"Making Finance Work For Africa" After The Financial Crisis

Making Finance Work for Africa after
the Financial Crisis

The importance of finance for Africa and South Africas chances in the
post-crisis era
An African case study by Moritz Hessler

Master Thesis, Erasmus Mundus Global Studies 11
Faculty of Social Science and Philosophy, University of Leipzig

Supervisor: Ulf Engel | Turned in on August 1, 2011
Making Finance Work for Africa after the Financial Crisis
Moritz Hessler
I.
Table of Contents
I.
Table of Contents ................................................................................................................. i
II.
Table of Figures................................................................................................................... iii
III.
Abbreviations ....................................................................................................................... v
Introduction.......................................................................................................................... 1
1.1 State of the Art ..........................................................................................................................................................................................................3
1.2 Methodology .............................................................................................................................................................................................................5
South Africa Needs an Own Financial Ideology ............................................................ 8

2.1 Definition, Goals, and Requirements of a Financial System....................................................................................................... 12
2.1.1
Challenges of the global financial system ................................................................................................................................. 15
2.1.2
The financial market as a complex, global bio-cybernetic system ................................................................................. 17
2.1.3
The South African financial system 1994 2007/8................................................................................................................ 19
2.2 Identity and Individualism .............................................................................................................................................................................. 22

2.3 Democratization and Socio-economics................................................................................................................................................. 26
2.4 Economic Productivity, Predictability and Stability ........................................................................................................................ 28
2.4.1
Macro-level opportunities and risks ............................................................................................................................................. 30
2.4.2
Micro-level necessities......................................................................................................................................................................... 33
2.5 Future Oriented Policing ................................................................................................................................................................................. 34
2.5.1
Towards an information society? .................................................................................................................................................. 34
2.5.2
Regional aspirations and integration into the global economy ..................................................................................... 36
Taking Africa Beyond Aid................................................................................................. 38

3.1 Partnership for Making Finance Work for Africa ............................................................................................................................... 41
A Crisis as Catalyst for Development ............................................................................. 43

4.1 The Crisis Impact on Africa ............................................................................................................................................................................. 46
4.2 South African Reaction to the Global Recession of 2008 ............................................................................................................ 48
African Financial System Idea & Infrastructure ........................................................ 50

5.1 People and Ideology: Financial Infrastructure, Literacy, and Inclusion ............................................................................... 52
5.1.1
Market ideology and capacity ........................................................................................................................................................ 53
5.1.2
Information and communication technologies and innovation ................................................................................... 55
Universitt Leipzig | Erasmus Mundus Global Studies 2011
Moritz Hessler
5.2 Institutions: Agents, Legal and Regulatory Infrastructure ........................................................................................................... 56

5.2.1
Restructuring the banking sector .................................................................................................................................................. 57
5.2.2
Legal and regulatory institutions................................................................................................................................................... 60
5.2.3
Preventing an African-born crisis................................................................................................................................................... 64
5.3 Rules and Agreements: Policy-Framework........................................................................................................................................... 64

5.3.1
The New Growth Path program..................................................................................................................................................... 65
5.3.2
Challenges of monetary policing................................................................................................................................................... 67
5.3.3
Reshaping fiscal aspects .................................................................................................................................................................... 69
5.3.4
Acknowledging a broader perspective........................................................................................................................................ 69
5.4 Regional Financial Integration ..................................................................................................................................................................... 70
Conclusion: Evaluation and Outlook ............................................................................. 72
IV.
References........................................................................................................................... 74
V.
Appendix ............................................................................................................................. 86
i.
Further figures ........................................................................................................................................................................................................ 86
ii.
New Friends for Development .................................................................................................................................................................... 96
VI.
Statutory Declaration .................................................................................................... 106
ii
II.
Moritz Hessler
Table of Figures
Figure 1: Clusters of African economies ........................................................................................................................................................................9

Figure 2: Money and substitutes of money ("swell money")......................................................................................................................... 14
Figure 3: Consequences of an inequation in the balance of accounts .................................................................................................. 31
Figure 4: The pattern of savings over a life cycle .................................................................................................................................................. 34
Figure 5: Total intra-SADC exports 1992 and 2002 .............................................................................................................................................. 37
Figure 6: Who has to do what to support African development (excerpt) .......................................................................................... 39
Figure 7: Swell or leverage money, shadow banking and risk trading.................................................................................................... 44
Figure 8: SA macroeconomic variables under the shock scenario ............................................................................................................ 48
Figure 9: The major goals of the NGP as reaction to the crisis ..................................................................................................................... 49
Figure 10: Financial development and selected determinants, 1995-2007......................................................................................... 50
Figure 11: The relationship between inflation and real wages .................................................................................................................... 51
Figure 12: Key aspects and challenges of a financial ideology .................................................................................................................... 54
Figure 13: Macro-framework for development banks ....................................................................................................................................... 57
Figure 14: Barriers for the access to bank services in Africa ........................................................................................................................... 58
Figure 15: Remote banking services have not kept pace with spread of cell phones .................................................................. 59
Figure 16: Active, unbanked clients of eight branchless banking pioneers and largest MFI in same country .............. 60
Figure 17: SA's financial regulatory structure .......................................................................................................................................................... 63
Figure 18: NGP packages to solve macro- and microeconomic tradeoffs............................................................................................ 67
Figure 19: Effects of currency dynamics on growth, employment, and price level stability ..................................................... 68
Figure 20: Net capital inflows, net private and official inflows to SSA 2001-2009............................................................................ 86
Figure 21: Economic growth in the First, Second, and Third Economic World ................................................................................. 86
Figure 22: Number of deposit accounts in banks and regulated non-bank financial ................................................................... 87
iii
Moritz Hessler
Figure 23: Number of bank loans per thousand adults in commercial banks ................................................................................... 87
Figure 24: Savings accounts in % of the population. Household survey sources, years and countries. ............................ 88
Figure 25: SADCs member states and sectoral coordination units (excluding Madagascar and Seychelles) ............... 89
Figure 26: Different action plans (next to MDGs, Stiglitz and Sachs) to overcome the African malaise .......................... 90
Figure 27: South Africa: market risks stress tests for the Banks..................................................................................................................... 91
Figure 28: South Africa: selected household indicators ................................................................................................................................... 92
Figure 29: Financial system development ................................................................................................................................................................ 93
Figure 30: Financial system development indicators......................................................................................................................................... 94
Figure 31: AFMI framework................................................................................................................................................................................................. 95
iv
III.
Moritz Hessler
Abbreviations
AfDB
African Development Bank
AFMI
African Financial Market Initiative
ANC
African National Congress
APRM
African Peer Review Mechanism
AU
African Union
BEE
Black Economic Empowerment
BIS
Bank of International Settlements
BRICS
Group of Brazil, Russia, India, China, South Africa
CeSTII
Centre for Science, Technology and Innovation Indicators
COSATU
Conference of South African Trade Unions
ECB
European Central Bank
FDI
Foreign Direct Investment
G20
Group of the 20 most powerful (industrialized and emerging) economies worldwide
GDP
Gross Domestic Product
GIZ
Gesellschaft fr International Zusammenarbeit
IBSA
Group of emerging democracies India, Brazil, and South Africa
ICT
Information and Communication Technologies
ILO
International Labor Organization
IMF
International Monetary Fund
MDG
Millennium Development Goal
MFI
Microfinance Institute
MFWfA
Partnership for Making Finance Work for Africa
NEPAD
African Unions New Partnership for Africa's Development
NGO
Non-Governmental Organization
NGP
New Growth Path
ODA
Official Development Aid
R&D
Research and Development
SA
South Africa
SACU
South Africa Customs Union
SADC
Southern Africa Development Community
SAP
Structural Adjustment Program
SARB
South African Reserve Fund
SME
Small and Medium Enterprises
SSA
Sub-Saharan Africa
TNC
Transnational Corporation
US
United States (of America)
USD
US Dollar
WTO
World Trade Organization
Moritz Hessler
vi
Introduction
Moritz Hessler
Introduction
"Pour ce qui est de l'avenir, il ne s'agit pas de le prvoir, mais de le rendre possible."1
The recent financial crisis is widely considered as the worst global economic meltdown since the world crisis of
the 1920s. In a future retrospective it might be seen as a milestone for African self-determination like the crises of
1997/8 were turning points for South-East Asia. Given quickly changing power relations in the global arena,
especially South Africa (SA), as one of the most globally integrated economies, is likely required to transform to a
new mindset, balancing partners from East and West and their own interest respectively. The change towards a
multipolar World System is not only predicted by many economists like Stiglitz and explained by Kondratieff
cycles,2 it is, among others, tangible by economic power, technologies and cultural exchange, but especially in
changing political relations in the global arena. How do SAs regional and global aspirations as regional leader
comply with an increasingly multipolar environment, which seems to subordinate the African continent once
more?
Roughly a decade after the Asian crisis a Western-triggered global financial and then economic collapse hit the
globalized economies of almost every country. Only South-East Asia, which developed an own financial ideology
in response to their earlier crisis, appeared to weather the global turmoil quite well. Post-crisis debates hence
mainly compared the two trajectories of the traditional Western model, which in the course of economic
globalization and fueled by the fall of communism had been exported to almost the entire world, and the regionbased newcomer model from South-East Asia. Most prominently one would find global imbalances and
antagonistic ideologies of regulation and liberalization at the core of the discourses, which are not only disputed
in the Western-dominated Bretton Woods institutions but also increasingly in the new clubs of South-South
cooperation. At the same time, the often as forgotten or lost continent neglected Africa seems to remain in its
inherited role as sole recipient of dynamics of globalization economic and financial as well as political and
cultural globalization, ideational and ideological globalization, globalization of security, but also globalization of
damage. With the focus on Sub-Saharan Africa (SSA) one has to state that even the globally most integrated
country of the subcontinent, SA, represents in many areas not much more than a reproducer following the
Western blueprint. The capabilities to manage internal or imported crises on a regional basis are limited, as the
Development Emergency3 in Botswana during the crisis demonstrates.
An increasing level of interconnectedness and interdependency in the global economy, even for countries which
didnt participate in the processes of economic globalization, paired with the condensing structures of ever
growing global conglomerates therein and the degree of continuously self-surpassing sophistication of
1
(Antoine de Saint-Exupry)
Global politics has thus moved from the bipolar system of the cold war through a unipolar moment . And now is passing through one or
two uni-multipolar decades before it enters a truly multipolar 21st century. (Kondratieff, 1926)
3
The pre-crisis economically prosperous country was due to its economic success ranked low in the IMF / World Bank table of indigently
states. When prices and demand for Botswanas export oriented commodities collapsed and threatened national development, it couldnt
access international institutions capital funds due to its low priority in the ranking. The imbalanced support for other world regions such as
Eastern Europe, which received 79% of the emergency funds 3% for African countries, aggravated the emergency. Cf. (Woods, Global
Governance after the Financial Crisis: A New Multilateralism or the Last Gasp of the Great Powers?, 2010, p. 52)
2
Introduction
Moritz Hessler
information- and communication technologies (ICT) enabled a contraction of time and space in interactional
processes like doing business. Modern markets develop more dynamic than its regulating institutions. Crises are
widely considered as an inherently cyclical process of self-cleaning of the markets. Yet, the fact that financial
crises are endemic to financial systems that are dynamic and innovative4 shouldnt be a sufficient excuse for
passivity. Rather one should ask how the severity and frequency of such crises can be reduced or even how some
may be avoided. The recent economic crisis with its global outreach, interconnectedness and complexity
revealed the deep systemic definition potential reformers are facing. Unfortunately, early reform efforts under the
immediate impression of the crisis ebbed. Activism for global approaches and fundamental reforms of the system
were first replaced by a more pragmatic focus on national counter-measures fighting the symptoms of the crisis.
With the fast recovery of some economies, the coursing of the banking sector, superficial reforms and
restructuring, and restored national interest as main impetus in global committees, the main actors of
international politics seem to return to business-as-usual. Reform recommendations from Stiglitz to the UN,5
Senbet to the African Development Bank and the G20,6 as well as from many other institutional and noninstitutional scholars are currently fading out of the public discourse, falling for pragmatism7 and following the big
scholars Kondratieff, Schumpeter, and Nefiodof in their assessment of crises as highly innovative periods. The fact
that leapfrogging innovation is only the positive side of self-cleaning markets seems to be neglected. Global
markets do not correct themselves in an even manner. To enable innovation the great scholars agree that there
first have to be fought stagnation, because the desired effects would be only applied with delay. A reorganization
of thinking and society only sets in when crises are peaking, because in periods of prosperity and relative welfare
there is no urgent need for reform. Not all countries are evenly capable of fighting a crisis. Especially African
countries belong to the group whose prospects for restart arent that promising.
Similar to the discourses on the global level, mainly represented by the G20, reform activism in Africa is fading in
favor of pragmatism. This has several reasons. One would be that such cycles of crises and boom alternate with
increasing speed. As result, contemporary discourses are more concerned with today and future prognoses than
with a retrospective or future simulations on basis of historic data. Despite its high degree of integration into the
world markets SA weathered the global crisis much better than most other countries on the continent.
Nevertheless, it appreciated the need for reforms given increasingly structural similarities between the cape
country and the collapsing Western economies. SA recognized without reforms it might be affected more
intensely by a possible future crisis. Yet, beyond the participation in global restructuring by for example new
regulatory frameworks such as Basel III, SA should revise its own position in the global arena, but foremost in its
region. The Asian BRICS partners were able use the Asian crisis 1997/8 as catalyst for a transformation of their
economies into independent and dynamic markets.8 Especially China and India were not only able to develop
own economic and financial ideologies, but also to become renowned as the future global powers. It can be
questioned whether their path would have been similarly successful without the deployment of a regional
approach and the modification of the great doctrines and ideologies into tailored local and regional
4
(Senbet L. W., 2009, p. 46)

Cf. (Stiglitz, The Stiglitz Report: Reforming the International Monetary and Financial System in the Wake of the Global Crisis, 2010)
6
Cf. (Senbet & Otchere, 2006; Senbet L. W., 2009)
7
Even though some countries are still heavily affected by the depression, like Greece, but also the United States, the willingness for
fundamental reforms is ebbing facing strong market lobbies, constraints for consensual and harmonized global agreements, and the quick
recovery of some economies which are fueling competitive rather than cooperative settings in the global arena.
8
Cf. (Senbet L. W., 2009, p. 107)
5
Introduction
Moritz Hessler
interpretations. Considering SAs aspirations of I) being a permanent member and equal partner in the New
Clubs like BRICS as well as in global institutions, II) representing its region as leader as well as being the agenda
setter therein, and III) developing the region in order to fuel its own growth demands, an emancipation of the
region similar to that in Asia would be the obvious next step.
Considering the fact that the crisis originated in the West and that Asia seemed to have weathered the global
turmoil quite well it is close to ask whether it is time for Africa to follow the Asian example and emancipate from
Western domination and dependency from its former colonizers. Especially SA would have to take a leading role
in such an emancipatory process claiming to be the regional leader for at least a third of SSA, being the
outstanding economic powerhouse, as well as being more intensely integrated into the global economy than
any other country of the region. Hence, in evaluating whether there could and should be an own African financial
ideology it should be firstly assessed whether SA would be capable to start developing an independent ideology,
which is ready to be transmitted through regional institutions and serve as blueprint respectively. The question is
how necessary SA considers an ideological shift to be. Representative for other emerging countries it could rightly
ask why it shouldnt bypass the challenges of developing domestic financial systems and just attempt to access
global financial markets to meet [] financing gap?9 Which endogenous and exogenous parameters would or
did lead to the pressure for reforms? Even a simple statement to these questions involves a deeper argument
about Africas role in a globalized world and as such doesnt allow an isolated examination of only the SA case.
Instead, it is important to elaborate the forces and stakeholders shaping agenda-setting and policy-making on the
subcontinent. How strong are the loans of either from Eastern or Western ideologies and dependencies
respectively? Which elements would distinct an African ideology from pure reproduction of Western and Eastern
ones? Is it possible at all for African countries to implement own, regionally integrated, financial policies in a
sustainable manner considering the superior position from which the West and, assumedly also in near future, the
East regulate or liberate global markets in the multilateral institutions? How and what should be aimed to
implement? What are the results of achievements already made? What does an own financial system mean?
What are the influences, where should it learn from? And in a deeply integrated and globalized world: in which
frameworks have these policies to be embedded?
1.1
State of the Art
The idea of individual African ideologies is nothing new. Postcolonial pan-Africanism mainly pushed forward by
Nkrumah and Nyerere as well as post-Cold-War African Renaissance conceptualized by Thabo Mbeki highlights
the desire of Africa, if you at all can generalize such a diverse continent, for self-determination and independence.
While political self-determination varied over time, space and context, the continent mainly remains to be
economically patronized by external actors. The nature of the globalized economic system with its financial
subsystem perpetuated colonial and post-colonial patterns, in which the core of a World System keeps the
periphery in a dependency to sustain exploitative ways of production.10 Whereas the financial system somehow
became a self-sustaining and almost distinct system in the core and some emerging countries, in SSA it is still an
(Senbet L. W., 2009, p. 42)

Cf. (Silver, 2003; Frank, 1998; Dedering, 2002; Easterly, 2006; Vries, 2010)
10
Introduction
Moritz Hessler
integral part of the economic systems. Accordingly, in elaborating requirements and goals of a possible African
ideology it is inevitable to not only examine the SA financial system but to engage in a much broader perspective.
The internal complexity and interconnectedness of the local financial system with the global counterpart and
other systems respectively demands to not only extend the research to the economic system, but also to
incorporate social, political, historical and cultural issues as well as a basic analysis of complexity and manipulation
of closed systems, as far as a system can be closed. There are few scholars who attempted to take such an
approach. Stiglitz, who strives to provide solutions for a better financial system, would be one of the most
prominent examples. Nevertheless, those who tried still incorporate a certain set, if not large parts, of other
systems into their analysis and thus append a whole set of associated ideologies and values. Furthermore they
mostly aim at designing universal one-fits-it-all solutions and thus arent able to elaborate specific
recommendations for specific countries in a sufficiently inter-disciplinary manner. A focus on an isolated financial
system in an isolated country doesnt reflect the reality. Rather the local financial system has to be regarded as
interconnected system of interacting actors and aspects at a certain location and a certain place in time and
history embedded in a regional and global framework of further systems. This hardly happened for an African
country so far.
SA, by many scholars and the US National Intelligence Council ranked among the six emerging powers until
2020,11 urges to be analyzed in such way in order to set the agenda for growth after the global economic crisis.
Indian-US scholar Fareed Zakaria, who acknowledges the SA claim for extended regional leadership, doesnt
predict a further positive development towards a diversification of the economy and increased global weight12
unless there are fundamental reforms. Several global initiatives and policy recommendations are indicating the
financial as first system to be reformed. Already before the crisis the UN designated 2005 the International Year of
Microcredit, adopting the goal of building inclusive financial systems.13 Financial inclusion can not only make a
positive difference in the lives of the poor and thus contribute to the fulfillment of the Millennium Development
Goals; it also creates an atmosphere of capital accumulation and investment incentives, which again benefits local
economic development and at best declining Gini-coefficients. The initiative for Making Finance Work for Africa
(MFWfA) represents a multilateral partnership with the claim that efficient and innovative domestic systems could
put Africa on a stronger and sustainable growth path. Categorizing its agenda into I) large scale: finance for
growth and employment, and II) small scale: finance for all14 it aims at opening up business opportunities to a
wider clientele and channeling larger resources more effectively. For MFWfA finance could be the leading sector
in transforming economies. Similarly, the SA New Growth Path NGP, a recently drafted roadmap for future socioeconomic development in the cape country, states that its major goal of job creation is closely correlated with the
soundness, stability and inclusiveness of the financial system.15
The debate around issues of global imbalances and different ideologies as well as the recent financial crisis
demonstrate how much the stability of a global and local financial system rests on the pillars of cultural identity
and economic behavior. More than ever before a crisis can be linked to one specific socioeconomic setting: the
11
Measured by economic growth, size of the population, access to sophisticated technology, military resources and relative power. Cf.
(National Intelligence Council, 2004)
12
Cf. (Zakaria, 2009, p. 72)
13
Cf. (Kendall, Mylenko, & Ponce, 2010, p. 2)
14
Cf. (World Bank Group, 2006, p. 1; Demirg-Kunt, Beck, & Honohan, 2008)
15
Cf. (South African Department of Economic Development, 2010)
Introduction
Moritz Hessler
excessive risk taking of a consumption-oriented Western society created a credit bubble which bursted with the
chain-reacting loss of confidence into the (neo-)liberal markets. Hence, as MFWfA postulates it, African financial
system reforms shouldnt dwell on widely agreed goals and building blocs, which are not Africa-specific. Instead
reform efforts should focus on distinctive needs of the continent. What policy response can help guarantee that
modern technology, organizational innovation and internationalization are exploited to the maximum?16
A critical issue in the development of an individual African financial ideology will be in how to balance local and
regional requirements with the global, still Western-centric global economy, especially with the still important
role of the Bretton Woods institutions in SSA. The challenge will be first to develop and second to slip an
ideational set of African values for an individually African modernization process in financial system reform
packages. Citing Huntington, modernization, speaking of industrialization, urbanization, education, and societal
sets of values, does not equal Westernization in the sense of secularization, the legal state, a vivid civil society, and
reproducing the Roman and Greek heritage.17 The idea of an African Renaissance18 borrows its name from the
Western counterpart, which is widely perceived as the earliest catalyst for a modernization process in the West,
based on antique societal structures and values. The intention is to base a similar development on the pillars of
African cultural and historical identity and diversity
1.2
Methodology
As part of the Erasmus Mundus Global Studies program the identification of relevant dynamics towards a
potential development of an African financial ideology examines the SA reaction to the exposition to different
aspects and characteristics of globalization. The theories of Great Divergence,19 Dependency and World System,20
Regional Powers,21 as well as Modernity22 and Pan-Africanism23 are positioned right at the core of the sociopolitical aspects in chapters two and three. Financial Systems, System and Complexity24 theories complement the
research with the methodological and economical perspective. Without incorporating the entire theories it is
furthermore inevitable to refer to elements of Kondratieffs, Malthus', Keynes, and Friedman's25 works. A special
attention is given to the selection of sources in so far as to avoid a biased perspective reproducing stereotypical
elements of Western-centrism. On that score the thesis is based on an analysis of five pillars of sources and
authors respectively:
i)
the non-governmental SA perspective represented by a.o. Moses, Gentle, Moeletsi Mbeki, and the
insights gained at a semester abroad at the University of Stellenbosch as well as the participation in
several public dialogue seminars at the Centre for Conflict Resolution in Cape Town;
ii)
the governmental SA perspective comprising official policy documents and speeches;
16
Cf. (World Bank Group, 2006, p. 10)

