Review: The Mediterranean Debt Crescent
Rather than outline the arguments made in Clement Henry's
Mediterranean Debt Crescent, our short review will attempt interpret the
case material presented in the book in light of John Zysman's typology of
banking structures. Dr. Henry has already attempted to classify many of
these cases in his article "The Financial Arms of Industrial and Political
Activity." However, particular cases fall under different classifications
in the two works. One of our goals is to examine why the classification
of these cases differs. We also hope to raise two theoretical questions.
The first involves the issue of state capacity. The second involves the
potential power of the German financial model to transform political
systems.
For Zysman, late-industrializing economies require a plan for development.
If the state possesses an autonomous "Weberian" developmental bureaucracy
then the plan can be expressed through state direction of finance and
industry, as in the French/Japanese model. For all of Henry's cases, the
professionalism of the state is particularly dubious. In varying degrees,
each government suffers from clientalism and corruption. The state's
incapacity to rationally direct investment leads Henry to focus on the
German model, which revolves around a planned investment strategy between
strong, oligopolistic banks and the industrial sector. By focusing on the
German model, Henry is forced to address the concentration of the banking
industry. Contrary to liberal economic prescriptions, Henry believes that
open competition in the financial sector is unlikely to form the basis of
a development plan. Instead, competition is likely to only provide
further opportunities for clientilism within the state.
Dr. Henry goes farther than simply stating that the German model may be
developmentally better for late-industrializers. He states that the
power of the oligopoly may in fact be capable of instituting political
change in the patrimonial-authoritarian regimes he examines. This
political interpretation of the German model is not found in Zysman's
original work, but has powerful implications for both political and
economic reform.
Turkey:
Of all the cases Henry examines, Turkey has progressed furthest along the
parallel roads of democratization and financial liberalization. Henry
believes that this progress can be linked to Turkey's colonial legacy,
which created an oligopolistic German-style banking system. However,
Ozal's financial liberalization reforms in the 1980's began to increase
the competitive nature of Turkey's banking system. In the process, the
Turkish banking system began to shift from the German to the
Anglo-American model. Ozal's reforms shifted the structural power of the
traditional banking oligopolists. They ceased to be "good" oligopolists,
in that they began to interact competitively rather than present a unified
front to government. Rather than guide government, the Turkish
oligopolists moved to form a political coalition with Ozal's authoritarian
regime.
One critical part of Ozal's liberalizations was the introduction of
Islamic banks into the financial system. These banks not only contributed
to a more competitive banking system, but also provided a strong economic
catalyst for the Refah Islamic party. However, Henry states that
competition among banks could not promote pluralism unless the banking
sector had previously acquired structural power. Thus, the transformation
from the German to Anglo-American model lead to limited political
pluralism in Turkey precisely because of the pre-existing political power
of banks.
Egypt:
Egypt reflects a British financial legacy that encouraged extensive
financial competition. From the late 1970s through the 1980s, Sadat sought
to promote a commercial banking system that would be relatively autonomous
and diversified. These infitah reforms resulted in a fragmented banking
system that only offered more patronage than a more concentrated system.
The expansion of the financial sector did not allow for the creation of
business constituencies that might press for political pluralism. Whether
the system was fragmented or concentrated, the public sector banks
continually dominated credit allocation, and private banks remained locked
into the public oligopoly. Thus, Egypt can plausibly be classified under
the French rather than British model, especially from state-led strategy
perspectives.
Egypt appeared to be successfully accumulating finance capital until the
1988 government crack-down on Islamic money management companies.
Disruption of the Islamic banks effectively drove considerable amount
capital out of the formal banking system. Since the mid-1990s, these
re-legalized Islamic financial institutions appear to be building a
capital base that could support a more pluralist political environment.
As the Islamic banks gain structural power, they will be in position to
play a constructive political role.
Algeria:
The Algerian case is in some ways the simplest to interpret.
Zysman's typology assumes that there is a meaningful distinction between
banking, industry, and government. In Algeria, with its history of
state-centered socialism, this distinction is far from clear. Banks
traditionally served as government cash registers, dispersing credit along
lines determined by the government investment plan. Henry draws on
Algeria's colonial legacy to explain at least a part of the banking
systems state-centered focus.
With its IMF supported reforms in 1990, Algeria gained "one of the
world's most powerful central banks."(p. 57) Unfortunately, these reforms,
including freeing the commercial banks to chose their own clients and base
lending on economic (as opposed to policy) considerations, only lead to a
further decline of the banking sector. Corruption and kickbacks
undoubtedly played a part in the decline. However, without proper
financial information, banks, even if they had wanted to, could not make
rational loan choices. The distinction between outright clientalism, and
the true inability to make rational investment choices is one that should
be examined more closely, primarily because it strikes at the heart of the
"professionalism" aspect of banking. For the cases studied in Henry's
work, it seems clear true that clientalism was the prime motivational
feature of the banking systems.
Tunisia:
Tunisia demonstrates the counterpoint to Henry's general
preference of the German financial model. He believes that in the 1980's
"Tunisia was in the strongest position to embark on structural reforms."
(p.50) However, this reform began from what could be seen as a statist
condition and at least on paper advanced towards an Anglo-American model
of market-led development. In 1988 the government moved to liberalize
banking. Market forces, not government policies, were to determine bank
decisions. Under IMF direction, the government declared the "four
essential pillars" of the economy. These pillars, such as foreign exchange
liberalization, development of stock markets, and a competitive banking
sector are essentially features of the Anglo-American model. The French
aspect of to the financial sector, which Henry refers to in his shorter
article, can possibly be understood as transitional features of the
system. Government is, at least in theory, steadily removing itself from
the financial sector. The continuing presence of public sector banks and
enterprises, coupled with capital flight and a tiny stock market seem to
hinder the full development of the Anglo-American model.
Morocco:
The Moroccan case is problematic. Henry's short article classifies
Moroccan banking as German in character, but the case treatment in Debt
Crescent tends to lend itself to the French model. The key difference
seems to be the competitive nature of the banks. Competition for
depositors and investment clients was seen in the early 1990's. An
informal "gentleman's agreement" seems to have halted outright competition
and steered the industry towards a more oligopolistic structure. Even if
this is true, it only blurs the rather clear line Zysman uses to
distinguish the French and German models. The Moroccan case demonstrates
an oligopolistic banking structure facing a state with still directs over
65% of bank resources. (p. 59)
The question raised by the Moroccan case involves the structure o
the oligopoly itself. Zysman's German model describes a relatively unified
oligopolistic structure. Morocco seems to demonstrate that the oligopoly
can also be divided against itself, as with two bankers competing against
one another in interest rates. Under this situation, perhaps the state
can perform a role in development.