports). Examples of pro-market activism initiatives around the world include public banks in Brazil and Mexico providing market infrastructure, correspondent banking networks, and online platforms for reverse factoring. Other examples are initiatives in Mexico and the U.S. to promote structured finance transactions, public credit guarantee systems in Chile, Japan, Korea, and the Netherlands, as well as initiatives in Brazil, Chile, and Indonesia to provide microfinance services.
These initiatives suggest that there might be a role for the state in promoting access to finance. In particular, the state could play a catalytic role, addressing collective action problems and even partnering with the private sector in developing these initiatives. This role implies varying degrees of state involvement in the financial sector – from simply writing specific regulations to directly coordinating with private financial intermediaries and engaging in specific financial transactions. This new view goes beyond the debate of whether market or government failures are more important behind problems of access. Instead, it recognizes the need to avoid one-size-fits-all strategies and argues that similar approaches might produce different results in different contexts. It also leaves open several questions for future research.