Cf. (Huntington S. P., 1996)
18
Cf. (Dedering, 2002)
19
Cf. (Frank, 1998; Vries, 2010; Diamond, 1999; Landes, 1999)
20
Cf. (Wallerstein, 2004; Zakaria, 2009; Vries, 2010; Collier, The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done
About It, 2007; Huntington S. P., 1996; Easterly, 2006; Stiglitz, Making Globalization Work, 2007)
21
Cf. (Nolte, 2006)
22
Cf. (Lerner, 1958; Singer, 1970; Taylor, 1996)
23
Cf. (Maalouf, 2000; Mbeki, 2009; Collier & Gunning, Why Has Africa Grown So Slowly?, 1999)
24
Cf. (Vester, 1999 / 2008; Meadows, Randers, & Meadows, 2008; Herbst, 2004)
25
Cf. (Friedman, 2004; Keynes, 1997; Kondratieff, 1926; Vries, 2010)
17
Introduction
iii)
Moritz Hessler
the perspective of regional institutions like the African Development Bank (AfDB) and the Southern
Africa Development Community (SADC);
iv)
traditional global agenda setters and the discourse-dominating Bretton Woods institutions as the
World Bank (WB), the IMF, the United Nations Economic Council, the Basel Committee and the G20
represented by its former and current employees Stiglitz, Sen, Sachs, Calderisi, etc.;
v)
and a complementary selection of leading scholars in their respective areas such as Eichhorn,
Friedman, Keynes, and Kondratieff for financial and economic issues, Meadows and Vester of the
Club of Rome for system and complexity theories, and Frank, Meredith, Wallerstein, and Zakaria for
the discussion of global power relations and dependency.
Extracting the most essential images of Africa over the last twenty years in the global public discourses it is
protruding that problem solution for the continent is mainly conducted from outside. Politicians and scholars
talked more about than with Africa, if they did it at all.26 Being a mostly passive actor and simply recipient of
among others marginalization and exploitation African scholars began to rethink their post-colonial position for
another time and ask why is it supposed that Africans can contribute so little in their own cause?27 SA as the
most industrialized and by Western terms modernized country of the Sub-Saharan continent approached this
question the most proactively. Being the only African member in many global institutions, panels and clubs
required it on the other side to take action. This leads to the question, who, if not the former apartheid state,
should kick-off financial system reforms in post-crisis Africa?
Consequently the hypothesis South Africa has to reform its financial system and therewith kick-off the
development of an individual, African financial ideology in order to reach its micro- and macroeconomic
goals and to fuel its regional aspirations is aimed at examining why and how SA can reform what in order to
reach its internal and external goals. Furthermore I will assess the impact the global financial and economic crisis
had and has on such a development and whether it served as facilitator or rather obstacle to reforms.
I will start with the second hypothesis South Africa needs an own financial ideology, heading chapter two, by
elaborating the importance of an individual ideology for SA. Combined with chapters three and four, in which I
will examine the impact of different stakeholders as well as the impact of the economic crisis, I aim to explore why
SA would need an own financial ideology. Considering the post-colonial history and the post-apartheid era since
1994 I am going to discuss whether there is a fertile ground for genuine reforms in SA at all. Which role does an
emancipated, African identity play in the struggle to find an own, individual position in a globalized world? Which
elements of which interconnected systems and disciplines could play a crucial role in reforming which financial
system? In chapter three I will then analyze in how far the Western imposition of ideologies as byproduct of aid
limit the ability to emancipate, and whether there are signs for a shift in traditional and neo-traditional28
approaches of the respective partners in the post-crisis era. Does SAs historically grown triple status as part of the
26
Africa reached a low point of international attention at the beginning of the 21st century when it was stamped by an Economist article as
the hopeless continent. Cf. (Anon., 2002)
27
(Lonsdale, 2005, p. 380)
28
Referring to the Elephant and the Dragon, India and China, which claim to pursue a cooperative approach of foreign policy with Africa but in
reality are only reproducing known patterns of exploitation in a different rhetoric setting. Cf. (Meredith R. , 2007; Lihua, 2006; O'Brien, 2010;
Sethi, 2010; Sharma, 2007; Tull, 2006; Woods, Whose aid? Whose influence? China, emerging donors and the silent revolution in development
assistance, 2008)
Introduction
Moritz Hessler
Western world, the new clubs of emerging countries, as well as of the African continent affect its maneuverability?
In the fourth chapter I will try to answer whether we are going through one of those natural cyclical downturns,
or [whether it] is something far more important, something epoch-making taking place29 in Africa and specifically
SA. Before concluding with an evaluation and an outlook I will try to answer in chapter five what reforms SA
should implement how. Based on the results of the previous chapters I aim at presenting core issues and
solutions for SA financial system reforms. How can in one of the most globalized industries, like the financial
sector, localized policies be achieved and implemented in which global framework? Dividing the questions in
four areas for reform, I) People and Ideology: Financial Infrastructure, Literacy, and Inclusion, II) Institutions: Agents,
Legal and Regulatory Infrastructure, III) Rules and Agreements: Policy-Framework, and IV) Regional Financial
Integration, I try to adequately illustrate the necessity for and quality of interdisciplinary approaches rather than
recommend a specific policy road map for SA.
The interconnectedness of the financial system with other disciplines and regions will require continuous
zooming activity in terms of a permanent alternation of a closer and broader perspective on SA. Still, this thesis is
about SA. Even though it might be relevant, because it would allow a prognosis or even more precise a
simulation of possible developments on the African continent comparing similarities of the regions and
incorporating Asian experiences, I will exclude a comparative analysis of the development of the Asian global
financial hubs and potential African ones for the future. I will furthermore defer a deeper historic comparison of
Western, Eastern and domestic approaches to development of the financial sector before 1994 and outside of SA.
Also, I will rather discuss the most relevant actors and instruments for a potential individual financial system
instead of elaborating the entire depth and complexity of financial products and agents.
29
(Kampfner, 2010, p. 268)
South Africa Needs an Own Financial Ideology
Moritz Hessler
Unlike the externally dictated structural-adjustment programs of the 1980s, the key struggles over economic policy will
be internal to African societies. [] To date, Africa has lacked the spectacular regional role models of economic success
that so benefited Asia.30
A broad variety of authors is currently reporting on the need for comprehensive reforms of the global financial
system, starting from a global scale and adopting top-down coordination and localization respectively.31 Essential
arguments are based on the main evidences for the recent collapse of the global financial system. Beyond pure
market-based and institutional explanations, like they are still to be discussed in chapter four, Stiglitz exposes the
lack of global coordination as major cause. Global imbalances and inequalities and the fact that economic
globalization outpaced political globalization are widely accepted issues for the global agenda. Nevertheless, it
can only be questioned whether large parts of Africa would be that much affected by the crisis if they werent so
much dependent on the West. As such the call for a global response to fight the crisis should be countered by a
call for Africa to emancipate. South-East Asian development before, in, and after their crisis 1997/8 should be
closely examined to identify tools and practices which could help compiling an agenda for national and regional
emancipation.
As in Asia, successes will have profound influence on neighbors and can thus be realized on a regional basis only.
For Africas fragmented socio-economic and political environment this opens a whole series of issues. The most
prominent one would be the area of tension between development and democracy or what should come first.
There are countries like Kagames Rwanda, Musevenis Uganda and further at the fringes of SA influence Meles
Ethiopia, which, at least at first sight, seem to have chosen a different path to development than the Mandela
country. The most tangible issue would be the broad gap between some economically strong and industrially
diversified economies and the rest. The four countries of Angola, Botswana, Mauritius and SA are on terms of
geography relative close together. But even though they belong to the top layer of exports per capita in Africa, as
figure 1 shows, they strongly differ in their diversification. Angola and Botswana mainly rely on the pure extraction
of their rich natural resource base and are thus heavily dependent on exports of a few specific commodities. But
whereas Botswana has a tradition of good governance and stability and defied its landlockedness, Angola
experienced several turmoils and still is more of a troubled than hopeful country. Although they first appear to
have no similarities, SA and Mauritius succeeded in diversifying their economies. They are both often referred to
as the role models for African development. Mauritius prospered by importing Asian skills and labor, opening the
political system, stabilizing the government by implementing rules of good governance and encouraging private
investment. SA with its specific geographical location, colonial and postcolonial history,32 economic and political
role on the continent and integration into the global economy always occupied an outstanding position in Africa.
30
Cf. (Collier, The case for investing in Africa, 2010)

Cf. (Stiglitz, The Stiglitz Report: Reforming the International Monetary and Financial System in the Wake of the Global Crisis, 2010, pp. 9, 19)
32
The South African economy was already in the late 19th century larger than the other African economies combined. Furthermore the
society was more penetrated by Western settlers than most other African countries, which influenced a different colonial and postcolonial
trajectory.
31
Moritz Hessler
Figure 1 illustrates the role of the economic powerhouse of the continent. It is among the biggest exporters,33 the
second most diversified economy, with the highest GDP per capita. And although this only measures superficial
economic power and doesnt reflect aspects like Gini inequality and socio-political issues, it demonstrates the
special position of SA on the African continent.
Figure 1: Clusters of African economies34
The challenge for SA used to be to balance the implications of being an African country on one side and being a
Western country on the other side. With the increasing presence of Eastern powers theres a new component in
these considerations, which also has to be acknowledged. The question would be whether SA should use a
strengthened regional approach for its political and economic aspirations or rather rely on the global economy
and the balancing of its major partners. With the latter strategy SA could risk damaging its image on the
continent and much of its weight in the global arena, interrupt the inflow of resources to the industrial hubs and
thus threaten domestic prosperity and growth. The regional approach would require an even enhanced
balancing capacity between the world systems and ideologies. Following definitions and requirements for
33
South Africa produces a quarter of Africas Gross Domestic Product (GDP) by mainly exporting row materials (1990 40%, 2005 60% of
exports), but is facing a downward trend due to increasing competition from Asian countries. Cf. (Mbeki, 2009, p. 166)
34
(Africa Progress Panel, 2011, p. 16)
Moritz Hessler
regional powerhood of Joseph Nye and Detlef Nolte,35 SA would furthermore invest more in erecting strong and
sound regional organizations, which foster regional growth. This institutionalization has to be based on a legal
system, relative equality, and profits for all members. Legitimated regional leadership not only guarantees power
in the region, but also beyond. Accordingly, SA should rather adopt the image of a cooperative hegemony,
campaigning for partnership rather as a fellow developing country than as an emerging power. Referring to its
economic strength, who else in Africa could facilitate regional cooperation and the development of regional
governance? SA deputy president Motlanthe reinforces this claim by stating that the country has a well
regulated banking system [a]nd [] a stable democracy. Theres predictability; investors can invest in South Africa
and use it as a springboard to the rest of the sister countries on the continent.36 At the same time, the country
should be attentive of dynamics towards being a neo-neo-patrimonial power in a New Scramble for Africa.37
Under its aegis it has to develop the region economically and financially in order to be able to establish a
sustainable regional leadership and to profit of reforms transmitted through the subcontinent. Therefore reforms,
which are firstly aimed for domestic use, should already incorporate aspects to improve the situation of the whole
continent.
According to most analysts, scholars, and Africanists the main problem of the poor situation in large parts of Africa
can be found in poor governance and policies.38 From the internal perspective and excluding SA, only a tenth of
black Africas exports are manufactured. As such, most commodities leave the continent even before the proper
value-adding process started. Multinational, often foreign corporations exploit African resources in an
unsustainable and least responsible manner. The countries political elites [] transfer vast amounts of economic
surpluses generated by agriculture and extractive industries, such as oil, diamonds, metals and timber, to
developed countries as capital flight, while simultaneously obtaining vast loans from developed countries.39 The
continents main industry, agriculture, had been dragged down by mismanagement of every kind.40 Africa hasnt
been a victim of globalization, but has refused to concern itself with foreign markets, as former WB employee
Calderisi puts it. Collier and Gunning, rightly asking whether policy or destiny has limited Africas growth,41 state
with the same conclusion, that lack of policy has to be regarded as cause of the continents poor condition.
Although colonialism played a key role in preparing the ground42 the 2000 by the Economist titled hopeless
continent, after early post-colonial glimmers of hope, got lost in corruption, patronage, military regimes,
subordination, proxy actor, and anti-ideologies. The provision of public services and goods collapsed, inequalities
grew fundamentally. The neo-patrimonial system reproduced archaic images in which the head of the state was
expected to demonstrate its qualification to take care for the country by showing off his amassed wealth. From
the external perspective Calderisi summarizes it quite well with stating that until late 2000 African governments
had been content to let other worry about international (trade) policy.43 Due to high exchange rates,44 dizzying
35
Cf. (Nolte, 2006)

(Motlanthe, 2010)
37
Cf. (Mbeki, 2009, p. 140; Bhebhe, 2011)
38
Cf. (Calderisi, 2006, p. 141; Collier & Gunning, Why Has Africa Grown So Slowly?, 1999; Sachs J. D., 2005)
39
(Mbeki, 2009, p. 9)
40
Cf. (Calderisi, 2006, p. 143)
41
Cf. (Collier & Gunning, Why Has Africa Grown So Slowly?, 1999)
42
By arbitrary drawing of borders, deliberate degradation of intellectual and political capacities, imposition of inadequate structures,
racialization,
43
36
10
Moritz Hessler
taxes, adverse and arbitrary regulations, a non-existent legal system, nationalized monopolies and marketing
boards, corruption, and fraud Africa was largely bypassed by private investments.45 Macroeconomic and political
instability46 lead to high volatility on financial markets, best illustrated by the endemic currency exchange volatility
for most of the African currencies. The resulting lack of confidence and concern about adverse changes in
government policies47 represent a dramatic impediment to foreign investments. Instead of the so important flow
of foreign direct investment, which facilitated the Chinese economic boom, Africa became increasingly
dependent on foreign aid flows and its donors respectively. The other elements of the Asian miracle, urbanization
and centralization couldnt be transformed into tangible development in Africa. Oppositely, paired with the
patronage system and extensive nationalization processes it caused the final breakdown of any incentive-culture
for capital and knowledge accumulation. Free market awareness was only kept alive in the informal sectors. And
even though the political and economic environment began to change with the last decade of the 20th century48
40% of Africas private savings are, still today, held abroad because people do not trust their own governments
and banks to treat them fairly.49 This continuous outflow of capital not only causes stringency of liquidity in the
African markets, but also, as discussed in the following chapters, strongly affects financial sector development and
therewith the general capacities to alleviate poverty, stimulate investment and create employment.
The sheer amount of interlinked issues could and did fill reformers on the African continent with consternation.
The increasing importance of the financial markets as well as the recent crisis induces contemporary scholars to
list the financial system on top of their reform agenda. Still, they remind of incorporating underlying causes of the
economic crisis like the debt, climate, inequality, poverty, and food crises,50 but also acknowledged the necessity
of a simplification and focus on one system to start with. Multiple complex and interconnected systems cannot
be optimized in a single process, but have to be simplified and as much as possible isolated in order to identify
proper adjustment screws and interfaces to a broader framework of interlinked systems, in which the processed
one has to be re-embedded after optimization. The main goal should be to improve the systems robustness and
ability for quick recovery after external and internal shocks as well as to reduce its vulnerability at all. But how to
develop a well-functioning financial system and build its capacity to exploit its potential contribution to
economic development?51 How far should and must a new SA financial system be embedded into which existing
environment? Which degree of individuality in terms of regulations and protectionist behavior would risk SAs
economic goals in the global economy? An examination of the four pillars of people and ideology, institutions
and agents, policies and agreements, and regional integration requires to reduce the interdisciplinary complexity
and fuzziness apriori by clearly identifying the definition and goals of a, and specifically the SA financial system.
The second step is to then align the four pillars with relevant issues and requirements of financial systems and its
reform needs.
44
This made imports cheaper.

46
Political risk not just associated with political turmoil; it often arises from lack of quality institutions such as law and order and democratic
accountability which then contribute to increased risk premia in financial markets.
47
Cf. (Senbet & Otchere, 2006, p. 104)
48
Compare net equity inflows of Figure 20, p. 86
49
50
Cf. (Eichhorn & Solte, 2009; Stiglitz, The Stiglitz Report: Reforming the International Monetary and Financial System in the Wake of the Global
Crisis, 2010, p. 52); Food crisis due to depreciation of national currencies and rising cost of food imports (Committee of African Finance
Ministers and Central Bank Governors, 2009)
51
45
11
2.1
Moritz Hessler
Definition, Goals, and Requirements of a Financial System
da die Vermittlung von Werten durch ein Finanzsystem im Allgemeinen eine effizientere Verwendung der Ressourcen
ermglicht als etwa der Feudalismus oder die Planwirtschaft. Dehalb kann es kaum berraschen, dass sich das westliche
Finanzmodell rund um den Globus verbreitete, zuerst in Gestalt des Imperialismus, dann in Formen der Globalisierung.52
As with most complex and global systems, theres no accurate and distinct definition of the financial system.
Modern financial systems are complex and feature a great variety of regulated and unregulated financial service
providers. In most countries there is no single central supervisor or coordinating entity for all financial institutions.
However, the main financial authority, usually a central bank53 or bank supervisory agency, regulates some nonbank financial institutions along with banks in about half the countries of the world.54 More precisely a financial
system can be considered to represent the framework in which financial intermediaries and economic actors
perform transactions under a respective market ideology as well as under a varying degree of regulation and
supervision. In a holistic approach the financial system has to fulfill multiple functions, of which the most basic
tasks would be the mobilization of capital, the risk allocation as well as the sharing of risk. These three functions
strongly determine the capacities of financial economics as link between the financial system and real economic
development.55 Under uncertainty and volatility in interconnected systems, risk allocation and sharing are vital
functions of financial markets in so far as to sustain healthy levels of investment in rather risky, innovative and
high return projects. Consequently, the financial system not only mobilizes and influences the saving rate and its
allocation, it also directly affects capital accumulation and therewith technological change, innovation, and
subsequently enables general endogenous growth by means of the Schumpeterian approach.56 It constitutes the
nexus between finance, innovation, and growth, and is responsible for the quantity and quality of capital. Senbet
identifies Africas simplistic understanding of the financial system as solely mobilizer of capital, neglecting its risk
associated functions, as one of the main reasons for relative economic stagnation of the continent.
In an environment characterized by imperfect information and agency problems a well-functioning and liquid
financial system furthermore serves as vehicle for efficient contracting among conflicting parties. The recent
financial crisis, which was caused by not only imperfect but excessively opaque information and incentive
problems57 among economic subjects and agents to act in a sustainable risk-adjusted manner, endorses the
importance for reforms. For Africa, these reform should be mainly aiming at improving the most central and vital
services of a financial system: to raise the effectiveness of financial intermediation, establish and improve banking
regulation and supervision, foster diversity of financial instruments, and facilitate an increased depth and capacity
of the stock markets.58
The financial as emancipated subsystem to the economic system became a somehow self-justifying and selfsustaining system in the course of economic and financial globalization. Based on a monetary bubble the main
52
(Ferguson, 2010, pp. 302,303)

Central banks as structural interface between regulatory policy field and regulatory structure with a politically independent as well as
political regulation function. Cf. (Mayntz, 2010, p. 9)
54
(Kendall, Mylenko, & Ponce, 2010, pp. 11 - 13)
55
56
Cf. (Paganetto, 2005, p. 121)
57
58
Cf. (Senbet & Otchere, 2006, pp. 92, 93)
53
12
Moritz Hessler
doctrine is to keep the money flow, meaning mobilize and liaise liquid capital. An earlier guiding principle to
avoid a bursting of the financial bubble59 seems to have lost sufficient incentives to comply to. Oppositely to
traditional, resource-backed60 systems, the modern monetary system consists of hardly any real assets but mostly
of confidence and promises. Central bank money therein represents the still tangible image of a real value, as it is
backed by real values and institutional and governmental promises respectively. As such, and that is one core
prerequisite of modern money systems, central bank money has by guarantee always and anywhere in the
respective currency area to be convertible into real assets. It is a money promise backed by the issuer. To explain
the second kind of money, which mainly constitutes for the built-up of a bubble, it is inevitable to elaborate the
basic infrastructure of a financial system.61 The source of money in modern financial systems is a central bank.62
State apparatus arent allowed to print money, because they could abuse their dual monopoly of money creation
and public spending to refinance their debts. Historical data demonstrates how this institutional concentration
causes uncontrollable inflation and destabilization of all interlinked systems. A central bank as independent
institution prints money63 and allows banks and other financial intermediaries further borrowing facilities.
Financial intermediaries can borrow as well as deposit money at the central bank at defined base interest rates.
Promising to the central bank to repay this loan in a certain period of time and at a certain interest rate, the bank
receives so called swell money as materialized confidence in future real returns.64 This swell money enables the
bank to do business beyond the limited maneuverability of reloaning customer deposits and acting as broker
between customers. To be able to I) refinance the loan from the central bank, including interest rate, II) to sustain
the organization and pay interest rates on deposits, and III) to generate profits and expand, the bank has to
charge a higher interest rate for borrowing money than the central banks base rate. Another layer of swell money
is created. Central and commercial bank are now hoping for the final debtor to realize their anticipated returns by
economic activity and real capital accumulation. As long as the political, economic, social, and ecological
environment remains stable and financial agents act in a risk-adjusted manner, swell money is likely to be
transformed into real money, facilitating growth of the economy, the financial sector, and increases in the
quantity and quality of liquid capital. But already small signs of instability in one interconnected system could
cause a toppling of confidence, the most important asset of modern financial systems. Loss of confidence leads in
contraction of liquidity, because market subjects stop trusting in each others ability to repay loans. The stringency
of liquidity forces market agents to raise interest rates which in turn reduces the likelihood of repayment of swell
money again. Finally, like it could be observed during the recent economic crisis, but also ten years ago in the so
called New Economy, the bubble of money promises burst with toppling rates of confidence into the other
economic subjects and institutions.
59
Cf. (Eichhorn & Solte, 2009, p. 60)

By gold, silver,
61
Cf. (Ferguson, 2010; Eichhorn & Solte, 2009)
62
Hierarchy of money and credit: central banks (international reserves), banks (deposits at central bank), economic subjects (deposits at bank).
Higher layers can create more elasticity or discipline. (Mehrling, 2011)
63
Mostly it allows the printing of certain amounts of money by special authorities and institutions, often governmental bodies.
64
Beyond the incremental increase and anticipative nature swell money mainly receives its wording from the fact that a commercial bank can
grant loans amounting a multiple of their central bank money and is only required to fulfill minimal capital requirements of liquidity. Given a
rate of 10% as minimum reserve level a bank can grant loans being worth 180 billion out of 20 billion central bank money.
60
13
Moritz Hessler
For this reason it is important to keep the growth and amount of central bank and swell money in a decent
relation to growth and amount of real added value65 as measured by GDP. The fact that there was 50 times more
swell money than real money in 2007 and clear tendencies towards an ever increasing imbalance to real added
value, illustrated in figure 2, lets Eichhorn predict that by 2030 the entire global GDP has to be used to pay credit
cost such as interest and dividends.66 This implicates, that there is no return of swell money anymore. It neither
generates investment opportunities to realize returns from economic activity nor does it allow employment,
maintenance of organizational and technological structures, nor any kind of capital accumulation. In a narrow
definition even the subsistence mode of production will be destroyed.
Figure 2: Money and substitutes of money ("swell money")67
The global financial system based on Western ideologies and concepts of modernity and individuality is tangibly
reaching its limits of growth.68 Regulatory and supervisory bodies, which were designed to constrain such an
unsustainable development, appear to have failed to a similar extend like the market ideologies and incentives
have proven to be counter-productive. As it will be discussed in chapter four, the designers of this system begin
to turn away from neoliberal rhetorics of self-cleaning markets69 and increasingly (re)turn to neo-Keynesianism.70
The problem for large parts of Africa, aligned to neoliberalism by concessional aid and structural adjustment
programs, is the lack of resources and capacities to pursue similar corrections.
From Africa it is thus not only necessitated to educate people to develop own ideas for innovative and
groundbreaking local financial solutions, but especially to develop something own. This requires a vivid public
65

67
(Eichhorn & Solte, 2009, p. 193)
68
Cf. (Meadows, Randers, & Meadows, 2008; Vester, 1999 / 2008; Eichhorn & Solte, 2009)
69
Based on the capitalist mindset of private property, individualism, supply and demand, maximization of profits and extended by the aim at
reducing the role of the state.
70
Cf. (Schmid, Buhr, Roth, & Steffen, 2006, pp. 170, 171)
66
14
Moritz Hessler
discourse and top-down deployment of I) an ideology, II) appropriate legal, regulatory, and supervisory
institutions as well as the local development of market solutions such as regulated cooperatives, III) a balanced
policy framework fighting inequality, brain drain, capital flight, exposition to external shocks as well as fostering
economic growth, and IV) regional integration to build a strong and harmonized region which can act as catalyst
for economic and social development internally as well as for a stronger African voice in global affairs.
2.1.1
Challenges of the global financial system
There are myriad challenges of the global financial system. Like on the microeconomic level, money has to be
kept flowing on the macroeconomic level. The increasingly faster and easier flow across national and regional
borders challenges the control of the amount and velocity of money. It imposes a serious limitation to the
capacity of designing sustainable and stable financial policies on a national or regional basis. Given the case of
lack of market liquidity and confidence due to for example the collapse of a commercial bank: as routine counter
measure to encourage borrowing and increase the speed of money circulation the respective national or regional
central bank would provide more money at a low interest rates to the markets, maybe supported by the
respective government which issues deposit insurances. From a local perspective this could restore confidence
and willingness to accept higher level of risk in borrowing. Yet, in an unbalanced global economy large
international conglomerates enter local markets and take use of cheap money provided by central banks through
buying assets. An alternative preying of cheap money is international currency speculation in which investors buy
central bank money only to bunker and sell it in the future at a higher exchange rate. Both strategies raise another
de-liquidation of the market, decelerate the velocity of money, and finally lead to deflation.
Beyond the internal focus of the four pillars a financial system has thus to be designed by additionally considering
external factors and even acknowledge global externalities. One of the main instruments would be the fiscal
system, in which taxes and tariffs have to be regularly reviewed and adjusted in order to accomplish the optimal
balance between protectionist and liberal measures. Yet, at the core of heated debates one would rather find
monetary policing. Different strategies for the quantity and quality of money achieve different micro- and
macroeconomic goals, but also imply various kinds of risk. As discussed below, SA pursues a strategy of high
interest rates and a strong currency. The willingness of international market agents to invest in SA bonds, the
Rand, and the general economy by for example foreign direct investment is very high. The large inflow of capital
raises the availability of foreign currencies and thus the foreign exchange rate of the Rand. Imports into SA
become cheaper. On the other side of the coin SA exports become more expensive and trading partners may find
cheaper locations to import from. Another risk, which closely correlates with the bunkering of central bank
money, would be the speculation with foreign currencies in countries with a high interest base rate. Instead of
investing capital inflows into I) either importing and therewith clearing the external account balance and allowing
a sustainable balance with other foreign exchanges, or II) the domestic economy and public services respectively,
large foreign exchange reserves are hold for speculative reasons. The circular flow of money is interrupted. Large
reserves of the own currency in foreign hands impose a major risk to the monetary maneuverability and stability
of a national and regional economy respectively.
On the other end of the spectrum a weak currency entails the opportunity to export cheaply. Export-driven
economies like China are thus interested in keeping their currency artificially low by buying foreign exchanges,
15
Moritz Hessler
mainly US dollar, into their reserves. This neutralization of the international account balance, which is starkly
positive for China due to its export-dominated growth ideology, is of essential importance for the economy to
offer products at a competitive price on the world markets.71 Turning the coin, the consumption-oriented society
of the USA holds a major trade deficit in these global imbalances. Purchasing USD constraints Chinas ability to
invest in social measures and public services. It can be generalized that artificially defending currency
appreciation implies cost for especially emerging economies. The debate around global imbalance revealed that
many countries, and specifically articulated by the BRICS in their recent Sanya declaration,72 would consider an
alternative to the USD-based currency system as the solution to this problem.73 At the very special moment after
the crisis emerging countries arent really able to counter US quantitative easing74 because they are captured in a
global financial and economic system based on the USD and dominated by USAs structural power therein.
The intervention of governments in foreign exchange markets is just one issue of the beggar-thy-neighbor
behavior of some countries in the global economy. In general, the externalization of domestic problems, as
underemployment or stagnation, by imposing barriers to imports while fueling export-led growth perverted and
put pressure on global markets with unsustainable competitive edges. The mercantilist behavior therewith not
only succeeds in increasing exports of goods, but also in exporting its problems. One example of such an
externalization would be the increasing indebtedness of the public sector, whose amount of credit service will
equal the global added value by 2030 and which will reach 100% of the global GDP by 2042.75 With a responsible
and sustainable fiscal policing and global coordination to mitigate inherited and integral imbalances of the global
economy, it could be avoided that the gap between real values76 and swell money continues to be mainly
financed by public budgets. The need of global coordination is best illustrated by the so cold tax havens.77 In a
global competition among countries transnational corporations (TNC) select those locations, which impose the
least cost to them. As such some TNC achieve a minimal payment of taxes at some locations at the same time as
they profit of policies of other countries, which aim at stimulating consumption.78 Yet, how are these
consumption-stimulating measures financed? Usually by tax income. As long as there are tax havens, which
impose their externalities to other countries, the global economy is racing towards its maximum limits. Eichhorn
even estimates that a solution for the global issue of tax evasion could almost immediately evaporate all
accumulated public debts. Either of both mentioned economies and societies profit in a sustainable manner of
the beggar-thy-neighbor behavior, the only profiteers are TNCs. Instead of a nationalization of risks,
responsibilities and debts and privatization of profits the general political goal should return to sustain polity and
infrastructure with its fiscal budget. Brazilianization79 furthermore limits a countrys capacities to provide
regulatory and fall-back mechanisms and thus destabilizes the domestic economy.
71
High demand of the Chinese currency to be able to import Chinese products would naturally raise its rate. In an optimal environment China
would offset this balance surplus by attracting FDIs, receiving remittances, and importing from other countries. In reality exports are by far
surpassing any capital imports.
72
Cf. (Bhatia, 2011)
73
Cf. (Woods, Global Governance after the Financial Crisis: A New Multilateralism or the Last Gasp of the Great Powers?, 2010)
74
Quantitative easing basically means the flooding of the markets with cheap dollars in order to stimulate domestic investment and growth in
an attempt to fight depression.
75
76
Real added value plus central bank money
77
78
Beggar-thy-neighbor countries furthermore profit of, among others, public services and goods provided by other countries, which they are
not able to provide domestically due to the lack in the fiscal budget.
79
Indebted country in which only privileged individuals/communities can sustain their quality of life and continuously centralize and
distribute the national wealth among few elites. (Beck, 1999)
16
Moritz Hessler
Recent market failures demonstrate the potential risk for the entire global economy if the regulatory part of the
financial system is unable to adequately set constraints and design appropriate incentive structures. A sound
financial regulation allows, if not the prevention of crises, then at least the avoidance of spillovers from the
financial sector to the real economy. Yet, a regulatory penetration through 80% of African countries due to the
increased importance and formalization of microfinance didnt impede the global economy to transmit the
financial system crisis through the real economic and globally interdependent system.
The same degree to which no regulation is harmful to a financial system, an overregulation and the imposition
of a zero-risk ideology is socially suboptimal.80 Following Schumpeters ideas efficient financial markets are the
basis for technological progress and innovation and key to long-term grow.81 Financial systems decide about the
general access to capital. Especially for inherently risky research and development projects and business start-ups
as well as for economically discriminated strata of the poor the level of risk-acceptance is the crucial element of a
financial ideology. Risk affinity and a culture like in Anglo-Saxon countries, which regards failure as an opportunity
to restart, facilitate a higher productive growth82 and rate of innovation in periods of boom. Oppositely, a culture
which rather punishes failure and tends to avoid risk may provide less venture capital but is likely to represent
more stability and sustainability. The questions for a potential SA financial ideology and system respectively are: I)
how much risk are we, considering our stability and sustainable growth plans, willed to take; II) how much risk is
needed in order to raise access to capital to a decent level which enables the alleviation of poverty and stimulates
creative and entrepreneurial forces; III) how can this setting be best mapped by the financial system and its
regulatory and supervisory bodies? As Paganetto dwells it, good governance and adequate selection of project
and entrepreneur83 are decisive in risk taking. Only adequate sophisticated and context-tailored structures of
intermediaries, regulators, supervisors, and governance bodies in a socio-economic and cultural environment of
financial literacy and risk awareness can guarantee the financial system to unfold its full potential.
2.1.2
The financial market as a complex, global bio-cybernetic system
One of the central concepts of modern system studies is cybernetics. Derived from the kyberntes, helmsman in
English, cybernetics aim at examining and developing control- and regulation-mechanisms of respectively for
systems.84 Originally the discipline mainly focused on mechanical systems. With the increased awareness of
perceiving our environment in systems cybernetics developed to become the link between the system theory of
interconnected systems and sub-systems and the ecology.85 Since emergence of the system theory the ecological
system is regarded to be the blueprint for any other system on this planet. From a global perspective it can be
considered to constitute the only top-layer system, which can sustain itself in a closed manner and without inrespectively output from and to other systems.86 As central thesis of cybernetics the helmsman, as integral part of
the system, only acts as source of inspiration for self-regulation, initiator for interactions between the individual
and the environment, stabilizer for systems and organisms by guaranteeing flexibility, and user of existent forces
80
Cf. (Senbet L. W., 2009, p. 30)

Cf. (Meyer & Ehmer, 2011)
82
83
84
Cf. (Vester, 1999 / 2008, p. 154)
85
Cf. (Ulrich & Probst, 1990, p. 20)
86
While including energy sources like the sun into this ecological system.
81
17
Moritz Hessler
and energies and their respective interactions.87 He doesnt intervene or interfere in foreign systems. At this point
systemic thinking has to be transferred to the compilation of a financial system and a financial ideology.
Unsystemic thinking in the environment of a highly interdependent world leads to opaque conceptualizations in
which interacting subjects are being separated by several layers of intermediation. The important connection of
transparency, accountability, and confidence between the issuer of a financial product and the customer got
pollarded with an ever-increasing complexity of the system and its products.88 The market created products,
which were specifically aimed at avoiding regulation.89 This depersonalization and perverseness of the
opportunities of the free market very specifically led to the inability of markets and governments to neither
sustain any kind of control and regulatory authority nor be able to antagonize the recent crisis when the first
evidences appeared.
The issue can be based on several of Vester's theses. First, regulation wasnt too lax but rather too narrow and too
much focused on a certain status. Another problem is the heterogeneity of regulation on a global scale.90 Second,
financial agents economic subjects the same as organizational actors and governments aimed at a
maximization of profits and growth. The neoliberalist / capitalist doctrine led the markets to believe there arent
any natural limits of a system. Also, it induced market agents to neglect externalities and interlinkages to other
systems such as the global economys impact on the social and ecological systems. But there is nothing like
limitless growth, and at the moment there doesnt seem to be growth for all. As the Club of Rome as one of the
most active institutions in this discourse points it out, unsustainable behavior eventually causes a collapse of the
system and may even affect other systems functionality and stability.91 Imagine for example the collapse of the
ecological systems, which would most likely destroy most of the other global systems including the human
being. It should therefore be in the interest of the entire global community to reach a continuous balance in a
system that is sustainable without sudden and uncontrollable collapse. How could that be achieved?
The first prescription should be the systemic reduction of complexity and a thorough examination of the various
systems towards identifying interfaces and dependencies. It would be wise to dis-assemble each respective
system in order to enable a fundamental discourse about an appropriate restructuring of its elements and
interactive processes within as well as beyond the systemic borders. It should specifically be aimed at clarifying
and distinctively defining the functioning of each single process and element. The goal should be to rather
reduce regulatory and interventionary mechanisms by reviewing and consolidating existent ones. In the financial
system the elements would be financial intermediaries, economic subjects, regulatory and supervisory bodies,
and so on. The global reaction to the recent crisis doesnt help much in so far, as policy makers and scholars only
added further mechanisms and actors to an already intransparent system. They are only fighting specific
symptoms of a specific systemic disease instead of truly examining, reviewing, and improving the system to
eradicate the proper cause of and therewith mitigate the likelihood and impact of a further crisis. A regulatory
system shouldnt be the crash barrier of a highway on which the financial intermediaries can drive as fast as they
87
Cf. (Vester, 1999 / 2008, p. 154)

Cf. (Balzli, et al., 2008)
89
Packages of securities of different ratings and heterogeneous compilation were incrementally and iteratively split up, re-assembled in new,
even more heterogeneous packages (diversified from best to worst ratings in order to parallelly generate various revenue managements and
maximize securities), and sold. It was deliberately made impossible to track a product from the issuer to the customer or the other way.
90
Cf. (Jost & Struve, 2008; Massenberg, 2008)
91
(Meadows, Randers, & Meadows, 2008)
88
18
Moritz Hessler
like as long as they dont leave the lanes.92 It should rather be constituted of speed limits, traffic lights, and further
traffic agreements. Channeling the traffic in one direction, meaning imposing a too narrow regulation,
furthermore creates incentives for the market to bypass rules and agreements.93 To translate this metaphor into
the real world: before 2007, the markets, including all actors, raced towards a massive gap between deposits and
credits. Increasingly higher risk was accepted while interest rates rose. Between 1997 and 2007 the depository gap
of the financial institutes in the Euro zone grew from 44 to 1300 billion Euro. Between 2000 and 2005, the market
with subprimes, credits with a high likelihood of default, increased by stunning 800% in the USA.94 This all
happened in a regulatory environment, which was deemed to underlie a constructive, iterative and incremental
improvement process.
Where global financial markets are overwhelmingly the dominant, and most highly integrated, most volatile and
least rational of global markets, the basis for systemic instability is laid.95 Still, it seems that contemporary reform
efforts neglect a broader perspective in which simultaneous crisis with complex interactions and inter-linkages
destabilize each other. As such it is important to repeat the importance of not fighting individual symptoms of
the specific financial market malaise but to diagnose an appropriate therapy for the whole financial system and
the entire global systemic setting. Some interesting questions from the cybernetics may help on this path:
What is connected with what and in which broader framework?
How important is an organic development of an order in living systems?
Since they are able to close a system and to save resources by mutual recycling mechanisms, should
symbiotic structures be preferred over mono-structures?
2.1.3
The South African financial system 1994 2007/8
As in most low and lower middle-income countries banking dominates the broader African financial systems
today.96 Other financial agents play a subordinate role. Apart from the Johannesburg stock exchange, the market
capitalization of the next seven exchanges on the continent only accounts for about 25% of the accumulated
GDP.97 This small size and illiquidity reflect low levels of domestically owned economic activity in many African
countries. Of a global amount of 6.2 billion bank accounts, more than one per adult, only 0.9 per adult are located
in the developing versus 3.2 per adult in the developed world. Still, only 38% of adults in the developing world do
have accounts, since the above-mentioned ratio includes accounts, which are not owned by individuals. In
comparison to Germanys 97%, Polands 60%, and Indias 47.5% the African countries reveal a fairly poor
penetration of individually owned saving accounts.98 SA with 46% and Botswana with 47% still reach similar levels
like India, but unfortunately Lesotho (17%), Namibia (28.4%), and Uganda (19%) are more representative for the
situation on the black continent.99 These figures not only demonstrate the need for action especially on issues of
financial access, but also the permeation of neighboring countries like Botswana with expanding SA banks.
92
Cf. (Jost & Struve, 2008)

Cf. (Vester, 1999 / 2008, p. 60)
94
Cf. (Dibelius, 2008)
95
(Keet, 2010, p. 2)
96
Cf. (World Bank Group, 2006, pp. 5, 6; Yousuf, 2009)
97
Cf. (Wajid, 2008, p. 48)
98
See full survey results from 2003 to 2008 in Figure 24, p. 88. Compare to further illustrations of global savings accounts penetration in Figure
22 and Figure 23, p. 87
99
Cf. (Kendall, Mylenko, & Ponce, 2010, pp. 35, 36, 50)
93
19
Moritz Hessler
Referring to a speech by South African Reserve Bank governor Mboweni given in 2004, SA has a well developed
banking system, which compares favorably with those in many developed countries.100 A mature banking sector
with moderate level of private-sector indebtedness, the respectable and first-rate regulatory and legal framework,
and the well management as well as the utilization of sophisticated risk management systems and corporate
governance structures would set SA apart from many other emerging market countries. Furthermore, the country
would not only be regulated in accordance with principles set by Basel Committee on Banking Supervision, banks
also comply with international sound practice and offer a sophisticated banking system to the public, which is
available online, real-time, nationwide, and 24/7. Being the most advanced financial sector and economy of the
subcontinent, these achievements represent a possible task list for a general African financial system. Especially
SAs structure of the financial system with the separation of the different regulatory and supervisory bodies, of
which one of the oldest central banks of the world, the South African Reserve Bank (SARB), had been privatized in
1989, can considered to be state-of-the-art in a global perspective.
In 2004, there were 38 registered banks of which 15 were domestically control, six were non-resident subsidiaries,
15 were local branches of international banks, and two were mutual banks. Five major banks dominated the
countrys market with 87.4% market share. Small local banks, which, in 1994, still constituted 21.7%, can be
considered of being the main losers of a centralization process, which only left them the relatively infinitesimal
stake of 3.1%. Especially in the period between 1999 and 2003, when medium to small banks faced serious
liquidity pressures, the large amount of 22 banks exited the system. Except of the acquisition of one of the five
major banks, Absa, by the British Barclays Group101 the general structure of the banking sector didnt changed
much since then. Yet, especially post-crisis dynamics within the banking sector have to be discussed in chapters
four and five.
The relaxation of exchange controls and liberalization of African economies resulted in SA becoming an
increasingly important financial center.102 The turn inwards towards the continent is furthermore supported by
SAs regional claim of becoming a financial and economic hub for at least the Sub-Saharan continent. As
explained at the end of this chapter this will not only strengthen SAs regional role, but also fuels it economic
growth and global aspirations. Locally registered banks increasingly expanded into other countries. At the same
time international banks expanded into SA, which brought further depth and sophistication to the financial
system. The raised degree of competition challenged local banks and put lending margins under greater pressure
what in turn made consolidation the only way to survive for smaller and less efficient institutes. Economically, it
thus resulted in an optimized performance. Socially, the increased centralization potentially diminished the
importance of the lowest strata and certain rural regions as customer base. Admittedly, banks adopted higher
credit-risk profiles, which could be an indicator for stiffened service provision to the lowest strata. The dynamics of
centralization, which pushed institutes towards becoming universal banks,103 tempt to assume that risky servicing
of the poor had been replaced by more speculative and capital-intensive financial services in the process of
market diversification. The fact that domestic deposits from the public remain the main source of funding could
strengthen this argument.
100
(Mboweni, 2004, p. 1)
Cf. (SA Financial Sector Forum, 2011)
102
Cf. (Mboweni, 2004, p. 1; Wajid, 2008)
103
Universal banks, in contrast to special banks, offer the full range of financial services to their customers.
101
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Moritz Hessler
Most external and internal analysts like Wajid or Gentle104 agree in their assessment that, since 1994, SA was able
to improve an already relatively stable financial system. This prosperous path was only interrupted by a small crisis
of small to medium banks in 2002 when a crisis of confidence due to a bottleneck in liquidity of the seventh
largest bank, Saambou, spilled over to the entire sector. The lack of confidence, that deposits would be available
anytime to be withdrawn, did succeedingly affect not only banks down but also larger institutes up the scale.
Common to all banking systems is the phenomenon that they are based on confidence in each other. As such,
the worst case scenario is decreasing confidence in the markets which induces customers to withdraw their
money from their financial instruments. This contraction of available liquidity further worsens the situation of the
institutes and, as such, deepens the lack of confidence in a downward spiral. Facing serious threats for the overall
of the financial system the privatized SARB and the National Treasury were forced to issue guarantees to all
depositors, that even in the case of insolvency of any institute the government and the central bank would stand
in and would provide real money for their deposits. Mboweni stated in 2004, that SA has learned its lessons of this
crisis. As result an institution can no longer be allowed being registered without conducting deposit-taking
business or doing boutique banking not allowing deposits from the general public.105 Furthermore the country
established a policy framework for dealing with banks in distress, not without highlighting the importance of
sound corporate governance in banks and the need for a sound relationship and proper coordination between
fiscal authorities and the regulators. With acknowledging that in a sound system, there will be failures. Instead,
the objective is to strive for an optimal balance between, on the one hand, the cost of controls and intervention
in order to address market failures and, on the other hand, the anticipated benefits of regulation and
supervision106 the focus of regulatory authorities shifted from direct controls to a more market-based approach
accompanied by an emphasis on proper capitalization, sound risk-management procedures and greater
disclosure.107 This dynamics were framed by global reforms of regulation, mainly driven by the Western world. The
Basel Core Principles for effective banking supervision, as agreement between a group of countries which
regularly met as the Basel Committee, were improved and packaged as Basel II. Each member of this committee,
SA as the only African representative, committed to implement a three pillar based approach. Furthermore
member countries were reminded of requiring an adoption of the Basel Principles from its trading partners
aiming at an internationally agreed framework in which regulation of both the home and host country of financial
institutes would be harmonized. Basel II, in SA implemented just before the global crisis in January 2008, was
thought to improve risk-management and align economic capital more closely with regulatory capital.108 The
global crisis proved this regulatory framework to be insufficient in quality.
The already mentioned centralization of the sector as well as the increasing share of the domestic market in
hands of foreign owners implied an additional risk to the overall stability. As reaction SA established a four-pillarpolicy, which required the minimum number of four substantial banks on which domestic banking could rely.
With these policies, which discourage a merger between any of those four banks, it was thought to sustain
minimum levels of competition in the interest of prudential and systemic stability. The additional layer of
104
Cf. (Wajid, 2008; Gentle, The Rand and SA's Three Growth Programmes: Searching for a Needle in the Wrong Haystack, 2011)
Cf. (Mboweni, 2004, p. 3)
106
(Mboweni, 2004, p. 4)
107
Cf. (Mboweni, 2004, p. 2)
108
The impact of the crisis on Basel II as well as the more detailed functioning of requirements of regulation in South Africa will be discussed in
chapters four and five.
105
21
Moritz Hessler
competition added by internationally owned banks would only benefit consumers with a denser penetration and
competitive market prices. Yet, at that point, it was neglected, that more competition also increased the
likelihood for and affinity to increased risk-taking. The debate also skipped over the issue of in how far
international ownership in one of the pillar banks could and should be permitted and what it would implicate
for the system and its regulation.
Summarizing the condition of the SA financial system and its future challenges it astonishes how similar
Mboweni's 2004 formulated findings are to a contemporary examination. The first major challenge should be the
provision of a broader access to banking services. A possible solution could be the establishment of different
classes of banking institutions, such as second-tier and third-tier banks, which have to ensure a flow-down of
banking services to the wider community always considering the perspective of risk and acting in a safe and
sound manner.109 The second major challenge is to align the optimization of the mobilization of capital, risk
allocation and risk sharing110 with appropriate and tailored regulatory and supervisory mechanisms. The third
challenge would be the embedding of African solutions into the global framework. Do the Basel Principles, antimoney-laundering agreements, and other Western and globalized measures really comply with the local needs in
SA? Do socio-economic, geopolitical and historical reasons as well as increasing complexity and interdependence
of the global economy not require an individual solution for Africa?
2.2
Identity and Individualism
Yet, Africa is all but a homogenous continent. It is all but the state of Africa,111 many seem to believe it is in their
analyses about the continent. Martin Meredith, Robert Calderisi, Alex Thomson, and other authors therefore
emphasize on the heterogeneity of the continent not only between North and South of the Sahara or
Francophone and Anglophone countries, but also even within specific nation states. Travelling across the black
continent it would be difficult to find one African identity, even in a distance of a few hours drive the sentiment of
belonging may differ fundamentally. What is common since decolonization is the desire to find an own, individual
position in the global arena. Ideas like PanAfricanism and the African Renaissance thus aimed at identifying sort of
an African identity based on the common experience of colonialism and post-colonial dependency as well as on
a trajectory of difference and diversity in relation to the Western and Eastern ones. Beyond these rather broad
approaches Africanists focused on identifying common attributes and values. Even though the number of
researchers from within Africa is growing, the stereotypization based on Western patterns for doing research as
well as on too little attention for detailed differentiations in countries with less academic capacities, the
fragmentation and the partial failure of some states impeded a break-through towards a common overarching
idea or even identity so far.
Nevertheless, there are issues on which most researches from inside and outside the continent agree. One of the
most crucial aspects in elaborating the idea of an African individualism in a broader global perspective would be
that African tradition is rather collectivist than individualist.112 Family, kinship, wisdom hierarchies and elderly
109
Cf. (Mboweni, 2004, pp. 5, 6)

111
Cf. (Meredith M. , 2006)
112
110
22
Moritz Hessler
councils play a very important role and shouldnt be treated as pre-modern113 socio-political setting. On the other
hand it is important to also apply a critical examination beyond the antagonizing rhetorics of global ideologies
and neo-historical awareness of unjust domination. As Calderisi argues, family and kinship differ fundamentally to
similar structures in Spain and Italy in the middle of the 20th century. Family loyalty can be tyrannous in Africa. The
roots for endemic corruption,114 patronage and missing re-investment are to be found in a culture in which those
who accumulate money are seen as traitors to the family and community respectively. Large parts of the so-called
African malaise like bad governance, lack of accountability and transparency, and misled economic incentives
could be explained in this way.115 Alternatively, kinship and accountability of a community could evenly be a
powerful socio-economic unit would it be framed by an appropriate ideological mindset and system respectively.
Another common characteristic across the continent is the fatalistic acceptance of hardship.116 On one hand a
deeply religious and superstitious attitude, on the other hand a post-colonial rhetoric of universal assignment of
guilt to the former colonizers and an unjust global economy, formed a widespread resignation awaiting salvation
from external forces, but at least from others but the self. As third force geographical determinism as of Jared
Diamond117 and the shared perception of destiny118 hinder a fundamental change towards domestic
constructivism and pro-activism. Negative consequences thereof, like the brain drain119 of the most talented,
educated and capable African individuals strongly affect the development of the small and skill-lacking
economies as well as the political consolidation processes towards democracy or whatever political ideology is
deemed to be best for the respective country.
The problem of basing a shift towards more African individualism on the postcolonial ideas of PanAfricanism is
that the latter concept was rather the agenda for a liberation movement than a pragmatic and creative roadmap
or ideology to facilitate the development of a broader awareness. PanAfricanism and following panAfrican
rhetorics tended to explain the African malaise with the history of slavery, colonization, and neo-colonialism. The
West would have robbed an anyway unprivileged continent in a systematic way and over hundreds of years not
only of natural, but also of the most capable human resources and thereby impeded any chance of progress on
the mother continent. Endogenous factors like geography and low density of the population already
endemically constrained the continents potential following Diamonds, Huntingtons, and Lerners theses120 that
urbanization as the ultimate catalyst for political consolidation, a sophisticated culture and economy, and
technological innovations would first require a surplus-oriented agriculture and then trade. The colonial creation
and imposition of the nation state with its arbitrary border-drawing and interlinked concept of Western
modernization121 further complicated the situation with exogenous constraints. Neither did the new borders
reflect ethnographic or political realities, nor the high degree of fragmentation favor any kind of development.
The associated imposition of the Western ideal of exclusive identities,122 which intended to strengthen the
convolution of the state and the idea of a nation, cut through communities of kinship, ethnicity, and trade and
113
The examination will return to these aspects in the respective chapter for Western concepts of modernity.
115
Cf. (Mbeki, 2009)
116
117
Cf. (Diamond, 1999)
118
119
[] in 2005, between one-third and one half of the so-called developing worlds science and technology personnel lived in OECD
countries. (Faist, 2010, S. 69)
120
Cf. (Dedering, 2002; Diamond, 1999; Huntington S. P., 1996; Lerner, 1958; Ogundimu, 2002)
121
Cf. (Taylor, 1996)
122
Cf. (Maalouf, 2000)
114
23
Moritz Hessler
did all but reflect the more flexible and mobile perception of belonging to geographical and political entities. As
this wouldnt have been enough destructive force the colonial powers succeeded in wrecking traditional
hierarchies and quasi-governmental structures as well as settings and tools for knowledge accumulation,
maintenance, proliferation, and diffusion.
The status of proxy-actor of the Cold War, third world and periphery in a Wallersteinian World System,123 and unmature recipient which has to be patronized by the developed world and its international institutions further
contributed to the institutionalization of Africas endemic issues. An outstanding example for the materialization
of these international structures can be seen in the Structural Adjustment Programs (SAP) of the 1980s and 90s as
well as in the policy frameworks associated with the so-called Washington Consensus.124 To fight the raging debt
crisis125 on the continent, which developed out of unjust terms of trade, structural inequity, unequal exchange,
import substitution, monocrop economies based on adverse colonial heritage and bad governance and
infrastructure, and unreviewed aid flows to African despots, the international donor community decided to
change to a strategy of concessional aid. In return for receiving continued flows of money through bilateral and
multilateral channels African countries were forced to implement the neoliberal SAPs, which mainly consisted of
the three pillars of I) liberalizing the economy, II) opening up to international and domestic private capital, and
most important III) to reduce the role of the state in economic governance.126 These fundamental reforms, mainly
supervised by the Bretton Woods institutions, were aimed at breaking anti-competition mechanisms like
marketing boards and state controlled monopolies as well as at dissolving neo-patrimonial structures of
horizontal integration.127 Basic Western modern and neoliberalist principles like efficiency, the importance of
private property and capital accumulation, as well as the belief in a self-correcting character of the markets was
imposed to a part of the world which societies didnt experience a French or Industrial Revolution.
Not until the late 1990s, when Africa lost its central position in postcolonial discourses of the West and was
declared the hopeless continent, Africa could begin to free itself from external interference.128 With quite new
approaches to the issue whether development or democracy should come first129 African countries re-discovered
a broader self-determinism, based on the combined experiences of pre-colonial, colonial, and postcolonial
history. The African Renaissance130 thus proclaimed to elaborate an individual African identity not only on mistyeyed concepts of pre-colonial Africa, but to identify the most suitable concepts and approaches of a global and
local perspective. This has to be a multidirectional process acknowledging diverse influences to a potential future
African identity and ideology. As SA deputy president Motlanthe argues, values are never a given. They have got
to be developed, worked upon, and consolidated on an ongoing basis. [] we have just embarked on our
123
Cf. (Wallerstein, 2004)

The term 'Washington Consensus' was initially coined in 1989 by economist John Williamson to describe a set of 10 specific economic
policy prescriptions (e.g., fiscal policy discipline, redirection of public spending, trade Iiberalization) that he considered should constitute the
'standard' reform package promoted for crisis-wracked developing countries by institutions such as the International Monetary Fund (IMF), the
World Bank, and the US Treasury Department. Subsequently, the term has come to be used in a different and broader sense, as a synonym for
market fundamentalism. In this way, the term has been associated with neo-liberal policies in general and has entered the wider debate over
the expanding role of the free market and constraints upon state social and economic policies. (Faist, 2010, S. 95)
125
Cf. (Levi M. D., 2005, pp. 520-523)
126
Cf. (Collier, The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It, 2007; Collier & Gunning, Why Has
Africa Grown So Slowly?, 1999; Dedering, 2002; Easterly, 2006; Mbeki, 2009; Meredith M. , 2006; Sachs J. , Common Wealth: Economics for a
Crowded Planet, 2008; Stiglitz, Making Globalization Work, 2007; Thomson, 2004)
127
Government institutions were seen as power insurance mechanisms for the political elites in terms of being key providers of employment,
services and resources. The state acted as gatekeeper to opportunities of social mobility and welfare.
128
Cf. (Oppenheimer, 2007)
129
Cf. (Mugyenyi, 1987)
130
Cf. (Dedering, 2002; Mbeki, 2009)
124
24
Moritz Hessler
transition from an order that was characterized by division along racial lines, along ethnic lines. We are therefore
duty bound to [] bring to the fore the values that bring us together as fellow South Africans, as human beings,
in our diversity.131 Considering those difficulties, the possibly most advanced country on the Sub-Saharan
continent faces, how can an overarching African identity and set of values be achieved? Could African scholars
and politicians maybe take a loan from similar debates about Global Citizenship, or would that imply to reproduce
and incorporate the Westernized concepts of modernity? For example, the struggle to embrace a common
history for white and black Africans, but also for different communities and for, by the colonizers established racial
groups reveal a first threshold already on the surface of such a debate. For SA, which experienced a specific
history of racial separation and which is still today struggling with this heritage, it poses the question who and
what is South African? A major brain drain of white academics, facing serious constraints in an economy, which
attempts to mitigate the heritage of apartheid by racial policing like the Black Economic Empowerment Program,
demonstrates the complexity of the discourse. Furthermore it shows the importance to incorporate not only one
historical period but also the entire history in a debate about an individual African identity.
The general PanAfrican concept of the United States of Africa should be the leading image of any broader reform
- not as one continent-wide state led by a personal leader, like Nkrumah aimed it to implement, but rather as an
ideological landmark to follow in gradual differentiations. Broader concepts and ideologies could potentially
mitigate historical and geographical constraints like the issue of a large number of countries with a small average
size and partial landlockedness. Broader concepts could generate more efficiency and trade-led growth due to
higher economies of scale and decreased transaction costs132 in terms of, among others, easier access to
information and cheaper cost for transportation. Social, political, and economic capacities could be aggregated
and diffused in a targeted way avoiding wasteful redundancies across borders. And even though one should be
beware of aiming at optimizing social systems using economic parameters and doctrines, the African banking
systems as the smallest in the world prove the need for a broader approach which would benefit all
interdependent systems on the continent. Due to its fragmentation, financial intermediary development in most
African countries is lower than in other regions of the world.133 Evidently, bigger economies and higher income
countries, as SA and the financial offshore centers of the Seychelles and Mauritius, tend to have deeper financial
systems which raise their capacities of financial inclusion and catalyst for economic growth.
Concluding with Calderisis account that Africa should be asking what they can do for themselves and how the
rest of the world can support them therein,134 the need for a strong regional leader is striking. Different to
Nkrumahism SA, as sole capable power, should extend it first steps of cooperative hegemony through
institutionalized regional frameworks like SADC to the entire subcontinent. As Nolte highlights it, regional power
hierarchies are, depending on policy area and power of the regional leading power, shaped in a varying degree
by external powers.135 A turn towards more individuality and independence consequently presupposes a strong
regional leader, which facilitates necessary reforms.
131
(Motlanthe, 2010)
Cf. (Collier & Gunning, Why Has Africa Grown So Slowly?, 1999, p. 19; Powell & Tieku, 2005)
133
134
135
Cf. (Nolte, 2006, p. 22)
132
25
2.3
Moritz Hessler
Democratization and Socio-economics
Of all reform imperatives democratization might widely considered to be the most urgent. The vividly led debate
about development or democracy first host the core question, what Africans really need. Comparably to this
generalization of Africans, the arguments and approaches of the Western patrons were and continue to be at its
best nave. More pragmatically SA president Zuma stated that [t]he benefits of democracy must lead to
economic development and help reduce poverty to improve the quality of life of ordinary people. You cant eat
democracy.136 The proverb of development scholars that democracy is founded on full bellies and peaceful
minds further underlines the thesis that democracy must concur with development. They both strongly depend
and build up on each other. As such, any future reform mustnt forget the democratic principles of, by, and for
the people even if the ideology, socio-political, economic, or whatever other kind, is called differently. On the
path to economic growth and development, democratic values are one of most important elements of
stabilization. This thesis is supported by Calderisis appraisal of SA, in that [d]espite decades of international
sanctions, its economic success, modern infrastructure and highly developed institutions have always made it
look un-African. Remarkably, too, its press and judiciary remained generally free even in the darkest days of
apartheid.137 Apart of issues like mislead racial policing,138 adverse dynamics to the freedom of press, problems
with the maintenance of infrastructure,139 raging HIV/AIDS, high levels of crime140 and an increasing domestic
inequality to be measured by the Gini coefficient141 and internal dualism,142 SAs relatively stable socio-political
consolidation clearly benefited its economic development. Two reciprocal aspects, which have to be emphasized
as most important imperatives for the continent and with which even a more advanced country like SA is still
struggling, would be good governance and socio-economic equality.143
Stiglitz especially highlights the fight against inequalities as most important measure to further development.
Fighting inequalities foremost requires a strengthening of the links between fiscal resource shifts, meaning
redistributive measures, and social outcomes144 as well as a general economic, financial, and political process of
inclusion. Following Honohan and Beck sound financial framework represents the basis for every other kind of
development145 and thus occupies a central role in fighting inequalities. As Sen states in developing countries
only creating social opportunities enables people to participate directly in process of economic expansion.146 A
sound and well-designed financial system is able not only to facilitate redistributive processes by financial
inclusion and by stimulating micro-entrepreneurship, its cultural elements of transparency and accountability can
furthermore help in overcoming neo-patrimonial structures of extraction, patronage, clientelism, and elitist
dominance. Representative success stories of capacity building and socio-economic inclusion are to be found in
the sectors of microfinance. Especially the India Grameen bank demonstrated as forerunner how direct innovative
136
South African President Jacob Zuma at the World Economic Forum on Africa 2010
(Calderisi, 2006, p. 74)
138
Cf. (Freund, 2007)
139
Cf. (Fourie, 2008)
140
Cf. (Levitt, 2004)
141
Globally, SA has the second largest inequalities after Brazil. Cf. (van der Berg & Moses, 2009)
142
Cf. (Singer, 1970)
143
Within social equality the formation of a quasi-bourgeois class, which has the wealth, the time and the education to organize groups that
can monitor and influence the state, should be a preeminent goal.
144
Cf. (van der Berg & Moses, 2009)
145
Cf. (Honohan & Beck, Making Finance Work for Africa, 2007)
146
(Sen, 1999, p. 143)
137
26
Moritz Hessler
financial inclusion can affect socio-political values and reshape hierarchies. Exported to large parts of the
developing world microfinance diffused its underlying democratic values and was able to create spheres of
transparency, predictability, accountability, and, through this transmission, an idea of a more equal, stable and fair
socio-political construction. Thus, finance and social change constitute themselves in a reciprocal process. In a
post-crisis era it is hence important to not only stimulate the economy and to restart the flow of credits but
especially to redress national inequalities and global imbalances, which are increasing due to international efforts
to fight the crisis, by a reformed financial system.147
As important financial reforms and a sound financial system may be for development, it has to be backed by
broader dynamics of socio-political consolidation and be framed by an universal idea of good governance.148 This
can, as mentioned, be supported by the ideological elements of financial inclusion. Yet, to root reforms in the
society and economy respectively, a more comprehensive democratic stabilizator to ensure peace, transparency,
and accountability, has to be elaborated. With the African Peer Review Mechanism (APRM) as important element
of the socio-economic AU program NEPAD149 the community of African countries already implemented an idea
and roadmap towards building capacities for good governance. Yet, [w]hile NEPAD may address some of the
worst excesses of the political elites through its African Peer Review Mechanism, it does not tackle the
fundamental malaise, that is, the enormous power imbalance between political elites and key private-sector
producers.150 As the Chinese example illustrates, a state alone cannot develop a country. The most important
component in Western modernization and industrialization were a vivid middle class and innovative private
entrepreneurship. There is an image that, with a century old bourgeois class, which got diversified and broadened
by BEE, and its relatively sound and sophisticated financial system SA hosts both qualities already today. But, as
Mbeki critically notes, BEE can be understood as strategy for SAs white oligarchs to co-opt and influence the new,
post-1994 political elite and to perpetuate their access to government contracts and protection from foreign
competition.151 The diminishing power of COSATU, the umbrella organization for SA labor unions, opposing the
allied opposition of oligarchs and political elites should be a warning example that also the most Southern African
state has still some homework to do. It also makes clear that there are no explicit role models for across-continent
learning yet.152 There are several countries like Ghana, Uganda, and SA, which could use their respective crises to
turn experiences into constructive and individual policies. Instead of planning utopian political frameworks or
accepting external checklists, they have searched for solutions which could work and based their research on
feedback from the respective systems.153 This distinguished their approaches from the lack of feedback and
accountability which has to be seen as one of the most critical flaws in the foreign aid strategy of the international
community. As explored in chapter three, the mainly Western countries rather asked how they could solve African
problems with Western solutions. They approached the continent rather to sustain a certain status quo in the
World System, in terms of resource extraction and political buffer, than to help properly. Thus, it would be
necessary to look for endogenous solutions to overcome the main four traps of conflict, resources,
147
Cf. (Stiglitz, The Stiglitz Report: Reforming the International Monetary and Financial System in the Wake of the Global Crisis, 2010, p. 43)
149
NEPAD was founded as kind of Marshall Plan for Africa, but by eight African heads of states, and intends to subject good governance a
transparent improvement process in order to raise the attractiveness of its member states to international investors.
150
(Mbeki, 2009, p. 160)
151
Cf. (Mbeki, 2009, pp. 66-73)
152
153
Cf. (Easterly, 2006)
148
27
Moritz Hessler
landlockedness, and bad governance.154 Good governance cannot be prescribed from externally; it has to be
developed in a process of feedback by public discourse from within a society in order construct a hierarchy of
accountability. Feedback of civic organizations and lobbies guides democratic governance towards supplying
services the market isnt able to provide. Furthermore public inclusion raises the awareness for participatory
systems and the supervising functions the civil society has to obey as well as it attaches a worth to public services.
As Easterly and Calderisi elaborate, even poor people are willed to pay for good public services recognizing that
free services were not worth much in quality and ideological value.155
These examples show the reciprocal process in which a democratic ideology of socio-economic inclusion and the
development of a sound financial system strongly cause each other.156 It furthermore highlights the catalyzing
effect crises can have on this development. What is illustrated by the Asian emerging countries is that [a] market
economy, which raises into the group of middle income countries, tends to adopt liberal-democratic governance
in the long-term perspective.157 On the other hand a general democratic trend, as experienced in many African
countries within the last decade, could support economic growth158 and attenuate the image of Africa as risky
investment for global as well as for African investors.
2.4
Economic Productivity, Predictability and Stability
Development cannot proceed when inflation is high, the exchange rate overvalued, farmers overtaxed, vital imports
in short supply, prices and productivity heavily regulated, key public services in disrepair, and basic financial services
unavailable.159
The major constraints for the African economies, caused by poor governance, are to be seen in lacking
productivity due to missing competition and an aplasia of economies of scale, and an uncertain socio-political
situation in terms of predictability and stability. For Landes, the invention of important technologies, a
leapfrogging level of productivity, and the creation of art are among the main reasons why the West succeeded
in overcoming its Malthusian constraints and the Rest did not.160 In Africa, local companies face issues of
productivity because they inherited a strong oriented to the small domestic market often additionally protected
by state measures of import substitution and monopolization. Neither were they required to raise economies of
scale, nor forced to offer products at competitive prices, nor to switch from labor-intensive to capital- and
technology-intensive production. As result, and exhausted to its maximum in for example Tanzania, the state
discouraged private investment, capital accumulation and disincentivized domestic innovation. In comparison to
other world regions, which are currently taking off, Africa is grounded by a lack of entrepreneurship.161 Without
economic incentives and the predictability to own the business and its profit still the day after tomorrow theres
154
Cf. (Collier, The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It, 2007)
Compare Easterlys example of the provision of bed nets to the poor to protect children from mosquitos. Because they didnt have to pay,
they used the nets for everything like fishing but for its actual goal. This changed when the nets were supplied to nurses who sold them for
small money. People began to value and only purchase them when they esteemed their proper goal. Cf. (Calderisi, 2006, p. 149; Easterly, 2006)
156
Cf. (Honohan & Beck, Making Finance Work for Africa, 2007)
157
(Zakaria, 2009, p. 134)
158
159
Cf. (Thomson, 2004, pp. 175-199)
160
Cf. (Landes, 1999; Vries, 2010)
161
Cf. (Mbeki, 2009)
155
28
Moritz Hessler
no reason to risk an engagement as entrepreneur. To complicate this systemic malfunction the global and
domestic financial sectors share this perception in an extended Afro-pessimism. Even Africa is not equipped to
do business with Africa162
The dependency on aid flows put a third limitation to an individual economic development. The unpredictability
of amount and regularity of aid, its passivity, and its specific nature of artificial money of a broader global
economy revealed to imply a rather destabilizing than supporting function. Especially its pro-cyclical character in
that money flows seared in times of crises, when aid was needed most, and the fact that most aid flows tended to
quickly find their way back to Western economies, either on private accounts of despotic elites or through
international exploitative economic streams, highlight issues which authors like Dambisa Moyo are nowadays
headlining by Dead Aid. External capital ruined African socio-economic systems first by raging debts and
eventually destructed those spared parts of the financial system, which were still working, by relieving debts.
Many African countries consequently neglected the importance of an own financial system and became quasiintegrated into an aid-based global financial system controlled and regulated by its donors, and eventually the
Bretton Woods community. Yet, who, in such a system, would be interested in performing a tailored and inclusive
reciprocal process of stabilization between the socio-economic and political as well as the financial system? It is
not clear whether the West attempted to fill this role with its SAPs and other instruments or whether the main
intention was to sustain the status-quo of a World System in terms of ensuring exploitative global supply chains
and avoiding a failed region. Yet, with the failure of the Washington consensus163 a fundamental rethinking
emerged on both sides. Whereas the West resigned and withdraw, Africa began to emancipate. Fuelled by a
process of political consolidation and economic, export-led growth, which should be at least in parts accounted
to the SAPs, African countries began to develop own approaches and increasingly cooperated in regional
networks as well as in Pan-African organizations like the OAU and later AU.
The AfDB therein took a leading role in fostering the continents economic growth. Through several initiatives and
programs it furthermore developed to become the continents representative organization in the multilateral
cooperation with Western partners. Especially two of the most recent initiatives should be subject to an
examination when talking about reforms in African financial systems. The African Financial Markets Initiative
acknowledges that financial sector development is paramount to successful and sustainable economic
development. Indeed a more effective formal financial system will contribute significantly to a better allocation of
resources for investments while an improved access to financial services for the poor and the rural population will
help alleviate poverty. As part of the Banks strategy to strengthen the financial sector in African economies, the
Bank has just launched the African Financial Market Initiative (AFMI), which is targeted to further the development
of domestic African capital markets.164 The initiative MFWfA, which aims at channeling the interests and
approaches of all stakeholders to financial sector reforms in Africa under the umbrella of the AfDB, has the
liberalization of the potential of the financial sector for Africas development as its main objective. The argument is
that Africas financial sector hasnt reached its potential as a growth factor yet. Therefore the AfDB seeks to bring
African governments, development partners and private sector players together in order to pool their efforts and
therewith fully exploit the financial sectors capacity. Among other things, national regulation, market and tax
162
(Calderisi, 2006, p. 152; Freund, 2007)

Cf. (Klein, 2008; Zakaria, 2009, p. 50)
164
(AfDB, 2011)
163
29
Moritz Hessler
harmonization and an annual government bond issuance planning165 are thought to serve as catalyst for
economic development and as contributor to poverty reduction efforts on the continent.
The fundamental requirements to an environment, in which financial reforms are aimed at unfolding the full
potential of an economy, are macroeconomic stability, contractual certainty as confidence in and predictability on
the local markets, as well as an appropriate policy framework and commercial transparency.166 As example, while a
strong and well regulated banking sector may dampen macro-economic shocks,167 inflation and other forms of
instability may impair the growth of a robust banking sector. Macroeconomic stability is furthermore not only a
crucial prerequisite for financial sector development but is also conditioned by a deeper penetration of deposits
representing liquidity and a potential high amount of savings. For another time this highlights the reciprocal
character and interconnectedness of the financial with its neighboring systems. Following different schools the
government or the market has to occupy the interface and regulatory role between the systems. The need for
such a role becomes primarily evident in times of crises. Whereas the neoliberal school deeply believes in a selfregulating quality of the global economy, the Keynesian school emphasizes the function of the state as anticyclical regulator of the economy. The government has to maintain stable levels of demand by intervening in the
markets in order to achieve sustainable economic growth.168 Yet, until the recent crisis the Keynesian model of
social welfare-ist and considerably state-regulated capitalism was displaced by the market-fundamental
neoliberal model. At the same time as governments and long-term investors engaged in production ventures
demanded guarantees of stability and predictability, speculators erected a business relying on price fluctuations.
While fluctuations were further accentuated by liberalization and new computer technology and thus maximized
profits for the gamblers of a global financial system, theyve increased the operational insecurity for corporate and
governmental planners.169 Mixed with misleading indicators170 for economic development, neoliberal programs
did all but to unfold the full potential of African economies.
Whereas the SAPs imposed through its neoliberal pillars a heavy burden on African policing, SA somehow
managed to follow a different trajectory. Its deeper integration into the global economy and ideological proximity
to Western standards allowed the cape country to develop more independently. Especially with its strong
currency and economy respectively SA became the financial and economic point of gravity of the Sub-Saharan
continent. This could be achieved not only by the relative socio-political stability but also by establishing the
country as a predictable business location on which international investors can rely.
2.4.1
Macro-level opportunities and risks
This confidence and strong position created not only macro-economic opportunities for the former apartheid
state, it also implied risks. With the issues of beggar-thy-neighbor behavior a major risk, which demonstrates the
complexity of policy making framed by a global economy, had already been discussed. Yet, far more critical in a
debate about macro-level opportunities and risks are the overarching issue of the external account balance and
165
Cf. (AfDB, 2009)

167
168
Cf. (Keynes, 1997)
169
Cf. (Keet, 2010, p. 2)
170
Western definitions like core inflation as main indicators for inflation dont include food and energy prices, which are essential indicators in
Africa. Cf. (Eichengreen, 2011)
166
30
Moritz Hessler
the underlying discourse about monetary policing. This is reflected by SAs economic goals. Among employment,
sustainable economic growth and a solid and fair fiscal policy, SA aims at keeping I) the balance of payments
within a managerial level, II) the inflation low, III) risks of the Rand as regional currency low.171
A balanced account equation as situation in which the economic interlinkages of the domestic economy do not
affect domestic development in a negative way represents the first important goal. To enable an adequate
support for the domestic development goals externalities and trade deficits or surpluses have thus to be
mitigated by either protective or regulatory policing of the government and market adjustments respectively. In
short, the achievement of a balanced external account, as situation when the value of exports equals those of
imports, is a precondition for a domestic equation and hence the basis for any further development.
Figure 3: Consequences of an inequation in the balance of accounts172
In general the Chinese approach to base a development strategy on export-led growth is widely appraised in
Africa. With the manipulation of the account balance by the built-up of massive foreign exchange reserves, a
competitive setting of the interest rate, and cheap, labor-intensive production, developing countries could find a
competitive edge in the world economy. Yet, the financial sector reforms of deregulation, gradual opening,
liberalization of interest and exchange rates, privatization, and measures to promote capital market development,
which were among the key pillars of the SAPs, pose myriad constraints and risks to such approaches. As visible in
many countries, the strategies of export-led growth and an open economy reproduce disadvantages of unequal
exchange and involve a new generation of even advanced trade liberalization agreements in terms of investment,
services, and government procurement. For Africa, which is already heavily oriented towards international trade
and overly reliant on market access into most industrialized countries, this entails an increased exposition to
externalities. The volatility of the prices of basic commodities such as food and energy puts a heavy burden on
export economies in such way as export prices arent predictable. This not only causes a financial bottleneck to
import basic commodities for the many monocrop economies on the African continent, but it entails the risk of
sinking prices for export goods at the same time as the prices for import commodities are rising. A solution has to
be the diversification of trade partners not only to include the emerging powers, but to establish a dense interand intra-regional network of trade.173 Trade-driven growth has to be put in relation to national and regional
policy needs as well as economic and social transformation aims. The facilitation of such a strategy requires a
preceding mounting of an infrastructure which enables trade, though. This would entail the physical
infrastructure as roads, information- and communication-technologies (ICT), and a domestic transport industry,
171
Cf. (South African Department of Economic Development, 2010; Gentle, The Rand and SA's Three Growth Programmes: Searching for a
Needle in the Wrong Haystack, 2011)
172
Own illustration.
173
Cf. (Keet, 2010, p. 4)
31
Moritz Hessler
but also the harmonization of fiscal, monetary, and regulatory systems as well as the financial framework to
support trade and investment throughout the region and beyond.
The overreliance on external foreign direct investment (FDI) contributes to a continued net capital outflow of
billions of dollars annually from African countries.174 Whereas already in times of economic boom the global
economy tends to exploit African countries and re-channels profits of investments on the continent as quick as
possible to the West, the repatriation of money appears to be the ultima ratio for international banks and
investors in times of crises.175 They arguably withdraw from more risky markets and cause an insufficiency of
international financing, on which African economies are widely built. How costly delays in financing and
refinancing can become was clearly demonstrated by development emergency176 of Botswana and the European
case of Greece in the aftermath of the recent crisis. Dropping ratings for credit worthiness often worsen the
situation in so far as they further complicate access to ways of refinancing. In general it should thus be clearly
examined to which degree African countries, and first of all SA, do and can gain from financial globalization.
The maxim for financial globalization in Africa should comprise the diversification of sources of external finance,
the global distribution of local equity risks, the reduction of the cost of capital for local companies, the reversion
of capital flight, and the promotion and validation of capital market institutions. To establish predictable, stable,
and transparent markets and therewith attract international investors and foster the development of stock
markets, African systems have to I) be exposed to best practices and standards and II) be upgraded in their
infrastructural capacities. Through a targeted use of positive externalities177 of the globalized financial system the
domestic financial sector could be the beneficiary of reforms178 and could, because of the globalization of capital
flows, increased its relevance in the global economy.
South Africa finds itself in a pole position within this process of financial globalization. With prudent policing and
regional strategies it could use advantages in access and information to other African markets in order to build
more diverse investment portfolios and explore widely unexploited and globally marginalized markets. Therewith
it could extend its already existing competitive edge in terms of access to the African continent on one hand and
access to the global financial system on the other hand. Yet, this strategy currently involves a vivid debate about
the socio-economic development path SA should adopt. A weak Rand would support the domestic economy in
so far as exports and the access to capital would be cheap. A stronger Rand would attract foreign capital by cheap
imports, FDIs, and currency speculation. The SA scholar Gentle therefore asks whether the Rand should be weak
or strong and answers this question in the same article in that [f]ixed investment in plant, machinery and
infrastructure creates jobs and development, while investment in bonds, hedge funds and derivates only creates
short-term profits for speculators and their hangers-on, like fund managers, the rating agencies and their
embedded economists.179 Yet, whereas in the wake of the recent crisis all other BRIC-partners re-imposed capital
controls, taxed capital inflows, and limited the outflows of capital, SA still seems thrilled by the free flow of money.
And many other countries of the continent didnt act different.
174
Cf. (Keet, 2010, p. 8)

176
Cf. (Woods, Global Governance after the Financial Crisis: A New Multilateralism or the Last Gasp of the Great Powers?, 2010, p. 52)
177
Externalities are uncompensated effects of economic decisions. They are unintended byproduct and can have a positive as well as a
negative characteristic. The negative occurrence of external cost for example is often to be borne by the public and not the origin. Thus it
should be in the interest of a government to restrain economic activities with high external cost. Profiteers of positive externalities are also
called free-riders.
178
179
(Gentle, The Rand and SA's Three Growth Programmes: Searching for a Needle in the Wrong Haystack, 2011)
175
32
2.4.2
Moritz Hessler
Micro-level necessities
Whereas the optimal formula for macro-economic design still has to be found, the necessities on the micro-level
are mostly identified. Considering the immediate interdependence of both perspectives through for example the
monetary policing, nobody should be seduced by the relative limpidness about a need for action in specific
micro-level issues. The most urgent goal should certainly be financial inclusion and literacy respectively. Based on
a stable and relatively cheap currency, financial sector reforms should aim at raising levels of private domestic
investment and of accessibility to financial products as saving accounts, insurances, and loans. Currently, Africas
banking systems are characterized not only by low levels of intermediation but also by high interest rates and
high intermediation spreads180 due to insufficient risk mechanisms. Private credit only averages 18% of the
average GDP in Africa, excluding SA with more than 50 %.181 Comparing these levels to averagely 27% in South
Asia and 109% in high-income countries,182 and including the thesis that finance is needed as driver of growth
and poverty reduction, there is clear evidence for the need for reforms. The initiative MFWfA as well as the SA NGP
support this demand, stating the economic, social and political benefits183 financial inclusion and a general,
broader reform of the financial system would bring.
This argument is further strengthened by Colliers and Gunnings acknowledgment that growth would be
unsustainable unless there is substantial growth in private investment. In their opinion a first step would have to
deal with the issues of lacking productivity, which rises out of low levels of competition, economies of scale, and
technology. The backwardness caused by capital-extensive production, few experts due to poor education, high
labor unit cost per skilled worker, and poor infrastructure184 could be solve through incentivizing investment. An
improved access to financial markets would facilitate an increased entrepreneurial investment, which in turn
would result in increasing competition, employment, and cooperation to raise economies of scale between for
example several specialized micro-firms. Accompanied by an improved provision of public goods, which
decreases transaction costs and potentially lowers the labor unit costs while increasing the amount of skilled
labor, financial sector reforms could thus be the catalyst for a brighter future.
According to Zakaria Africa should especially rely on its relatively young population, compared to the aging
societies of Asia and Europe. Differently to aging societies, which lack of labor forces, are burdened by an
increased pension spending, and suffer of fewer saving,185 African economies could prosper with an adequate
and efficient use of its young population.186 Young people are more likely to engage in risky but proper valueadding entrepreneurial and innovative activity, if enabled by sufficient capital, infrastructure, and education.
Although Zakaria further states that the traditional Malthusian constraints of work and capital became, due to
their increasing availability to more and more countries, replaced by ideas and energy as constraining elements,187
these modern constraints can only be reached by adequate levels of capital and motivated labor. For SA this
180
Foreign-owned banks are more profitable than foreign-owned banks elsewhere and than locally-owned banks because of high risk
premiums demanded by bankers due to lack of competition (small size of the economies causes a high degree of economic concentration).
181
Access to financial services is poor throughout Africa, also in SA - compare figures 22 and 23, p. 87. Cf. (Kendall, Mylenko, & Ponce, 2010)
182
183
Cf. (AFI, 2010; Demirg-Kunt, Beck, & Honohan, 2008)
184
185
Cf. Since the older the working populations gets the more they spend (finally they spend more than they earn compare figure 4)
186
Cf. (Zakaria, 2009, p. 229)
187
Cf. (Zakaria, 2009, pp. 241,242)
33
Moritz Hessler
implies that it has to be innovative in terms of financialization and use of its natural resources to I) guarantee
stability and sustainability and simultaneously II) enable growth and its strive for regional leadership.
Figure 4: The pattern of savings over a life cycle188
2.5
Future Oriented Policing
At the same time as reforms have to fuel domestic investment and general financial inclusion they have to
implement mechanisms to intercept dynamics of bubble-building. Especially within the last decade there are
obvious trends towards investing in Africa. An increased profitability, improved public ratings and benchmarks of
governance and macroeconomic reforms since the 1990s, and the fact that returns on investment and capital are
nowadays higher than in any other region - in some areas even 66% higher than in China, India, Indonesia and
Vietnam189 - helped the liberalized markets of Africa becoming a sleeper among international speculators. But
especially PanAfrican speculation based at its financial hub in SA should be regulated as early as possible to avoid
a future African financial crisis.
Another element of future oriented policing should take a possibly changing society and status of SA into
account. The penetration of ICTs at much lower prices throughout the continent is likely to increase sharply
throughout the next decade and will dramatically change ways of communication, doing business, and
supervision. For reforms it is thus inevitable to firstly think beyond current constraints but constructively and
pragmatically simulate, rather than predict or plan, developments in accordance to cultural, political, and socioeconomic parameters and secondly transform that into adequate African policies
2.5.1
Towards an information society?
An obvious first question should be what kind of social system is likely and intended to dominate the continent.
Since this could be difficult to answer, the question should be limited to SA. Considering social and economic as
well as political structures, policies, and development plans, which path is SA going to pursue? Would the country
intend to become an industrial society, an information society, or something completely different? Should Africa
188
189
(Read, 2009, p. 44)

Cf. (Collier, The case for investing in Africa, 2010)
34
Moritz Hessler
even disentangle from those Western categorizations of a broader modernization process, as further explored in
the appendix? Should it, instead of aiming at skip industrialization and modernization steps, like India did it with
leaping right into the most modern mode of a service-oriented information society, define an own
understanding of a somehow transitory social system? And finally, how would that again fit into the automatisms
and doctrines of a global economy such as the Kondratieff-cycles,190 and the global supply chain as well as its
inherent dynamics of labor unrest and fixes?191
Assuming the continued penetration of ICTs192 it can be expected that SA would move towards becoming an
information society by Western definition. In such a social system, and with this opinion Hndeler supports
Zakaria, the natural constraints are not labor, resources, or machinery anymore. The competitive edges of an
information economy would rather be the availability of cooperative, adequately healthy knowledge workers
with their ideas and abilities to solve problems at appropriate cost.193 Global competition would increasingly not
only be decided by the price, but also by quality and a head start in processing information. Hndeler believes
that the () einzige Standortfaktor, durch den sich die Regionen der Welt knftig noch voneinander
unterscheiden ist die Fhigkeit der Menscher vor Ort, mit den Informationen umzugehen.194 The crucial skills of
those future knowledge workers are their social and empathic capacities in order to be able to quickly process
information in a collaborative process and environment.
From a todays perspective such a worker class seems illusionary in a deeply unequal society like the SA one.
According to the CeSTII, the number of researchers just slipped from the stagnant ratio of 1.5 per 1000 employees
to 1.4 in comparison to 1.9 in China and 6.4 in Russia. Furthermore, while SA targets 1.5% by 2014, the public
research spending even dropped slightly from 0.93% to 0.92% of GDP from 08 to 2009.195 To experience the
necessary transformation process, socio-political and economic systems have to reduce barriers of e.g. poor
public services in health and education, have to establish a culture of innovation and creativity, and have to
strengthen the policy framework. In this process the political elites are chased by the rapid spread of the ICTs,
which are dramatically fast and sustainably changing the rules of the game in the context of e.g. accountability
and transparency functions by and for the people. ICTs may not be the all-purpose-tool for the African malaise
spreading democratic values, healing diseases, and providing capital, as it is often proclaimed, but they will kickoff a more multidirectional mode of polity in which political elites arent the last resort of decision anymore.
As already emphasized, efficient financial markets occupy an outstanding role in a process of technological
progress and innovation. As ultimate decision-maker over the access to capital the soundness of the financial
system and its integral ideology are key to long-term growth. An information society, or any kind of society
transforming into a similar mode of social system, deeply relies on investment- and risk-affinity as well as risksharing for innovative projects.196 Whereas in such a society all other systems seem to become globalized or at
least globally integrated, the financial system could and should experience an opposite trend of localization.
190
Cf. (Hndeler, 2009, p. 11)

With its globalized and ever-curtailing product cycles. Cf. (Silver, 2003). These are certainly important questions, yet not to be discussed at
this point.
192
This is supported by the rapid, recent upgrading of high-speed internet, the astonishing development of pervasiveness of mobile phones
throughout the continent within the last decade, and the disproportionate interest of domestic as well as foreign firms to invest in
technological infrastructure in Africa.
193
Cf. (Hndeler, 2009, p. 27)
194
(Hndeler, 2009, pp. 24, 25)
195
Cf. (Centre for Science, Technology and Innovation Indicators (CeSTII), 2010)
196
191
35
Moritz Hessler
Considering global dynamics of disintegration and flexibilization of labor combined with the experiences of the
recent crisis, in which the cutting of the line of confidence between issuer and customer caused a speculative
bubble, wouldnt be the extended provision of small loans to individual entrepreneurs and knowledge workers
embedded in a global economy the solution to I) achieve social, economic, and political goals as well as to II)
stabilize the growth path based on more self-determination, individuality, and independency? And wouldnt
there be the opportunity for SA and its regional partners to implement such a socio-economic business plan on a
common and cooperative basis to gain from economies of scale and a stronger aggregated position in the world
economy? The example of India, which overcame still existing constraints of traditional infrastructure by leaping
right to ICT-infrastructure, could in parts serve as blueprint how the region could be connected short term
without neglecting the importance of a more fundamental, incremental erection of traditional infrastructure in
the medium-term.
2.5.2
Regional aspirations and integration into the global economy
Despite the fact that SA formulates elaborated regional aspirations in among others the NGP it isnt always clear
which region the cape country aims to lead with which policy framework. Next to the broader claim of a leading
role on the continent SA occupies central positions in diverse regional networks and organizations. Whereas
SACU may be the most integrated network, SADC represents the main source of power for SA in the region. The
SADC focuses on policy reforms aimed at progressively eliminating barriers to the free movement of goods and
capital. With these measures SA deliberately fosters economic dependency of its regional partners to the
Southern African point of gravity.197 A planned merger with the other two sub-Saharan economic zones currently
evokes criticism, the dependency and dominance to respectively of SA within an extended region will further
increase.198 The integration in SAs core region SACU199 is already more advanced and comprises shared tariff
structures and custom revenues developed under a SA leadership. Yet, the most intense penetration of SA
regional agenda setting is to be found in the Common Monetary Area, in which the country of the Rand not only
dictates monetary and exchange rate policies, but also represents the uncontested leader in its representation
and political as well as economic planning. The main objective of all regional policing for SA can be summarized
with the intention of becoming economic and financial hub for at least the Sub-Saharan continent. SA therewith
attempts to fill the bridging role between the global economy and smaller African economies and networks by I)
taking a value adding role in the global commodity chain profiting of its privileged access to African resources200
and II) becoming a financial intermediary between the global and a regional financial system. Only an
appropriately sound financial system could provide the economy with sufficient capital to becoming such a hub
and simultaneously act as export good serving an entire region as buffer towards an adverse global financial
system. Yet, without benefits for the whole region such a dominating role of South wouldnt be accepted.201
197
Cf. (World Bank, 1999, p.5)

Cf. (Bhebhe 2011); South Africa, with its strong industrial base would be the major beneficiary as it would flood smaller member states with
its products and in the process stifle local industries
199
SACU with its member states SA, Botswana, Lesotho, Swaziland, Namibia, as only significant economic player in SADC and with SA as
farmost dominant player as shown in figure 5Figure 5.
200
The most prominent example would be Angolan crude oil for which South Africa wants to become a downstream hub: refine the oil and
bring it back to the continent.
201
Cf. (Nolte, 2006, p. 14)
198
36
Moritz Hessler
Figure 5: Total intra-SADC exports 1992 and 2002202
Next to an enhanced visibility to investors203 in a more stable and possibly higher rated region regional
integration can contribute significantly to reducing infrastructure costs, by allowing countries to capture scale
economies and manage regional public goods effectively.204 According to Mbeki the need for regional integration
in Africa is based on rather economical than political or security issues like in other regions.205 Exemplary, SA is a
growing source of private investment and expertise for manufacturing206 for its neighboring countries as well as it,
through its international network of partners, diversifies trade and facilitates multi- and bilateral partnerships. And,
as it is tangible in SACU, it is able to provide public goods as such as stable and sound policy frameworks to its
regional fellows. Yet, with this provision of ideological elements SA also becomes responsible for a whole region
and has to take this responsibility into account in any reform considerations.
Economic and political unity or at least strategic cooperation and tactical coordination - is thus essential for all
SADC countries in order to deal with processes and problems internal to individual countries but that also affect
the cross-border relations. Especially under conditions of global crisis and a very challenging and even hostile
global economic and political environment207 it becomes an imperative to take advantage of the benefits of
regional cooperation.
202
(Mbeki, 2009, p. 143)

204
Cf. (Foster & Briceo-Garmendia, 2010, p. 14)
205
Cf. (Mbeki, 2009, p. 142)
206
SA accounts for 70% of intra SADC exports, but also provides substantial technologies and skills transfer. Many businesses in region owe
their existence SA. Cf. (Mbeki, 2009, p. 149)
207
Cf. (Keet, 2010, p. 1)
203
37
Taking Africa Beyond Aid
Moritz Hessler
Africans need breathing space much more than they need money.208
Due to its difficult environment composed by endogenous factors like scale, informality, governance, and
shocks209 Africa increasingly lost shares on the world market from 1970 onwards. The fact that others could
produce and deliver goods more cheaply created a loss of income of around USD70billion a year. The question
was and is how to fill that gap? For a long time African governments preferred to speak about their endogenous
issues with foreign visitors rather than their countrymen.210 Hence it was no surprise that it was expected that this
question would be answered rather by external actors than by a domestic public discourse.211 Unfortunately, the
SAPs,212 which focused on budget cuts in public spending, liberalization, privatization, and intended to alter the
sources of growth and promote agricultural and rural development as launching pads for more diverse activity,213
couldnt help much. It even worsened the situation for the most vulnerable in so far as many states almost
entirely withdraw from providing public services like health and education. Especially measures for reducing food
imports to heal the country from within by facilitating better prices for farmers, incentivizing investments in rural
infrastructure, and initiating liberalization of transport and processing as well as marketing, should be regarded as
deeply mistaken. Acknowledging the inefficiency and corruption of local administrations, more recent
development aid approaches bypassed the governments and channeled money right into the hands of
community-driven programs.214 But as Calderisi summarizes it:215 the failure of any approach, from supporting
state-owned industries to private investment, from distributing to specific sectors to letting the locals decide, just
reflected the limits rich countries encountered themselves. Eventually, with the end of the 1990s the question
emerged, whether there is any appropriate aid approach at all?216
A common problem of foreign aid is that investments in modern infrastructure and technology are so advanced
that they cannot be used, maintained, improved and powered at all. Mostly, foreign technical assistance is
needed. This involves the need for higher budgets and makes such Special Economic Zones of investment,
differently to its Asian role models, to industrial islands of inefficiency217 without an opportunity to generate
economies of scale218 or to enable absorption of knowledge and socio-economic profits to its environment. As
White Elephants they burden the public budget by lifecycle and maintenance costs and rather serve the elites
than a general economic development.
208
(Calderisi, 2006, p. 9)
Small size, sparse population, great distances, lack of systematic documentation, unpredictability, no credibility and stability, likelihood of
occasional economic and political meltdowns. Cf. (World Bank Group, 2006, pp. 11, 12)
210
211
212
Bretton Woods Articles of Agreement required member countries of IMF to: 1) promote international money cooperation, 2) facilitate
growth of trade, 3) promote exchange rate stability, 4) establish system of multilateral payments, 5) create reserve base (contributions to
reserve by quotas). Cf. (Levi M. D., 2005, p. 516)
213
214
215
Cf. (Calderisi, 2006)
216
Cf. (Moyo, 2010)
217
218
209
38
Moritz Hessler
On the neighbor-continent China and India were charging ahead on the strength of domestic demand, strong
exports, private investment, and normal borrowing rather than foreign aid. Despite being fundamentally different
in their development trajectories and approaches219 to the African continent, their immense foreign currency
reserves220 allowed them to fuel an export-, technology-, and increasingly also consumption-led growth based on
cheap credits and international competitiveness. The South-East Asian tiger states, who by mid-20th century were
even worse off than many African states, demonstrated the power of good economic policies, solid public
finances, low inflation, and clear investment rules.221 What would be necessary to put African countries on a
similar trajectory?
Figure 6: Who has to do what to support African development (excerpt)222
A quick answer would be: public discourse.223 Although this seems to be oversimplified, it will only be possible to
stem the required integrated and multifaceted approach when public inclusion enables the broader civil society
to participate in an interdisciplinary and inter-systemic reform process. As Nobel-price-winner Sen formulates it,
broader approaches are often harder to sell than narrowly focused reforms.224 For a long time, the lack of a civil
society and the exploitative dominance of the elites hindered fundamental reforms. Disentangling from
development bizz and development buzz225 it is important to focus on individually tailored solutions, developed
219
Cf. (Zakaria, 2009, p. 136; Sharma, 2007; Sethi, 2010; Giessmann, 2006; Levi W. , 1953; Lihua, 2006; Meredith R. , 2007; Rao, 2010; Tull, 2006)
221
222
Own illustration based own: (Africa Progress Panel, 2011, pp. 63-65)
223
Cf. (Calderisi, 2006, pp. 44 -54)
224
Cf. (Sen, 1999, p. 127)
225
Cf. (Collier, The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It, 2007)
220
39
Moritz Hessler
through a public discourse and embedded in broader frameworks. It will be crucial to gain a position in which it is
possible to leverage partners from all around the world. As illustrated in figure 6, the Africa Progress Panel
properly identified who should be in charge of what in which specific, domestically driven reforms.226 Without the
right balance between and appropriate participation of those three blocs African countries might face issues of
new traps on the development track. The example of India shows how the successes of a dynamic private sector
development can be extenuated by failures of the state in terms of overregulation, corruption, and extreme
inefficiency of the public sector.227
The West also appears to become convinced that real development in Africa has to come from within. The new
development doctrine is consequently headlined with Taking Africa beyond aid.228 And even though this title
perpetuates the image of Africas passivity by having to be taken somewhere, initiatives like MFWfA could make a
real and tangible difference to earlier approaches. Still, as long as Western input in such reform efforts is strongly
based on fixed ideas of modernization,229 it could be problematic to find an appropriate formula to solve specific
problems. It wont help to create White Elephant policy and governance frameworks in an environment which is
either not ready or not in need for them, or even both. Instead of straightforward modernist approaches, why not
starting with the most basic tools and training how to use these instruments to enable the locals to develop
further steps?230
One of the most debated issues in the post-SAP era is the increasing emergence of Asian countries on the black
continent. Why is Africa so attractive? And what does an Asian engagement on the continent imply in terms of
new economic, political, and ideological dependencies? It may not sound revolutionary when political solidarity
and economic interest are identified as the core purpose of all stakeholders. Yet, the implementation and
framework is dramatically changing. New clubs of strategic partnerships and symbolic diplomacy build the
fundament for emerging countries, of which SA is the African lighthouse, to gain a major voice through
representing the developing world in changing geopolitical tectonics. The pinnacling global competition for
resources and energy especially benefits Africa which increasingly can leverage its partners and achieve more
independence. Close partnerships of some African countries with the Chinese demonstrate this new
opportunities. Africa can increasingly ask for the best package of investment. Furthermore the new clubs extend
especially SAs role in global politics, but also affect local policy-making. The Sanya declaration of the recent BRICS
meeting demonstrates broad consensus on key international economic and financial issues as well as on certain
global political issues like the re-drafting of Special Drawing Rights, the establishment of a broad-based reserve
currency as alternative but not substitute to the USD, the agreement to pay intra-BRICS credits in local currencies
instead of dollar.231 This is necessary in so far as the continuing dependency on capital inflows from Europe and
the USA threaten the stability and predictability of the emerging markets. But it isnt clear whether Africa has an
appropriate voice in these panels and whether those claims and policies really benefit the continent.
226
Cf. (Africa Progress Panel, 2011, pp. 63-65)

Cf. (Zakaria, 2009, p. 169)
228
Cf. (Volz & Wolff, 2009)
229
The debate about modernity and the Asian stakeholders in Africa is to be found in the appendix.
230
Cf. (Vester, 1999 / 2008)
231
Cf. (Bhatia, 2011)
227
40
3.1
Moritz Hessler
Partnership for Making Finance Work for Africa
MFWfA specifically aims at bringing African governments, the private sector and international development
partners together to coordinate their actions. Launched at the G8 summit in Heiligendamm and located at the
AfDB headquarters in Tunis the multilateral initiative232 shall enhance Africas financial systems on the macro scale
with finance for growth as well as on the micro scale with finance for all.233 Emphasized with these two
approaches, the partnership demonstrates its conviction that a sound financial system is key to economic
prosperity and poverty alleviation.234 The WB states that finance could be a leading sector in transforming African
economies. Efficient and innovative domestic system could put the hopeless continent on a stronger and
sustainable growth path opening up business opportunities to a wider clientele and channeling larger
resources more effectively.235 Focusing on the securities market and banking regulation236 the initiative mainly
comprises measures like a microfinance roadmap, responsible finance, which includes the aspects of central
banks, corporate governance, and financial literacy, and an enhanced donor coordination titled from Paris to
Accra. The German GIZ further classifies the agenda in seven categories:237 I) promoting financial access through
microfinance; II) facilitate the development of customized lending products for rural and agricultural finance, the
so far excluded sectors; III) establishing a culture and system of micro-insurances; IV) implementing financial
sector stability following post-crisis G20 recommendations; V) fostering the pervasiveness of new technologies in
finance as such as branchless banking; VI) institutionalizing financial services for migrants and their families to
simplify remittance transactions. The seventh project is thought to build the fundament of all other agenda
points: it aims at establishing a culture and infrastructure for responsible finance and financial capability and
literacy.
The other measures of especially enabling access to and reducing cost of capital will only be adequately efficient
if all domestic market actors are trained in how to responsibly use which financial instruments. Only within an
environment of financial literacy and of a sustainable ideology it is possible to transform businesses as well as to
help the poor by small-scale payments, savings, and risk reduction services. Only by fostering an entrepreneurial
stratum through an adequately sound and fair financial system African countries can appropriately use new
technologies, be innovative, and attract as well as spread investment.
Most analysts identify risk as the biggest problem for domestic financial systems. As the WB states, the main
obstacles to on-lending lie in the difficulties banks have in finding bankable projects, given the information and
contractual infrastructures, and their traditional loan underwriting strategies. Despite tangible improvements over
the last decade Afro-pessimism is still a major characteristic not only to external investors. Low country ratings
due to endogenous issues and persisting images of massive corruption, poor governance, and project failure as
well as sparse investment activity also discourage domestic and PanAfrican investors. This perception of risk is
further amplified by the general doubt that African countries have the capacities to deal with the effects of
232
The main forces behind MFWfA are the AfDB, AFD, BMZ, DFID, USAID, SIDA, CGAP, IMF, FIRST, UNCDF, MinBuZa and the Worldbank. Besides,
there are other initiatives like the Alliance for Financial Inclusion, which is a global knowledge-sharing network of financial inclusion
policymakers from developing countries launched in 2009: 50 member countries, 40 more pending.
233
Cf. (Demirg-Kunt, Beck, & Honohan, 2008)
234
Cf. (Volz & Wolff, 2009)
235
236
237
Cf. (Gruijters, 2010)
41
Moritz Hessler
financial globalization. Especially capital flow volatility engenders considerable risks in so far as a sudden and large
collapse of capital inflows can be enormously costly and, as just experienced with the case of Botswana, may lead
to major withdrawals of deposits with the result of a subsequent credit crunch.238 Another issue of risk arises of
uncontrolled bank privatization in the wake of the SAPs. Senbet and Otchere summarize that the positive and
stabilizing effect of such a restructuring will not set in until I) government intervention and partial ownership of
privatized banks is eliminated, II) a deep and well-functioning financial system can lead to gains from bank
privatization,239 and III) minimum levels of domestic ownership of privatized banks are sustained.
The most damaging perception of risk emerges out of a lack of financial deepening and credit to the private
sector. In an unequal banking system assets are heavily concentrated on few institutes and actors, which are
excessively liquid. The result is that interest rate spreads of the big banks are extremely high due to lacking
competition and weaker banks have to attract the non-serviced, disproportionately high-risk individuals. To
support this lending to mostly lower strata and risky entrepreneurs, the state issues deposit insurances used to
reduce the risk of systemic failure of banks and to stabilize the payments and the overall financial system.
Unfortunately, such insurance mechanisms are socially counter-productive if the system, as in most African
countries, is not structured appropriately. When deposits are guaranteed depositors face no risk. It is obvious that
this leads to high risk lending and moral hazard. The big actors even increase the systemic risk240 by reaping big
payoffs under favorable economic conditions and transferring losses to the insurance agency and society at large.
Measures, actually targeted at increasing the access to finance for the underprivileged, are turned upside down.
The financial system will even be less able to intermediate effectively as long as safety nets are not embedded in a
sound regulatory and supervisory framework as well as structures of financial responsibility and good governance.
To sum it up: finance for all and finance for growth requires not only a financial system in which people and
ideology, as well as its institutions are enabled to act responsible and equivalent. It also requires a policy
framework of regulators, supervisors, rules and agreements, which facilitates an inclusionary process by
simultaneously I) mobilizing capital through new channels and technology and II) guaranteeing stability through
appropriate risk control mechanisms and a culture of responsibility.
238

240
Cf. (Senbet & Otchere, 2006, pp. 93 - 96)
239
42
A Crisis as Catalyst for Development
Moritz Hessler
Das Ausufern des Geldschpfungspotentials, das die Welt in die Finanzkrise gefhrt hat, entstand aus Liberalisierung der
Finanzmrkte, die dem Finanzkapital exzessive Gewinne durch die Verschleierung von Risiken, die Hebelwirkung hoher
Kredite241 und schlielich die Erzwingung von Steuerprivilegien ermglichte. Die steigende Renditeforderungen des
Finanzkapitals haben die auch vorher schon gravierende Ausbeutung des Natur- und Sozialkapitals [] noch weiter
beschleunigt.242
Even though there are myriad explanations for the financial meltdown, the key issues can certainly be categorized
under risk, system, coordination, and ideology. Excessive risk-taking in an insufficiently transparent
environment with distorted incentive structures can be seen as the genesis of the recent crisis. And, despite
severe efforts of all societal groups to identify culprits and to pursue reforms based on agent models, the entire
system with its destructively complex structure and interconnectedness as well as with its inherent culture of
gambling and profit maximization has to be reviewed. Not only roping bankers, undisciplined banks, and
almighty rating agencies, but every economic subject has to review its respective compliancy.243 Furthermore it
must be avoided to only look for issues on the micro-level but incorporate a macro-perspective into reform
considerations. The liberalized and thus limitless exploitation of an imbalanced global interconnectedness
allowed the privatization of profits in an undisciplined and unregulated environment. Under the aegis of
neoliberalist capitalism with its core-ideas of privatized accumulation, liberalized growth, and risk affinity244 and
further fueled by institutional failure as well as a broader environment of systemic crises, global governance failed
in erecting appropriate global accountability and regulation mechanisms.
There were national and even some international mechanisms in place. But since risk became a tradable good
and the financial system a gambling arena with excessive leverage, weak corporate governance and ill-designed
executive compensation contracts which created incentives for excessive risk taking, the actors tried everything
to avoid regulation. Figure 7 highlights how banks even increased borrowing when core equity requirements
were strengthened by the regulators. These requirements actually aimed at demanding more core equity from
the bank for more risky customers. The natural limits of core equity should therewith trigger a bank-internal
process of optimizing risk mechanisms. Unfortunately, the financial sector invented instruments for banks to sell
risk, and sometimes even the entire credit, to so-called shadow banks. These unregulated and high-profit-seeking
institutes issued quasi-insurances for default, so-called credit default swaps or more general securities, at a certain
premium. Among their high-profit-seeking customers were often again the commercial banks. Whereas the
shadow banks re-packaged investment products and sold them to other institutes and financial market actors in a
multilevel, complex, opaque and depersonalizing process, the first issuer of a credit, the commercial bank, could
continue conceding borrowing limits to even those customers with the lowest likelihood of repayment. Every
market actor anticipated infinite growth in its big bets.245 The capitalist culture, the central banks, regulators,
241
Leverage buy outs: acquisition of assets (real estates, firms, etc. financed through credits. Cf. (Eichhorn & Solte, 2009, p. 171)
(Scherhorn, 2008, p. 81)
243
Since every capitalist economic system largely tends to be shaped not only by the supply side, but foremost by demand.
244
Cf. (Ferguson, 2010, pp. 226-244; Eichhorn & Solte, 2009)
245
Cf. (Senbet L. W., 2009, p. 4)
242
43
Moritz Hessler
rating agencies, and the state even accelerated this market behavior with low interest rates, inflated ratings for
opaque and complex securities, because the raters were compensated by the rated, and the general business
model was based on leverage or swell money. When the crisis surfaced nobody was sure what the securities and
packages were really worth.
Figure 7: Swell or leverage money, shadow banking and risk trading246
Neither regulation nor the proclaimed self-cleansing quality of the markets could mitigate the impact of the crisis,
which, out of cyclical experiences, could be expected with reaching certain limits of growth.247 Sociology wasnt
prepared to appropriately analyze the course and deficiencies of a reform processes following earlier crises.248 The
separation of the disciplines of the economic sociology of the markets and the political sociology of the
regulation impeded to analyze control structures and control fields with their reciprocal setting of constraints and
reactions. Instead, the constraints set by control structures were bypassed by new instruments of the control field
which in turn required new regulations, and so on. Obviously, one wave of strengthened regulation only evoked
another wave. Vertical and horizontal control structures, like governmental supervision, central banks, the Bretton
Woods institutions, the Basel Committee, the International Accounting Standards Boards, and the Financial
Stability Forum, were furthermore fragmented in their operational frameworks and didnt reflect necessary levels
of cooperation. National authorities and interests overruled cooperative approaches and prevented sufficient
macro-level control competencies. Additionally to the complexity within the control structures, the control field
got increasingly opaque. Global expansion and operation as well as mislead governmental policing and ICTs led
to dissolution of sectoral specialization and centralization towards increasingly powerful, multifunctional financial
institutes and corporative actors. Against the example of the ecological system, which proves that diversity is the
crucial mechanism to avoid systemic collapses,249 greed and naivety created a global mono-culture with a
246
Own, simplified illustration

Cf. (Vester, 1999 / 2008; Meadows, Randers, & Meadows, 2008)
248
Cf. (Mayntz, 2010, p. 4)
249
The more different elements compete, the bigger, more productive, and more stable is a system. Cf. (Polasky, Tilman, & Lehman, 2005)
247
44
Moritz Hessler
decreasing number of competing elements. The banking sector became increasingly unable to fulfill its basic task
of accepting savings, conceding loans, and organizing monetary transactions250 in a responsible and risk-adjusted
manner. Instead, the financial sector emancipated from being a subsystem to the economic system. Whereas the
latter was still strongly dependent on the first financial actors were able to create money without independently
from the real economys added value. Surprisingly, the increasingly monopolistic actors could even profit of crises
in a process of the survival of the fattest instead of a survival of the fittest. Contradicting to Kondratieff,
Schumpeter, and Nefiodof, who deem crises as major opportunity,251 Sen acknowledges when shocks occur []
there is great chance that severity of the habit [] will jump to a new, higher level that persist even after the
shock has abated.252 Whereas smaller institutes dropped out of the market, the major financial intermediaries of
the global and national financial system became systemically critical and, to avoid a chain reaction, had to be
rescued by the state in a process of nationalization of losses.
Parallelly, the globalization of damage with no commensurate globalization of resources to repair these
externalities253 imposed an enormous collateral damage to especially developing countries. Following Sen,
global imbalances and inequalities jumped to a higher level. Paradigmatic are fiscal stimulus packages254 and
funds as investors of last resort. Whereas the West and most Asian countries were able to use those instruments
for stabilization, Sub-Saharan Africa lacked the resources and organizational structures to match Western bailouts
and fiscal measures. As such African countries should be actively participating in demanding and designing
global reforms of oversight and regulation mechanisms for globally systemic financial institutions. The need for
global coordination of long-term reforms to mitigate the impact of such crisis in the future255 is evident. Yet, the
fundament for such demands in the global arena presupposes, as mentioned, reforms on the national and
regional level. Instead of trying to manipulate global reforms through national lobbying, the African region should
rather take the Asian crisis256 as blueprint. This crises of 1997/8 not only demonstrated for the first time with which
dynamic a globalized credit business affects liberalized financial markets and that only institutes with healthy risks
structures and sufficient equity basis are capable of weathering such crises.257 It also evinced the potential
regional approaches and ideologies offer developing countries. While the recent crisis highlighted Africas
dependence on FDIs, ODA, and remittances, regional approaches could meet the need for concerted
governmental and non-governmental social programs to achieve independence based on societal inclusion. The
SA NGP elaborates how regional approaches of production and investment programs to fight challenges of
unemployment, marginalization and deepening poverty could look like. In one of the fastest growing regions, as
Africa currently is, the government occupies an important role in accelerating social and economic development
through effective regulation of markets. As the NGP highlights, shared development in our region is a precondition for sustainable prosperity in South Africa.258
250
Cf. (Mayntz, 2010, p. 6)

Entdeckungen und Erfindungen finden in einer Richtung und in einer Intensitt statt, die den Anforderungen der praktischen Wirklichkeit
entsprechen. Cf. (Kondratieff, 1926, S. 593)
252
(Sen, 1999, p. 139)
253
Cf. (Senbet L. W., 2009, p. 16)
254
Cf. (Senbet L. W., 2009, p. 18)
255
Cf. (Senbet L. W., 2009, pp. 2-4)
256
Cf. (Levi M. D., 2005, pp. 525,526)
257
Cf. (Maurer, 2007, S. 1)
258
(South African Department of Economic Development, 2010, p. 4)
251
45
4.1
Moritz Hessler
The Crisis Impact on Africa
Afro-pessimism caused that investors withdrew and curtailed letters of credit from Africa more drastically than in
other regions259 as result of the first financial trouble in the developed world. As consequence commodity prices
and exports plunged whereas FDIs and remittances dried up.260 Yet, those countries, which already before the
crisis kicked-off reforms and diversified their partners, weathered the economic storms quite well: led by the
subcontinents biggest economies Nigeria and SA, most countries had built prudential fiscal positions, best
illustrated by Nigerias $70 billion exchange reserves. Commodity prices rapidly bounced back underwritten by
growing Asian demand.261 Several indicators show that with the right policies theres still a chance to restart postcolonialism within a framework of pan-African cooperation and led by its most powerful economies and
ideological powers.
Like in Asia a decade earlier, reforms already started before the crisis. Fundamental reforms of the financial and
economic system,262 rapid improvements in global conditions and advancing technology led to significant
increases in GDP per capita, brought inflation increasingly under control, facilitated improvements in fiscal
discipline, and allowed a declining debt burden. Increasing flows of FDI and remittances, owed to the Western
boom and bubble, paid-off liberalization efforts and fueled the good performance of stock return and on riskadjusted basis in African stock markets. Yet, as in Asia, a crisis encompassed from external forces263 derailed gains a
strongly threatened the development prospects for the overall region.
The Committee of African Finance Ministers and Central Bank Governors264 dont share Senbet's optimistic
outlook for the continent. They state that reduced trade caused especially for the middle income countries of the
region a full blown development crisis. For SA, a sharp decline in quantitative demands and commodity prices, a
sharp decline of stock market capitalization by 33% in 2008, and the collapse of asset prices combined with the
increases in cost of capital, which caused severe contraction in lending, led to sharp downturns in the retail and
manufacturing sector. This not only affected neighboring countries through decreasing worker remittances from
and shriveling trade linkages to the economic hub of the region, it also threatened the regional stability, because
states couldnt fight the aggravating poverty anymore due to the lack of export revenues and weak governance
capacities. In general, the decreases in capital inflows to Africa, including FDIs, ODA, remittances, and tourism, cut
the stocks of foreign reserves to dangerously low levels. This jeopardizes the capacity to import even basic
commodities such as food, medical supplies, and agricultural inputs as well as it affects the private sector by the
shortage of liquidity and thus has adverse impacts on trade and investment. Bailouts and fiscal stimuli in
developed countries as well as the global crisis of confidence furthermore led to sharp declines in global
aggregate demand. Suffering from the declining access to international real and financial markets emerging and
developing economies are rationed out altogether.265 The reform-era of neo-liberalization furthermore limited
African governments ability to take use of countercyclical measures. As such, many countries of the subcontinent
259
Cf. (Collier, The case for investing in Africa, 2010; te Velde, 2008)
Cf. (Senbet L. W., 2009, p. 1)
261
Still many resources are undiscovered in Africa: there is a chance of five times the commodity exports of today. Cf. (Collier, The case for
investing in Africa, 2010)
262
Measured by large privatizations, measures for private initiative, interest rate liberalization, supervisory and banking regulatory schemes,
and development of stock markets.
263
In Asia induced by IMF conditions and policy packages. Cf. (Senbet L. W., 2009, p. 7)
264
Cf. (Committee of African Finance Ministers and Central Bank Governors, 2009)
265
Cf. (Senbet L. W., 2009, p. 1)
260
46
Moritz Hessler
are neither able to match Western public spending, nor to increase the international competitiveness of the
domestic industry, nor to stimulate domestic investment and growth. The severity of the crisis and pro-cyclical
conditionalities forced governments to retrench and undertake a contradictory fiscal policy. Lacking public
resources and the limited access to financial markets and institutional funds impede the maintenance of
adequate levels of investment, which especially affects infrastructure projects and the poor strata.
SA hence had to revise its budgetary expenditures and had to target assistance on key sectors to reduce job
destruction and loss of sector specific capital and know-how. Another measure, the adjustment of the personal
income tax, mainly aimed at relieving middle and lower income earners.266 The European example of Greece
demonstrates how vital the speed of access to money and how costly any delay can be. A little delay can cause a
devaluation of the country rating which raises the cost for credits and in turn would likely lead to another
devaluation. How difficult it is for African countries to get access to capital is illustrated by SA, which failed in
raising long-term finance through the issuing of sovereign bonds.
Paradoxically, the expansionary monetary policing of the US flooded high interest countries like SA with foreign
capital. Yet, as already elaborated, this money rather served speculation with bonds and securities than to
facilitate investment and aggravated the inflation of energy and food. Even though some countries attempted to
counter-measure the externalities of mostly Western neo-Keynesianism and protectionism, the impacts of their
socio-economic heritage of dependency and surrendering to the global economy petered them out. Attempts to
reduce capital outflows during the crisis, to implement deposit insurance schemes, to pursue an expansionary
monetary policing to stimulate consumption and encourage borrowing, and to artificially protect the exchange
rate, can mostly be regarded as failed. Still, the Committee of African Finance Ministers and Central Bank
Governors agreed in the inevitability of reforms to strengthen regulation of the banking system and financial
markets to increase efficiency while minimizing risk. In combination with their acknowledgement that reforms
have to be balanced against social benefits in terms of financial stability and equitable participation 267 this could
be a turning point for Africa in terms of self-determination. And although there are no tangible broader reforms
under construction, the SA NGP and measures like the mentioned tax adjustments could be early indicators that
the crisis could have been the eventual catalyst for a broader, more inclusive, and African self-deterministic
development. The Asian example should provide enough reasons to take it as blueprint. As Hurrell argues,
[w]hatever the actual limits to purely Asian responses to the financial crises of the late 1990s, there has been a
significant sense that the region needs to develop a greater sense of its own identity and of its own capacity to
deal with economic vulnerability (especially in the financial and monetary field).268 The African case provides and
even more striking example of regionalism launched on the back of crisis, human disaster, and widespread
political and economic failure.269
266
Proposed tax adjustments to personal income tax providing middle and lower income earners with R13.6 billion in tax relief.
(Committee of African Finance Ministers and Central Bank Governors, 2009)
268
This self-confident, very pragmatic approach supposedly roots in the Asian financial crisis of 1997/8, when the West refused unconditional
aid and the emerging powers had to help themselves. Increasingly failing "projects" of the Chicago School influenced Washington Consensus
like the "shock therapy" in former UDSSR states, Latin American economic disasters, and the misleading IMF-strategies in Asia and Africa
induced China, India, and several smaller economies like Singapore, Korea, etc. to create an own ideology of public policy.
269
(Hurrell, 2007, p. 140)
267
47
4.2
Moritz Hessler
South African Reaction to the Global Recession of 2008
As highlighted, especially SA began to comprehensively implement counter-measures for the short-term and
review economic development plans for the long-term period. In a presidential state of the nation address on 6th
February, 2009 the government announced to bring the following four measures underway to avert the crisis:270 I)
to increase funding for public investment projects, II) to intensify public sector employment programs, III) to
adopt industrial financing and incentive instruments to assist firms in distress, and IV) to sustain and expand social
expenditure. The financing of these measures should include support from development finance institutions as
well as partnerships with the private sector and should be unburdened through an increased liquidity in the
markets, reflected by the biggest cuts of the repurchase rate of the SARB271 in more than five years.
The strong Rand permitted reductions in the interest rate, which contributed to rapid credit creation, as well as to
cheaper imports, but it also implied lower profitability and competitiveness in manufacturing, agriculture and
other tradable-goods sectors. As such the generated consumption boom was largely restricted to South Africans
in upper-income groups. In a retrospective the NGP acknowledges that mis-targeted measures yielded around
40% of national income and around 75% of the new credit creation for the richest 10% of households.272 This
imbalance was further strengthened that whereas investment and domestic savings remained below the levels
required for sustained growth the continued economic concentration in key sectors permitted rent-seeking for
the well-off at the expenses of consumers and industrial development.273 To detoriate the situation the economic
downturn ended a pattern of growth with a 3% fall in GDP and severely rising unemployment rates especially
among the underprivileged strata.274 Figure 9 illustrates that the NGP foremost focused on restoring employment
as general basis for the financial as well as the overall economic system.275
Figure 8: SA macroeconomic variables under the shock scenario276
Even though SAs financial system is sophisticated and fundamentally sound, as discussed in 2.1.3, and although it
weathered the global financial turmoil without major pressure, the system faces increased macro-financial risks
arising of household indebtedness and mounting debt service burden.277 High credit risk and cost due to still
270
Cf. (Committee of African Finance Ministers and Central Bank Governors, 2009, p. viii)
The SARBs benchmark interest rate was cut by 100 basis points to 10.5.
272
Cf. (South African Department of Economic Development, 2010, p. 5)
273
274
Employment rates of just 41% in 2010.
275
Without employment there might be no need for financial services since theres neither capital to save nor to invest nor creditworthiness to
be eligible for a credit.
276
(Wajid, 2008, p. 51)
277
See SARB South Africa: selected household indicators in figure 28, p. 92
271
48
Moritz Hessler
insufficient structural capacities, inflation, low savings, global imbalances, and the need for broader access to
financial services as well as institutional centralization are issues which urge for reforms. Money, foreign
exchange, and capital markets are relatively well developed, but may be subject to contagion risks given their
close linkages with offshore markets.278 Assuming a further integration within the region it should be asked,
whether the positive stress tests for SA banks robustness279 are meaningful for a future market with a significant
role for non-resident inflows in stock and bond exchanges. SA shouldnt assess its status quo but should rather
aim at implementing policies that induce investors confidence and guarantee a maximum of symmetrical
information and regulatory oversight. Extending this call Wajid believes that SAs mission should be to foster
liquidity and depth in local markets and to attract FDI inflows, but to be cautious towards foreign exchange
regime liberalization with regard to macroeconomic circumstances.280 This would require a better deposit
insurance system beyond existing SARB liquidity assistance mechanisms. A primary focus should be placed on
transparency and stronger market conduct regulation and supervision. The biggest challenges in this process will
be the strengthening of information exchange, the identification of gaps and overlaps, and the establishment of
clear-cut delineations of responsibilities among regulators. And finally, as highlighted by most authors, financial
inclusion281 will be key variable to the success of all reform efforts. Even though the naked figures of the banked
population increased from 25% in 1994 to 63% in 2008 and alone between 2004 and 2008 by 17%,282 the most
risky such as the most vulnerable individuals or most innovative entrepreneurs are still excluded.
Figure 9: The major goals of the NGP as reaction to the crisis283
278
(Wajid, 2008, p. 6)
See figure 28: South Africa: selected household indicators, p. 92. Cf. (Havrylchyk, 2010, S. 25)
280
Cf. (Wajid, 2008, p. 6)
281
Cf. (AFI, 2010; Demirg-Kunt, Beck, & Honohan, 2008)
282
Cf. (Wajid, 2008, p. 7; Kendall, Mylenko, & Ponce, 2010, p. 50)
283
Own illustration based on: (South African Department of Economic Development, 2010, pp. 7, 8)
279
49
African Financial System Idea & Infrastructure
Moritz Hessler
We are searching for a model output that represents a (world) system that is: 1. sustainable without sudden and
uncontrollable collapse (...). 284
Das systemrelevante Hauptziel muss immer die Erhhung und Sicherung der Lebensfhigkeit eines Systems sein. 285
Whereas the NGP represents the necessary fundament, long term reforms of the financial system must mitigate
the severity and frequency of future crisis in SA and the impact of crisis originating from externally. Well
functioning African financial systems [] promote domestic resource mobilization by providing incentives and
profitable options for domestic capital to be retained. Given the massive financial capital flight from Africa over
the years, the use of domestic financial systems to retain domestic capital is highly desirable. 286 The goals of
finance for growth and finance for all can only be pursued in a balanced, stable, social, and sustainable system
without sudden and uncontrollable collapse. The system needs to be improved not only in terms of optimizing
structures and monitoring dynamics, but foremost by examining interactive processes of institutional alterations
over time.287 Hence a reform approach based on four areas is to be recommended: I) People and Ideology:
Financial Infrastructure, Literacy, and Inclusion, II) Institutions: Agents, Legal and Regulatory Infrastructure, III) Rules
and Agreements: Policy-Framework, and IV) Regional Financial Integration. Whereas the first three areas aim at
endogenously push African self-determination forward on a rather long-term path of own ideologies and
structures, the fourth area can be understood as mechanism to integrate the continent into the global economy.
Figure 10: Financial development and selected determinants, 1995-2007288
284
(Meadows, Randers, & Meadows, 2008)

(Vester, 1999 / 2008)
286
(Senbet L. W., 2009, p. 42)
287
Cf. (Mayntz, 2010, p. 13)
288
(Senbet L. W., 2009, p. 11)
285
50
Moritz Hessler
During the crisis, the fundamental reforms of the last two decades were proven as going into the right direction
but still being insufficient. As figure 10 highlights, the financial sectors of African countries remain
underdeveloped, especially in depth and liquidity.289 High interest spreads highlight that, from a functional
perspective, financial systems remain inefficient. The mere existence of banks is of little value if they primarily
purchase government securities. Due to frictions arising from moral hazard, access to credit and each type of
financial instrument are determined by the wealth distribution. [] Initial inequality is shown to determine
financial development, with high inequality preventing developed systems from emerging. A more equitable
income distribution as well as larger capital requirements of the industry tend to promote a bank-based system.
Investment risk promotes a greater reliance on non- monitored sources, while institutional parameters affect the
financial structure in intuitively plausible ways.290 The NGP acknowledges that of many challenges it will be
crucial to raise productivity and equality. The New Growth Path [] must also lay out a dynamic vision for how
we can collectively achieve a more developed, democratic, cohesive and equitable economy and society over the
medium term, in the context of sustained growth.291 As elaborated, capacities to handle information292 will play a
vital role in increasing productivity in a transforming SA society.
Next to financial inclusion and the provision of literacy, employment, investment into innovation and economic
growth, the exchange rate and currency stability should be the main motivations behind reforms. Within this
process, figure 11 illustrates the need to involve a thorough simulation of different scenarios of velocity of money,
deficit and inflation discipline, and varying degrees of social welfare. The achievements to overcome the
widespread belief that human development is kind of luxury only richer countries can afford and to take use of
financial globalization in a sustainable way represent two of the earliest milestones within the reform process.
The lessons from the [East Asian financial] crisis, if drawn correctly, can help Africa adopt sustainable financial
globalization.293
Figure 11: The relationship between inflation and real wages294
Different policy recommendations for SA295 mainly contribute to the four area approach. Wajid considers I)
financial stability, II) money, foreign exchange, and capital markets, III) financial sector supervision and regulation,
289
Cf. (Senbet L. W., 2009, p. 9)

(Chakraborty & Ray, 2007)
291
292
Cf. (Hndeler, 2009, p. 24)
293
(Senbet & Otchere, 2006, p. 115)
294
(Havrylchyk, 2010, S. 12)
290
51
Moritz Hessler
and IV) financial sector inclusion and consumer protection to be the main issues for reforms. Senbet and Otchere
highlight the need to focus on first domestic financial sector development, mainly to antagonize the financial
globalizations ramifications of capital flight and the offshore holding of bank deposits by Africans, which are
higher than in other regions.296 As second issue they target efficient regulatory schemes like improved capital
adequacy requirements, appropriate deposit insurance schemes, incentive features of management
compensation, as well as to foster competition, accelerate privatization, and create efficient capital market
regulation. The third goal aims at increasing depth and liquidity of African stock markets by fostering public
confidence and informational efficiency. Only a consolidation of African stock markets - through harmonization of
rules and regulations as well as synergized development efforts in human resources by pooling resources for the
production of capital market data and research - allows increased market capitalization and broader access to
equity capital. Regional credit rating agencies and a culture of good governance represent the fourth goal and
constitute the framework for the fifth goal: to promote the financial globalization of Africa. The growing
confidence that African stock markets are generating appropriate investment rewards for an acceptable level of
risk297 should be strengthened by making data on Africa available. Investment based on more symmetric
information is key to overcome Afro-Pessimism and to generate benefits of diversification of risk, partners, and
capital sources. And even though financial globalization exposes countries to the volatility of the global financial
markets, it is no solution to avoid it. Since the recent crisis demonstrated that major crises are transmitted through
the real sector, such deliberate protectionism would rather increase cost for SA. The sharing of local country risks
on a global basis leads to increased competition and potentially reduces cost for capital and improves economic
performance, since even more risky innovative and entrepreneurial projects get financed.
In theory, there are simple solutions to complex and interdisciplinary problems. A solution to how to avoid capital
flight or even turn outflow into inflow could aggregate national resource mobilization. By convincing the wealthy
to intrust their deposits to local banks it would be possible to increase macro and political stability, the soundness
of banks, the levels of competition, and allowed reasonable rates of interest to be paid through a quasi-tax
regime. Yet, the lack of confidence and insufficiently effective intermediation explain why African savings rates
have been low.298 If there were capital inflows at all, they couldnt be absorbed by the urban and rural economies
in such a way as to generate the maximum growth dividend.
5.1
People and Ideology: Financial Infrastructure, Literacy, and Inclusion
The need for individualism, socio-economic inclusion and a broader societal transformation mark the importance
of people and ideology for any reform process. Without adequate levels of public incorporation in such reforms it
will be difficult to develop a comprehensively sustainable system. Without the participation and support of all
societal actors a system will not survive. Structural reforms remain worthless unless they are resurrected by an
applied ideology. As elaborated above, a weak and incomplete ideology has adverse consequences on the entire
system such as Afro-Pessimism due to lacking confidence and information asymmetries.
295
Cf. (Wajid, 2008, p. 8; Senbet & Otchere, 2006, pp. 107-117)

297
Cf. (Senbet L. W., 2009, p. 41)
298
296
52
Moritz Hessler
MFWfA hence hosts responsible finance in its core principles. Three layers are crucial to the achievement of a
culture of responsible finance: the central bank, which functions as the kyberntes to either create monetary
elasticity or discipline and thus steer an ideology top-down; the corporate governance of especially financial
intermediaries, which has to ensure a responsible and sustainable market behavior aligned to socio-political and
economic agreements; financial literacy, which has to enable every economic subject to not only take an
appropriate use of financial instruments but also to monitor the market and its supervising institutions.
In a continuously interactive299 and iterative reform process SA has to find the appropriately pragmatic and
context-specific approach between the camps of modernists and activists.300 It is crucial to examine the interest of
every societal group and to define their respective tasks within such a reform process. 301 The challenge is not to
ask which system would fit best, but to fundamentally look for the best solution. What kind of regulation, of
financial culture and of policy framework is desired? How can very specific challenges of SA be best addressed?
How can low levels of financial intermediation be tackled beyond the pure structural issues? Modernist
approaches, which aim at transplanting best practices from advanced economies, but tend to overreach by
neglecting the real world constraints, should be wisely balanced with their activist counterparts, which consider
new technology, good governance, and regional integration as instruments to overcome traditional African
constraints.
5.1.1
Market ideology and capacity
The importance of a financial ideology for a system is to be best illustrated by the two views of speculation. The
Keynesian school considers speculation to be a destabilizing beauty contest of herd behavior and mass
psychology and calls for a transaction tax to curb it.302 Oppositely, Friedman, as mastermind of the neoliberal
school, believes in the self-cleansing quality of the markets, in which irrational traders die out. As such, only
laissez-faire would guarantee stability and rational arbitrages. 303 The just experienced crisis emerged from the very
functioning and logic of the latter ideology. In a deliberately de-regulated environment vast over-accumulation
and concentration of capital caused that the activities of financial institutions and financial speculators accentuate
their economic dominance.304
Yet, too much state control and wellfare-ist behavior also risk the stability. SA therefore has to closely examine
whether the provision of public goods like insurance systems distorts individual efforts and works
counterproductive to innovation and competitiveness.305 Sen, van der Berg, and Moses discuss the risks
information and incentive distortion as well as of stigmatization, corruption, and sustainability in respectively of a
redistributive system.306 Next to the side-effects of increased public spending in an environment of inefficient
intermediation, the social cost of behavioral shifts and increasing Gini-coefficients might turn positive approaches
into negative impacts. Therefore it should be reflected in how far political intervention and institutionalization,
299
Between the three societal actors of public, private sector and the civil society
301
See figure 6, p. 39.
302
Cf. (Keynes, 1997)
303
Cf. (Friedman, 2004)
304
(Keet, 2010, p. 1); Financial and economic interdependence as well as growth in trade is intended to / will increase. As such global
deregulation only fosters massive structural imbalances of trade and fiscal deficits as well as risks. Cf. (Levi M. D., 2005, p. 529)
305
Cf. (Sen, 1999, p. 130)
306
Cf. (van der Berg & Moses, 2009; Sen, 1999, pp. 130-136)
300
53
Moritz Hessler
such as public spending and regulation, outperform ideological shifts through a strengthening of the civil society
or an improved access to finance. Exemplary, higher savings as result of broader financial inclusion might be an
internal insurance mechanism for speculative banks during a crisis. Comparing European with American banks
this can be even considered to be an outstanding competitive edge in terms of robustness. In turn, such
robustness raises confidence, which potentially mitigates the destructive and self-amplifying force of a crisis. For
Africa, confidence is the premise to wipe-off Afro-Pessimism.
Another prerequisite for raising confidence is a clear commitment to build a well-functioning, dynamic and
innovative financial system. Dynamism and innovation are risky and used to represent opaque and highly
complex structures. Hence, the development of capacities to understand and manage risk in order to maintain
the operation at optimal risk levels is a crucial task for reforms. Proper incentives and responsible risk behavior
should not be aimed at preventing, but at mitigating the impact of future crisis. Without appropriate capacities
the system is likely to reproduce its inefficiency in a destabilizing way by either unduly conservative lending policy
that minimizes private credit, or unduly high-risk lending.307 A well-functioning financial system demands well
informed participants. MFWfA cites the example of micro-insurances for the need of financial literacy and
symmetrical provision of information: how to tell people they have to pay for something they are not getting any
guaranteed return?
Figure 12: Key aspects and challenges of a financial ideology308
The major challenge of reformers is always to plant the ideological framework of new structures into the mind of
its participants. Confidence, financial literacy and the capacity to manage risk are just some aspects of an ideology
which, among others, furthermore has to foster good corporate governance - including responsibility,
transparency, and mechanisms of best practice management and well-designed compensation structures to
provide decent.309 Figure 12 illustrates some of the key questions broad-based reforms should be able to answer.
A public discourse should provide evidences to balance economic development between sustainability and
growth, between bubble and trust, and between different structural approaches. The solution shouldnt neither
be Keynesian nor purely neoliberalist, nor a copy of any Asian ideology. It should aim at meeting local demands
without neglecting best practices and a broader global framework. There might be blueprints for specific
307
Cf. (Senbet L. W., 2009, p. 39)

Own illustration.
309
Cf. (Senbet L. W., 2009, p. 36)
308
54
Moritz Hessler
challenges to SA finance like Islamic or diaspora banking in comparable environments of the Middle East or Asia,
but other issues arising from renewed PanAfricanism may be better answered locally. Considering the devastating
impact of a-cyclical measures in Africa,310 imposed by the SAPs, as well as the principle of modern capitalism [t]he
bigger you are, the softer you fall311 and issues of beggar-thy-neighbor behavior prove the need for individual,
and not for recycled standard-solutions. Especially the discourses around innovation, knowledge, regulation,
complexity and individualism require tailored solutions to use the full potential a financial system can offer. A core
question should be how to enable and encourage people to found ventures and to invest in infrastructure, R&D,
people, and technologies.
5.1.2
Information and communication technologies and innovation
As shown above, [] dynamism of a developed economy depends on the degree of risk taken in innovative
business [and] on the possibility of risk sharing (which is a function of the efficiency of financial markets) [].312
As such innovation requires a sound and efficient financial system and appropriate instruments to assess risks and
fund the project. The difficulty of supervising and monitoring increasingly intangible technologies313 characterizes
an uncertainty surrounding all investment decisions around R&D. Yet, different ideologies mark different affinities
to accept risk. Whereas European innovation is rather financed on debt and hence relies on banks to provide
venture capital, the Anglo-Saxon tradition of equity financing and cultural element of trial-and-error might allow
more flexibility and explain the increasing centralization of TNCs in the US. Equity driven economies are based on
the willingness to share risk by a plurality of agents, but also more apt to take increasing risks. Yet, more flexibility
and risk tend to involve less robustness. The vulnerability to sudden shocks may thus lead to sharp decreases of
confidence in moments of crises with amplifying impact on devastating dynamics. As such, it is important to
clearly balance the benefits and risks of different levels of innovative dynamism. Which existing affinities should
be scraped together with which intended cultural and socio-economic elements to construct an own ideological
aptitude towards innovation and risk?
A further discourse should research to which degree markets and technology form The Great Enabler or the
Great Disabler.314 Information innovation and perfect transparency may cause an opposite kind of inefficiency.
The fact that any information relevant to the market is now simultaneously available everywhere in the world only
proves the rapidly raising quantity, but not quality of information. As long as information isnt validated and
assessed by sufficiently capable agents faster and more comprehensive dispersion of information doesnt
enhance information symmetries. Consequently, to improve the access to good investment opportunities and
sustainable venture capital simultaneously, a well-developed regulatory environment is necessary to ensure
financial information is reported accurately.315
Still, a mature regulatory regime alone cannot redeem that I) some countries may not follow speed of innovation
and II) information technology and its inherent dynamics towards automation increase the importance of rational
310
During the crisis, when the developed world returned to neo-Keynesianism and pro-cyclical measures. Cf. (Stiglitz, The Stiglitz Report:
Reforming the International Monetary and Financial System in the Wake of the Global Crisis, 2010)
311
(Read, 2009, pp. 158-165)
312
(Paganetto, 2005, p. 122)
313
314
Cf. (Read, 2009, pp. 180-188; Paganetto, 2005, pp. 121-142)
315
Cf. (Read, 2009, p. 181)
55
Moritz Hessler
hard facts. Automated analyses of risk and potential as well as automated investment and disinvestment may
allow to process information based on historical data and projections more efficiently. Yet, it cannot incorporate
soft facts like African kinship relationships. As highlighted above, the decoupling of issuer and customer not only
obstructs irrational and mutually beneficial opportunities for the bank and its customer, it also poses the major
risk that intransparency and complexity cause systemic collapses. For African reform processes it is thus inevitable
to think about technology not only through the Western lense in terms enhancing the efficiency of regulation
and risk management. Instead it should be discussed in how far technology can serve financial inclusion through
improved penetration and provision of services - and without cutting the customer relation as one of the most
important issues in terms of its cultural value as well as its relevance to monitor risk.
5.2
Institutions: Agents, Legal and Regulatory Infrastructure
The interest of dealers [] is always in some respect different from, and even opposite to that of the publick.316
Next to the required capacities and skills to use, maintain, and improve technologies the success of reforms will
be strongly dependent on the systems infrastructure. Different agents of the market pursue different interest.
Whereas market dealers like banks and security traders try to maximize their profit at an acceptable level of risk,
the central bank, despite its role as dealer, should aim at ensuring stability and social welfare.317 Although figure
13 illustrates the tasks and challenges to development banks, the principles and dimensions could as well be
applied to the SARB. Yet, symptomatic for sophisticated and globally harmonized regulatory systems, SA did not
centralize the supervision in one institutional body but divided it between several ones.318 Sustainable monetary
and fiscal policing, regulation, and supervision are ensured by independent, yet harmonized authorities.
The recent crisis demonstrated, that harmonization among national and international legal and regulatory
authorities is crucial for the functioning of each respective microsystem. Eichengreen even calls for a international
coordination of banking supervision, because Bankenaufseher denken nicht darber nach, welche Auswirkungen
ihre Regeln auf andere Lnder [] haben. 319 The need for enhanced regulatory regimes didnt emerge due to
internal dynamics but due to international competition of less regulation, risk of litigation, and so on.320
Harmonized approaches like the Basel Accords should prevent that supervisory authorities are engaged with
enhancing the competitiveness of their respective system for investors, skilled labor and industrial capital from all
around the world on a daily basis.
Consequently, Mboweni summarizes the infrastructural challenges for SAs banking system with the full
implementation of the next generation of the Basel Accords and international anti-money laundering measures,
adding the provision of broader access to banking services.321 As elaborated, this triangular approach is important
to fight the illegal outflow of Africas stolen wealth and to facilitate sustainable and endogenous growth.
316
(Smith, 1976, p. 266)

Cf. (Mehrling, 2011)
318
As figure 17, p. 63, demonstrates.
319
(Eichengreen, 2011)
320
Cf. (Zakaria, 2009, pp. 235-238)
321
Cf. (Mboweni, 2004, pp. 5, 6)
317
56
Moritz Hessler
Figure 13: Macro-framework for development banks322
5.2.1
Restructuring the banking sector
Symbolized by the UN annual goal of 2005, one primary goal of the reforms has to be the restructuring of the
banking sector. Lacks in the quality of information in credit markets, the low density of the population and
deficiencies in infrastructure drove up costs for financial institutions to supply financial services.323 The hampering
of business activity and higher transaction cost to access services are illustrated by an unequal distribution of
accounts. Financial inclusion thus not only has to target increased levels of savings, credits, and physical outreach
of branches, but also to lower cost and bureaucratic thresholds to open an account.324 The more documents are
needed to open an account, the more difficult it may be for poor people lacking identification cards or a
permanent address to enter the banking system. The more complex the procedure is the less likely entrepreneurs
will access bank credit for working capital. With interventionary measures like the four pillar policy SA already
acknowledges that concentration in the banking sector tends to be negatively associated with the supply [and
cost] of credit.325 With the NGP it furthermore attempts to offset dynamics, to which concentration leads to focus
on urban areas. Only formal jobs and a stable income, mostly found in the cities, create a reason to use banking
322
(Thorne & du Toit, 2009)

Cf. (Kendall, Mylenko, & Ponce, 2010, p. 27; Demirg-Kunt, Beck, & Honohan, 2008; Mylenko, et al., 2009; Honohan, Cross-Country Variation
in Household Access to Financial Services, 2007)
324
See figure 14 below.
325
(Kendall, Mylenko, & Ponce, 2010, p. 32)
323
57
Moritz Hessler
services.326 Yet, the issue returns to the banking sector, because to create formal jobs businesses have to grow,
which requires credit.
Figure 14: Barriers for the access to bank services in Africa327
Of the five different kinds of regulated banks, distinguished by the WB,328 especially universal commercial banks,
institutions with mutual ownership, and MFIs are interesting for a restructured banking sector. Specialized state
owned financial institutions are only interesting in so far as to support specific sectors and strata in a targeted
way. For a transformation period they could serve medium scale firms, which often find it difficult to access
capital329 being too big to be served by MFIs and too small to be interesting for large banks. Community based
financing, another possible source for capital, is often connected with ethnicity. Reforms have to facilitate the
integration of the entire society into the regular market. The success of the Indian Grameen bank should at least
raise the question, whether SA needs to develop a new kind of bank to extend the integrative potential of
financial sector reforms. Mbeki is convinced there is a need for such institutes, which not only provide capital
through co-operatives, but also undertake technical services and assistance.330 The spatial dimension, inherited
from Apartheid, created discrepancies between rural and urban needs and access to banking and indicate the
need for an individual approach. How can reforms I) bring non-salaried individuals into the system, II) broaden the
access to nonbank services, and III) enhance the financing of SMEs and affordable housing?331 The key to access
could be innovative financial engineering and technology, combined with ruthless attention to low cost. Which
of the above mentioned kinds of banks could serve that best?332
One solution would be to focus on basic banking. Characterized by free or low-cost standard processes and
services, which are highly automated by relying on technologies and self-administration, basic banking could
reach higher level of penetration at lower cost. Transaction limits, the encouragement to use ATM cards rather
than tellers, and one time fees for special services like consultation could complete a versatile financial instrument
by inherent risk mechanisms and customizable services. The standard banking and the fact additional services are
only provided on demand allow a fundamental reduction of cost for service, maintenance, and access - and risk
326
Without sufficient income theres no reason for nor might they be regarded as worthwhile to provide them with banking services. In a
South African survey 78% of unbanked responded with the reason lack of income; 13% with documentation, fees, distance. Cf. (Chakraborty &
Ray, 2007, S. 7-11; Demirg-Kunt, Beck, & Honohan, 2008)
327
(Kumar, et al., 2009, p. 10)
328
Excluding more complex institutes like pension funds, insurance companies and over-the-counter speculation agents.
329
330
Cf. (Mbeki, 2009, p. 162)
331
Cf. (Wajid, 2008, p. 7)
332
58
Moritz Hessler
fundamentally. As soon as more risk is involved or services needed, a bank consultant has to establish a personal
customer relationship through all available consultation channels.333 The most broadly discussed concept for
this basic banking is branchless banking.334 Especially interesting for remote areas, banks increase penetration
without additional cost for infrastructure and maintenance by offering online-banking and services as well as by
certifying supermarkets and shops as partners, where customers can withdraw and deposit money. Yet, given the
broad penetration of cell phones throughout Africa mobile banking should represent the main instrument for
branchless banking. As in India, it should even be more sophisticated than in large parts of the developed world.
Yet, modernist approaches relied on Western concepts of online-banking, neglecting infrastructural constraints
like unpredictable power supply, high costs for internet, and lacking capacities to maintain technologies in
remote areas.
Figure 15: Remote banking services have not kept pace with spread of cell phones335
On average branchless banking is 19% cheaper than comparable products336 offered via traditional channels, but
customers also expect additional optional services. For banks the precondition to offer branchless banking is a
large number of mass market clients. Only then returns on investment and maintenance of technological
infrastructures can be transformed into profits and into stability for the institute. Statistics prove that branchless
banking can boost financial inclusion. Growing much faster than the biggest MFIs,337 around 30% of its active
clients were previously unbanked. Yet, whereas branchless banking mainly serves for deposits, payment services,
and money transfer, the more personal MFIs rather provide loan and insurance services. The solution for SA
therefore has to consist of a complemental mixture of all three kinds of banks. Financially strong and domestically
rooted universal banks have to extend their offer of branchless banking especially by more sophisticated mobile
banking. Parallelly, they have to support MFIs through inter-bank loans to support their extended presence in
even remote areas. As in large parts of Asia this presence would not only benefit the positive effects of
microloans, but also supports the diffusion of financial literacy. MFIs could serve as outposts for the entire market
333
Either by on-site consultation, online, through mobile consultation, or through agent-based consultation.
Cf. (McKay & Pickens, 2010)
335
(Kumar, et al., 2009, p. 14)
336
On basis of percentage based fees for usage it is comparably more expensive than other banks at high amounts and cheaper at low
amounts and thus clearly aims at attracting lower-income strata. Cf. (McKay & Pickens, 2010, p. 2)
337
Reaching 79% unbanked people more than the largest MFI in the same period of time.
334
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Moritz Hessler
in terms of spreading literacy and responsible behavior, as well as to function as full-scale intermediaries by
allocating, sharing and monitoring risk in end-to-end relationships.
Figure 16: Active, unbanked clients of eight branchless banking pioneers and largest MFI in same country338
The third component of the banking infrastructure has to be the co-operative banks, which are currently being
formalized by the government. The last attempt raise the potential of the inherently African element of cooperatives, the mutual banks act in 1993, hasnt made the difference to financial services access.339 Too many
restrictions on size and too little returns pushed half of the mutual banks between 2000 and 2009 into ruin. The
recent formalization measures are not much different and are unlikely to led emerge further co-operatives next to
the only tangible successful mutual banks, Capitec and Sasfin. It would be wise to at least venture an examination
of successful European co-operatives and their regulatory and ideological framework respectively. Couldnt they
serve as blueprint? Dont they, being developed in pre-industrial Europe, meet the demands of many rural African
communities of today?
5.2.2
Legal and regulatory institutions
The globalization of banking and financial markets was not accompanied by a globalization of prudential
regulation.340
The Basel Committees proposal to strengthen global capital and liquidity regulation with the goal of promoting a more
resilient banking sector. [] improve the banking sectors ability to absorb shocks arising from financial and economic
stress [] reducing the risk of spillover from the financial sector to the real economy341
The complexity and reciprocal nature of constraint-setting between the different systemic actors evoked
increasingly comprehensive, but confusing regulatory frameworks. Instead of reducing complexity by
establishing overarching regulatory frameworks in a co-operative process, contemporary regulation mainly aims
at offsetting misbehaviors of certain market dealers neglecting that new regulations only induce the market to
look for other regulatory gaps. The goal of macro-prudential systemic regulation342 should be to ensure stability of
a system for lending and organized financial transactions as well as to enhance the robustness of individual
338
(McKay & Pickens, 2010, p. 5)

Cf. (Theobald, 2009)
340
(Braithwaite & Drahos, 2000, p. 103)
341
(Basel Committee on Banking Supervision, 2009)
342
Cf. (Mayntz, 2010, p. 12)
339
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system agents against insolvencies. Applying the Latin proverb corruptissima re publica plurimae leges343 it
should always be asked how much regulation a system needs. As the systemic scholarship alerts, all exogenous
interventions into complex systems are precarious.344 The fact that most interventions happen ex-post and may
only be effective with a time-lag involves certain unpredictability and could cause imbalances and malfunctions,
because the system might change in the meantime. The best example would be Basel II, which, implemented
shortly before the recent crisis, actually fought the symptoms of the earlier crisis in the New Economy. Its
successor, Basel III, wont be fully implemented until 2019. How much sense does such a regulation make in a
world in which the markets operate much more dynamic than its regulating institutions? How capable is
contemporary regulation to manage complexity? Referring to Vesters imagery,345 wouldnt ideological changes,
like good corporate governance and internal monitoring mechanisms, be more efficient than ever stocking up
supervision - considering the risks of over-regulation, like reducing competition, and the limits of supervising
large numbers of intermediaries in a cost effective way?
From a regulatory and supervisory perspective, SA reveals structures of a Western country. It is the only African
member in international panels reforming the global financial system. Yet, the over-elaborated modernist model
of regulation, implemented in an unmodified manner, over-reaches itself in countries, which are incapable to
fine-tune. The Western-developed model, whose adjusting screws are unknown or out-of-reach for SA policy
makers, precludes small issuers, fails to achieve substantial liquidity for larger issuers,346 and neglects a distinction
between international and local markets. Whereas international harmonization is needed to avoid beggar-thyneighbor policies, global imbalances, like the inability for developing countries to conduct counter-cyclical
measures, demand differentiations in regulation. SA wont be able to create a fundamentally new financial
system, but it should aim at reflect malfunctions of existing systems, to decompose requirements and processes,
and to re-assemble an individual solution implementing interfaces to and requirements of the global financial
system. Only then it will be possible to adequately react to crises and fine-tune the system in a self-determining
way.
But also a more active participation in international panels is needed not only to improve the ability to absorb
shocks and to improve risk management and transparency, but to ensure sound micro-prudential (bank-level) as
well as macro-prudential (system wide risks and pro-cyclical strengthening) regulation.347 In a globalized world
only pro-active participation in global panels can lead to improvements on the national level. The most important
project to strengthen the soundness and stability of the international banking system is the quasi-normative
regulatory framework Basel III, which was developed as derivative to Basel II as response to the recent crisis and
comprises the three pillars of 1) minimum capital requirements, 2) supervisory review, and 3) market discipline.348
The goal is that any financial institution should ensure having the necessary capital to support its financial
commitments. Next to imposed capital requirements, transparency and a culture of good financial governance
343
The more spoiled a state is, the more acts it has. (Tacitus, Annals III, 27)
Cf. (Herbst, 2004, p. 245)
345
Cf. (Vester, 1999 / 2008)
346
347
Cf. (FSB, 2009, S. 18)
348
Cf. (Levi M. D., 2005, p. 532)
344
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Moritz Hessler
and cooperation have to improve the capacity for banks and regulators to measure, control, and monitor risk.349
Responsible and risk-adjusted finance furthermore has to be rewarded by the market to root market discipline.
In comparison to Basel II, the reviewed framework mainly reforms I) capital requirements, II) liquidity standards,
and III) mechanism to deal with systematic risk and interconnectedness. Exemplary, new countercyclical macroprudential capital buffers aim at protecting the banking sector from periods of excessive credit and assets
growth.350 Pro-cyclical spending during booms and austerity during crises351 worsens periods of recession and
increase the risk of total collapses. New additional capital charges to major speculating banks and unregulated
institutions as well as a reduction of the overreliance on external credit ratings furthermore targets at raising the
systems robustness. Especially important in the debate around global imbalances are the extended capital
requirements and loss absorbing capacity for systemically critical banks.352 This might avoid dynamics of
unbalanced public spending and mercantilist behavior in the wake of future crisis and tackles the nationalization
of losses.
For SA banks Basel III could potentially lead to more competitiveness and predictable access to capital on the
global market. Yet, weaker banks may struggle with raising required capital, which could involve a reduction in
different business models and competition and would thus counter-act to a restructuring of the banking sector.
And even though it raises levels of confidence in the market in a long-term perspective, the increased capital
requirements and reorganization will lower the attractiveness for investors at a time when firms even need them
more to restore and rebuild buffers. Hence, the reduction of risk of future systemic banking crisis through a
reduced interconnectivity between institutions will likely cause less banking activity and credits. The inconsistent
Basel III implementation will furthermore lead to international arbitrages and could lower investors appetite for
SA bank debt and equity.353 Struggling with their profitability SA banks will be forced to change their funding
models, which currently rely on the wholesale market.354 Supporting the restructuring of the banking sector, SA
banks might be tasked with reinventing the attractiveness of retail savings in order to achieve the new Basel III
liquidity target355 ratios.
The integration into standardized frameworks, which increasingly rely on cooperatively used infrastructures and IT
solutions, gives a break to reducing cost, sharing best practices, and increasing transparency. Though, the
integration and centralization involves that banks outside the regulated spheres may experience even further
disintegration. Especially non-formalized credit unions and specialized micro-institutes will face increased cost for
refinancing and complicated access to international financial markets. Because they cannot afford external ratings
and are not regulated by any authorities, they are classified by the country rating, which imposes a heavy burden
on institutes in developing countries.356 Whereas more rating fosters transparency and better risk assessment, it
also excludes institutes and with them certain target groups and SMEs. A solution could be alternative rating
agencies, established by regional institutions, which could offer ratings more affordable than the big three rating
349
Cf. (Maurer, 2007, S. 3)

Cf. (van Dyk, 2011, p. 5; Maurer, 2007, S. 11)
351
Cf. (Repullo & Saurina, 2011)
352
Cf. (van Dyk, 2011, pp. 3-9; FSF, 2008, pp. 3, 4; FSB, 2009)
353
Cf. (van Dyk, 2011, pp. 9-10)
354
Provision of services by banks to the likes of large corporate and institutional clients as well as the international financial markets.
355
Cf. (van Dyk, 2011, p. 12)
356
Cost of refinancing depends on rating. Bank can either pay external rating agencies (expensive) or receive a rating I) which is one category
lower than that of the headquartering country. As such, for many MFIs which are not able to pay external rating, it is almost impossible to
refinance their business. Cf. (Maurer, 2007, S. 8)
350
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agencies. Yet, every diversification and decentralization in the supervising and rating regimes would also involve
new risk and cost through the need for increased harmonization and less standardization. Instead of establishing
new, complex structures it should rather be asked how the access to capital at decent cost could be raised for e.g.
SMEs. Basels inherent risk differentiation will further improve the access to credit and reduce prices for customers
with good creditworthiness, while risky loan applicants will face increasingly unfavorable conditions and
complicated access. Maurers proposal to make small loans more accessible and attractive357 by not demanding
full capital requirements for smaller loans indicates the importance for countries like SA to pro-actively participate
in the development of global agreements.
Figure 17: SA's financial regulatory structure358
Havrylchyks stress tests359 as well as other warning mechanisms and the implementation of Basel II and III prove
SAs effort to not only pursue plans for stabilization, but to anticipate even unpredictable developments and
thereof generate capacities for fine-tuning. Yet, existing deposit insurance systems threaten the stability. SA
furthermore struggles with the transparency and predictability of its financial market and especially with the
information on offshore activity, exchange controls liberalization and the macroeconomic situation.
357
Cf. (Maurer, 2007, S. 4)

(SA Financial Sector Forum, 2011)
359
Cf. (Havrylchyk, 2010); see figure 27, p. 91
358
63
5.2.3
Moritz Hessler
Preventing an African-born crisis
To mitigate the impact of future crises, and especially prevent African-born crises, SA should be interested to
develop systemic mechanisms of crisis resolution, especially targeting the recapitalization of banks. For market
solutions to handle financial distress by themselves there should be an environment of informational
transparency as well as market prices need to remain rational and panic free. To prevent panic and increase
confidence during downturns, direct capital injections in equity and securities may be a temporary rescue
measure. In order to avoid a business doctrine based on privatization of profits and nationalization of losses, it
should be minded that temporary nationalization has to be used to break up too big to fail-banks and clean out
bad assets. Parallelly it is important to implement automatisms of re-privatization into such mechanisms. The
system should not allow the regulators to be captured by or be involved with the regulated. Alternatively to
direct capital injection the central bank could incentive private capital to enter the initial auctions by reducing the
interest rate. Yet, such monetary measures always involve highly complex macroeconomic issues.
Summarizing, regulatory reforms - to prevent future crisis, reduce their frequency and severity, as well as to
mitigate the impact of external crisis on Africa have to take a multifaceted approach. As main result of the
recent crisis it should regulatory gaps and distorted incentives should be tackled in order to reduce excessive risk
taking. Since a zero-risk level would be equally socially suboptimal, regulation has to be implemented with the
global as well as a tailored local perspective. Due to the importance that different banks serve different social
groups with different levels of risk the focus should be rather put on enhanced managerial capacities and
appropriate incentives for the market than on even more standardized and complex regulation.360 Jointly with
prudent deposit insurance mechanisms and emergency funds,361 better management could reduce systemic risk
stemming from size, interconnectedness, complexity, and pro-cyclicality of risk taking. Especially shadow banking,
as sector of highly concentrated and systemically critical interconnectedness, deserves a high priority for African
countries. Due to their low degree of economic diversification they are particularly vulnerable to systemic failures
caused by these unregulated institutes. Yet, the most important issue should be to raise confidence. Legislation
and regulation alone cannot produce confidence. And even though an even playing field with strict enforcement
of laws and rules by a credible and independent judiciary and regulatory body is essential, the culture and
ideology is the determining factor for the success or failure of a system. As Senbet notes it is never the job of a
regulator to determine what is best for the investor; he should only create an environment in which the investor
can make an informed decision.
5.3
Rules and Agreements: Policy-Framework
Why is SA so fascinated by the free movement of capital? Fixed investment in plant, machinery and infrastructure creates
jobs and development; hedge funds and derivates only create short-term profits for speculators, and their hangers-on,
like fund managers, and rating agencies.362
360
Cf. (Senbet L. W., 2009, p. 34)

Instead of raising general capital requirements for all institutes, systemically critical banks have to deposit money in a fund, which will be
tapped into by troubled institutions.
362
Cf. (Gentle, The Rand and SA's Three Growth Programmes: Searching for a Needle in the Wrong Haystack, 2011)
361
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Moritz Hessler
Besides the ideological, structural and regulatory components, reforms should also closely examine rather
political aspects like the trade-off between monetary policy and financial stability. Havrylchyks study shows that
SA banks are very sensitive to interest rate increases. A redesign of monetary policies should hence acknowledge
the potential impact on the stability of the banking sector.363 Currently, the Rand is one of the strongest currencies
in the world. In comparison with its main trading partners SA has one of highest real interest rates. Yet, these
indicators dont reflect the devastating impact of the crisis on the cape country.364 Instead, SA attempts to balance
international trade deficits, caused by account liberalization policies, by attracting foreign capital. Instead of
imposing capital controls, taxing capital inflows and limiting outflows of profit SA365 invited global speculators to
boost domestic corporations to replace the declining European market on the African continent.366 Yet, the
appreciation of the Rand diminished export opportunities through less competitiveness, thus caused
unemployment, and increased the cost of credits and therewith the amount of debts.367
A weaker Rand, which Stiglitz is campaigning for, would admittedly make exports more competitive, but would
fuel inflation and raise the cost for imports, on which SA still depends. Next to the fact devaluation would only be
a disguise of lack of competitiveness, to generate the optimal environment to facilitate greater deposit
penetration the country would need low inflation and explicit deposit insurances.368 So, what should be the
consequence? Should SA lower the Rand by buying USD? This would not only waste capital which could
otherwise be used on public services but would also make the currency more vulnerable and exposed.369 It would
mean even more dependency and less liquidity for investments in infrastructure and social improvement policies,
which are reckoned as core element for African economic development.370 Should SA continue issuing Bonds and
attracting foreign capital? This hampers the domestic industry and has devastating effects on measures to fight
inequality and to raise employment. It furthermore impedes reforms towards more self-determination and less
interconnectedness and centralization.
In reality, due to the high interest rate, bonds have overtaken equity as main source of investment in SA during
the first half of 2010, with mainly foreign buyers. And although there would be no point for relatively small African
economies to build up own foreign currency reserves like China does, high interest rates threaten individual
approaches and sustainable economic development from the start.
5.3.1
The New Growth Path program
All three SA economic programs since 1994 targeted a too strong Rand by insisting on tight fiscal discipline,
monitoring competitive interest rates and lowering exchange rates. While GEAR (1996) focused on a business
friendly environment371 and ASGISA (2005) on a greater role for the state to lower cost of doing business, the NGP
mainly targets job creation.372 All three programs commit to an open-door policy on capital movement373 and
363
Cf. (Havrylchyk, 2010, S. 26)

1.5 million people lost their jobs, poverty and inequality are increasing, and many services remain to be poor.
365
366
Cf. (Gentle, The Politics of Economic Policies , 2010)
367
Cf. (Gentle, Parastatals between a Rock and a Hard Place: From Privatisation to Commercialisation and Back, 2010)
368
369
370
371
By privatization, fiscal austerity, privatize reserve bank, and interest rate regime.
372
Cf. (Gentle, The Rand and SA's Three Growth Programmes: Searching for a Needle in the Wrong Haystack, 2011). The ILO criticizes it doesnt
target the creation of employment or decent jobs, which would involve a more sustainable and formalized labor framework.
364
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Moritz Hessler
thus to a high Rand. As explored a high currency runs against measures to create jobs and therewith contradicts
to the NGP. Furthermore, large reserves, which are required to protect a possible run on the Rand, represent idle
instead of available liquidity to invest in public services. Consequently, the SA bond market has become source of
inward speculation with escalating debts, which places SA at the mercy of rating agencies. This even increases the
pressure for high interest rates and fiscal tightness and once more demands budget cuts for better public services
and job creation. Lacks of political will and mobilization of public opinion led to a growth path which so far
prioritizes the interest of monopolies, such as a stable currency and the free flow of capital.
Though, the NGP is still in development. Its latest draft states at main goals the development of a policy package
to enhance social equity and competitiveness, systemic reforms to mobilize domestic investment around
activities that can create sustainable employment, and a strong social dialogue to focus all stakeholders on
encouraging growth in employment-creative activities.374 Due to inequalities associated with extraordinarily high
levels of unemployment 40% of the national income went to the richest 10% of the population during the last
decade. Logically, the NGP aims at building a long-term foundation for vibrant society in contrast to shorttermism of unregulated markets by reducing unemployment from current 25% to 15% in 2020. Although
COSATU criticizes too much state involvement and fears possible wage freezes in the private sector,375 the state
rather wants to achieve those goals by setting the rules of the game than by direct intervention.
The identified job drivers are I) substantial public investment in infrastructure, II) a targeted support of labor
absorbing activities across the main economic as well as future-oriented sectors,376 III) taking advantage of new
opportunities in knowledge and green economies, IV) leveraging social capital in the social economy and public
services, and V) fostering rural development and regional integration.377 Most drivers presuppose good
infrastructure, better public services, foremost tertiary education, and greater support for R&D. By developing
South Africa as the higher education hub for the continent378 and extending its position as economic and
financial hub in the SADC region, SA hopes for 550.000 new jobs by 2020 alone in the new, knowledge and green
economies as well as in the regional integration. The statement that regional development is imperative for
solidarity and sustainable growth underlines the importance of mutual stabilization for SA.
Two tradeoffs require the NGP to pursue a looser monetary and more restrictive fiscal policy backed by
microeconomic measures to contain inflationary pressures and enhance competitiveness. The first one exists
between present consumption and future growth, which requires higher investment and savings in the present.
The second is found between a competitive currency that supports growth in production, employment, and
exports and a stronger Rand that makes imports of capital and consumer goods cheaper.379
On the microeconomic level the importance of the individual and of the mobilization of capital for higher
investment rates sticks out. With the emphasis on BEE reforms, social dialogue and mobilization as well as the
focus on raising spending in R&D from 0.93% in 2007/8 to 2% in 2018, SA defies itself with high, yet appropriate
challenges. The critical issue will be how to create appropriate combinations of incentives to save and invest and
373
Free capital flow for monopolies traded for majority rule which enabled ANCs peaceful victory in 1994.
375
Because of the pressure to hire without, due to a high Rand, the supportive economic environment. Cf. (International Labour Organization,
2011)
376
Mainly agriculture, mining value chains, manufacturing and services.
377
Cf. (South African Department of Economic Development, 2010, pp. 9, 10)
378
379
374
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Moritz Hessler
disincentives to accumulate personal debts on luxury items and high-end property. There will be no definite
answer nor a blueprint for this question, as the 50 years old modernization discourses and theories discussed by
Lerner demonstrate.380
Figure 18: NGP packages to solve macro- and microeconomic tradeoffs381
5.3.2
Challenges of monetary policing
For the macroeconomic perspective of monetary policing, the NGP is intended to contain inflationary pressure,
build competitiveness, and facilitate investment by low real interest rates. Possible contradictions are planned to
circuit by larger foreign currency reserves, an African development fund, and further tools to take global
agreements into account and to deal with imbalances.
Like in most sophisticated financial systems, the 1989 privatized SARB calls its major objective to protect the
value of the currency in the interest of balanced and sustainable economic growth in the Republic. [] in pursuit
of its primary object, [it] must perform its functions independently and without fear, favor or prejudice, but there
must be regular consultation between the Bank and the Cabinet member responsible for national financial
matters.382 These tasks are comparable to institutions such as the European Central Bank, which agrees in article
105 of the European Community Contract on price level stability as major objective. Furthermore, through
ensuring low inflation and stable price levels and based on the principles of an open market economy the ECB
380
Cf. (Lerner, 1958)

Own illustration based on (South African Department of Economic Development, 2010)
382
Cf. (SA Financial Sector Forum, 2011)
381
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Moritz Hessler
would have to support the general economic policies of the EU. Foremost, this comprises the supervision of
quantity, quality and velocity of money through a monitoring of indicators like inflation and real GDP as well as
through the operation of permanent facilities and minimum reserves policies.
Figure 19: Effects of currency dynamics on growth, employment, and price level stability383
For the SARB the main challenges of monetary policing consist of the balancing of capital inflow controls and
economic development support under the premise to avoid volatility, capital flight, brain drain and the image of
risk.384 As the NGP acknowledges measures to address the currency must be paired with consistent efforts to
avoid a price and wage spike as a result of the currency depreciation.385 Yet, a competitive exchange rate to
support economic development doesnt come for free and involves explicit and hidden cost like the building-up
of foreign reserves entails diverting resources from social needs.386 It is clearly necessary to strongly align
macroeconomic measures, microeconomic interventions and social partner commitments in order to achieve the
shared goals set out in the NGP.387 But the instruments to fight overflowing capital inflows - induced by e.g. US
quantitative easing and lax fiscal policing are limited. Whereas the structural power388 of the US still provides the
maximum flexibility for the global hegemon, the externalities mostly affect emerging countries. All reform
agendas by Senbet, Stiglitz, and other admit that to react to this structural power involves at least the same risk as
to do nothing.389 Yet, given the implications of poor economic development and systemic structures, like brain
and capital drain, it is crucial to find individual solutions. Instead of reacting, reforms should bring SA into a
position of binge able to determine the rules of the game within certain geographical and sectoral spheres.
383
Own illustration.
Cf. (Senbet L. W., 2009, p. 44)
385
386
A more competitive exchange rate is undermined by rising domestic prices and wages. Yet, less jobs and buying power per capita cause
less (traditional) savings and investment as well as it, if unregulated, induces capital flight and brain drain.
387
388
Structural power is the ability of one state to indirectly influence other countries by controlling a global structure in this case the
international monetary and financial system in which these other countries inevitably have to operate. Cf. (Nolte, 2006, p. 15)
389
Accept increasing value of the currency would slowing growth and foreign investment. Redirecting capital inflows into the reserves and
damming capital inflows by capital flow control mechanisms and macro-prudential measures would risk lacking liquidity and also slow down
growth. A reduction of the interest rate would involve the risk of inflation as well as too low interest rates increase the likelihood of buildup of
a bubble.
384
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5.3.3
Moritz Hessler
Reshaping fiscal aspects
Based on socio-economic inclusion, confidence and improved structural capacities an indirect approach would
be to increase the number of export-oriented companies on the stock market. Though, this would require a
countercyclical fiscal stance in support of a more competitive currency while achieving critical public spending
goals. At the same time, a mobilization and prioritization of fiscal resources should clearly aim at leveraging
inequality by direct and indirect redistribution. It should nevertheless not neglect constraints and disincentiving
effects of redistribution, elaborated by Van der Berg and Moses.390
From an infrastructural perspective SA needs to decentralize tax collection and policy making as well as it has to
implement a horizontal redistribution of revenue amongst the provinces, as Warnecke summarizes in a
comparative analysis of the SA and the German fiscal system.391 The power of individual and decentralized fiscal
policy making is illustrated in Lagos: the introduction of a property tax not only enabled an access to capital even
for the poorest,392 it also allowed the city to invest the earning in infrastructure. Neglecting organizational
challenges, costs, and corruption, this decentralization demonstrates a potential improvement for SA.
5.3.4
Acknowledging a broader perspective
The monetary and fiscal systems mustnt undercut balanced, stabilizing and wealth-increasing redistribution
patterns.393 Public goods and services394 have to guarantee the maximal creativity of the individual. Hence,
education to empower is more important than redistribution by public measures; the acknowledgment of a
broader perspective and fundamental reforms more important than to solve long-term issues in a short period of
time. Especially when it comes to the development of integration into global frameworks the cultural diversity
and principle of subsidiarity shouldnt be neglected:395 global standards, local interpretations and solutions.
Eichhorn therefore present a seven point agenda comprising comprehensive reforms in all systems.
Environmental and social standards, more sustainable markets, and global treaties to e.g. fulfill the MDGs by cofinancing would be imperative and could be financed by reforms of the financial and fiscal systems. He calculates
that the drying-out of tax havens and a harmonized tax base as well as a progressive swell money tax of 1% could
free 3000 to 4000 billion USD. Yet, this presupposes all countries to comply with standards and regulations. SA
should aim at participating pro-actively in the development of a new global institutional architecture, which
could consist of an UN Economic and Social Council396 - based on reforms of the Bretton Woods institutions and
with the principles of the Marshall plan as Global New Deal-, a IMF liquidity circulation fund, and a WB global
structure fund, responsible for co-financing,397 on top.
390
Cf. (van der Berg & Moses, 2009)

Cf. (Warnecke, 2003, pp. 184-187)
392
With their property or land as security.
393
Cf. (Eichhorn & Solte, 2009, p. 204; Meadows, Randers, & Meadows, 2008)
394
Like education, health services for long term return on investments education, infrastructure, cultural identity, and environmental and social
awareness.
395
396
Officially endorsed by German chancellor Angela Merkel.
397
Co-Financing like in the EU: structural fund money in return for certain standards, membership not until a country complies with all
standards.
391
69
5.4
Moritz Hessler
Regional Financial Integration
Regional approaches could represent the subsidiary institutional framework to customize and apply global
standards to supra-regional and intra-regional systems. The presence of international banks in an increasing
number of countries requires a normative global solution like Basel, with globally coordinative institutions, as well
as it demands an incremental localization and elaboration through regional, national, and smaller institutions. An
important way to address the thinness and illiquidity of African stock markets is, according to Senbet, a market
consolidation through regional cooperation to pool and build capacity. Based on the establishment of regional
commissions, regional self-regulatory organizations, an harmonization of legal and regulatory systems as well as
of accounting reporting systems and tax policies for security investments398 he considers a regional stock
exchange of the SADC as the opportunity to accelerate the momentum of African financial integration into the
global financial economy. By alleviating public concerns that stock markets just serve the few elites' regional stock
markets could provide an opportunity for and public awareness of local investor participation and promote
diversity in the ownership of the economies resources. Liberalized and regionally integrated financial markets
would furthermore support cross border business activity and attract private capital as well as they mitigate risks
to market agents of operating within single small and highly concentrated economies. With the reduction of
exposure to price and supply shocks399 and rising levels of confidence in more diversified and robust regional
systems the cost of financial intermediation could decline.
Crucial will be to define a common and harmonized understanding of financial markets in terms of an African
financial ideology. The theoretical challenges posed by the implosion of the neo-liberal paradigm at its very
(financial) core and in the economic heartlands of globalized capitalism have now to be taken up with even
greater determination by critical analysts and activist.400 While developed countries currently tend to abandon
free market principles,401 but continue to impose neo-liberal formulae on developing countries, African countries
should discuss how to match Western protectionist and transformative strategies with regional approaches of
specialization and targeted subsidies.402 The economic crisis of 1929 demonstrated that protectionism doesnt
lead the way out of a recession.403 Symbiotic programs across sectors, like cross-bordering manufacturing hubs
and supply chains, would create integrated and integrative bases for much greater self-sustaining and sustainable
development.404 Only with such a reorientation and diversification of partners many African countries can
mitigate the impact of new protectionism among its traditional trade links.
Regional financial integration would yet necessitate an agreed regional financial framework with a common
regional investment code. A special attention should be given to cross-border capital movements within and
rapid and speculative capital flows into and out of the region. Guidelines for profit-reinvestment by all local and
international companies operating in region as well as requirements for local inputs into such ventures could
encourage sustainable and responsible investment into technology, skills, and people.
398
Cf. (Senbet L. W., 2009, p. 37)

400
(Keet, 2010, p. 2)
401
Especially the USA are increasingly protectionist being skeptical against former own values of free markets and trade, immigration,
technological innovation. Cf. (Zakaria, 2009, p. 77)
402
Cf. (Stiglitz, The Stiglitz Report: Reforming the International Monetary and Financial System in the Wake of the Global Crisis, 2010, p. 37;
Senbet L. W., 2009, p. 1)
403
404
Cf. (Keet, 2010, p. 7)
399
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Moritz Hessler
The African Financial Markets Initiative (AFMI) represents the first concrete action plan for regional integration,
though aimed at incorporate the entire African continent in reforms. Financial sector development is paramount
to successful and sustainable economic development. Indeed a more effective formal financial system will
contribute significantly to a better allocation of resources for investments while an improved access to financial
services for the poor and the rural population will help alleviate poverty. As part of the [AfDBs] strategy to
strengthen the financial sector in African economies, the Bank has just launched the [AFMI] which is targeted to
further the development of domestic African capital markets.405 Yet, for the more dynamic SADC-region the
objectives of the AFMI406 might not reach far enough.
Hence, SADC should additionally strive to augment liquidity through regional arrangements. Such more limited
efforts could be particularly effective because of greater recognition of cross-border externalities and greater
sensibilities to distinctive conditions in neighboring countries.407 The NGP proposal to establish an African
development fund to finance regional logistics as well as water and electricity infrastructure and at the same time
play the role of a sovereign wealth fund in helping to achieve a more competitive Rand as important regional
currency should thus be strongly bolstered. Taking the Asian Chiang Mai initiative as example a regional reserve
fund could rather secure a financial base than individual efforts of tying up vast sums in external foreign currency
reserves, foreign government bonds, and the like.408 Whereas even individual European states werent able to
provide adequate emergence funds, the ECB and IMF umbrellas unfolded a certain reassuring power on at least
most of the Western markets.
But regional integration also always involves risk, even risk of destabilization, as the example of Europe shows as
well. A strong SA role in the SADC as well as its structural power due to the strength and penetration of the Rand
not only risks and imbalanced economic development only favoring the cape country, but also exposes the Rand
to more volatility. As main profiteer of regional integration SA would also have to take responsibility for every
member state. The NGP chapter Policies for African development indicates that SA acknowledges the failure of
one regional partner could strongly affect its own growth path and currency.
As part of a public discourse to achieve more independency it is furthermore inevitable to discuss the
establishment of regional or even African-wide rating agencies, which could be based on the APRM. The benefits
of financial inclusion and economic empowerment outweigh the loss of a certain normative power of ratings.
And finally, regional sector-focus banks, which feed into inter-governmental programs, should complete the
framework of regional financial integration to support the above-mentioned need for targeted subsidies in crucial
sectors. Public-private-partnerships, financed through these banks, could lead in domestic private investors and
would provide incentives for regional businesses and banks.
405
(AfDB, 2011); also see figure 31, p. 95

Among others to I) contribute to the development of local currency debt markets in Africa, II) reduce African countries dependency on
foreign currency denominated debt, III) help enlarge the investor base in African Domestic debt Markets, IV) improve availability and
transparency of African Fixed Income Markets related Data, V) provide alternative sources of long term funding for borrowers in African
currencies, VI) create a permanent forum for discussion and provision of technical assistance on domestic bond market issues.
407
408
Or depending on forex remittances from nationals working abroad. Cf. (Keet, 2010, p. 9; Woods, Whose aid? Whose influence? China,
emerging donors and the silent revolution in development assistance, 2008, p. 59)
406
71
Conclusion: Evaluation and Outlook
Moritz Hessler
After the recent financial crisis, SA reform efforts havent been taken off yet. Even though the NGP could be
understood as first step, the country cant decide whether to focus on the development of an individual financial
system or on fostering a pan-African financial framework. Its global interconnectedness furthermore captured SA
in modernist debates which retard the capacity for more fundamental discourses. The major question of the SAPera remains unanswered: how far does social infrastructure benefit of investment and aid of the respective, mostly
external, parties?
As elaborated, it will be inevitable for SA to reform its financial system. Socio-economics, the challenges of the
global economy, and SAs regional aspirations demand the development of an individual, African financial system
and ideology. Further inclusion and socio-economic development as well as required levels of investment and
self-determination can only be achieved in the framework of a sound, effective, and social financial system.
Considering recent external shocks and systemic failures the development of an individual system should occur
under the premise of maximizing internal qualities of robustness and sustainable behavior. By not only reengineering but compiling an entirely new system, based on the pillars of financial literacy, responsibility and
inclusion, the former Apartheid state could fuel its macro- and microeconomic goals. Remittent Afro-Pessimism,
the fact that Chinas days as low-wage factory of the world are limited, and Africas geographical proximity to all
other economically important continents, allow hope for a whole continent becoming a future manufacturing
hub. Using existent links and its short ways from resources to factories SA could, based on broad-based structural
reforms, even extend its leadership in the region. By strengthening the SADC and diffusing an individual African
financial ideology it would furthermore profit in a mutual beneficial and stabilizing way. Yet, this will only be
possible if policy reforms and socio-economic inclusion ensure relatively low wages in average.409
Most important will be, to which degree reforms are structured interdisciplinary. At best, clear definitions of the
elements and interactional processes within and beyond the respective system enable a targeted analysis at any
time and for everybody. Vester elaborations of how public discourses can be structured in order to reduce
complexity should be used as blueprint of any reforms410. SA can demonstrate that, based on public inclusion and
simulations under different scenarios and with varying parameters, it is possible to develop sustainable artificial
systems.
Yet, SA cannot neglect the importance to embed national and regional solutions into broader global frameworks.
As main representative for Africa in the global arena it should acknowledge that talking globally, retarding
nationally cant be a solution. Theres a strong need not only for harmonization among some countries, or within
some regions, but on the global scale. An individual African financial system will only be able to unfold its desired
potential if it is prudentially integrated into a sound global framework. With taking the leadership of regional
financial integration it should also be SAs goal to adequately participate in a restructuring of the global
framework. Supporting regional self-determination it should specifically be aimed at improving subsidiary
international structures of global coordination and gradual localization.
409
410
Another aim of reforms has to be to avoid the Dutch Disease. Cf. (Collier, The case for investing in Africa, 2010)
Cf. (Vester, 1999 / 2008)
72
Moritz Hessler
In all reform activism it shouldnt be neglected to assess, which instruments of financial markets would be need
for which developmental phase at all. Even though market capitalization through stock markets can fuel
entrepreneurial and innovative activity, it is more difficult to supervise and poses enormous risks of information
asymmetries. The degree to which development of a financial system facilitates commensurable growth in the
real economy has to be balanced with the risks arousing of financial globalization and a too strong bias towards
the financial sector. To be able to monitor and regularly assess reforms all societal actors have to cooperatively
identify and agree a certain set of indicators and goals. Investors confidence, account penetration, employment,
and private R&D spending are just some aspects with which the implementation of reforms has to be evaluated
and, if necessary, be adjusted.
At this moment it is difficult to predict whether SA could be able to pursue a similar path like some Asian
economies after their financial crisis 1997/8. A detailed statement would not only require a comparative analysis
of the Asian tigers and SA, but also a closer examination of the post-crisis global framework as well as of all
stakeholders interest on the African continent. Similar, it is difficult to assess the likelihood of an SA financial
system to become the role model for Africa. Though, it would be interesting to examine whether a SA financial
ideology could transform the hopeless continent into an individual and dynamic part of the global economy.
Could such an individual system be applied to other African countries? This would require to first base the
research on a broader, comparative case study across several African countries, and second intensify the research
in each of the respective four areas for reform, introduced in chapter five.
Whereas Western scholars still dominate the discourse of what is best for Africa, I hope to have shown that
especially SA should start developing an own ideology. The most Southern African country not only qualifies
through its infrastructure, special historical role, and political and economic strength, but foremost through its
intellectual capacities. The recent, informal nomination of the former SA finance minister Trevor Manuel for the
IMF presidency demonstrates the even global appreciation of these capacities. After having acknowledged the
importance of finance for the overall socio-economic development, SA should finally accept its responsibility to
make finance work for Africa. Initiatives like MFWfA continue to lack vigor until the most dynamic member state of
the AfDB takes the role of the mastermind and moderator. With the crisis still in mind, there hasnt been a better
moment for fundamental reforms in an ideologically united Africa.
73
IV.
Moritz Hessler
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V.
Appendix
i.
Further figures
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Figure 20: Net capital inflows, net private and official inflows to SSA 2001-2009411
Figure 21: Economic growth in the First, Second, and Third Economic World412
411
412
(Africa Progress Panel, 2011, p. 49)

(Read, 2009, p. 49)
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Figure 22: Number of deposit accounts in banks and regulated non-bank financial413
Figure 23: Number of bank loans per thousand adults in commercial banks414
413
414

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Figure 24: Savings accounts in % of the population. Household survey sources, years and countries.415
415
88
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Figure 25: SADCs member states and sectoral coordination units416 (excluding Madagascar and Seychelles)
416
(World Bank Group, 1999, p. 15)
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Calderisi417
Collier418
Introduce mechanisms for tracing and revering
Breaking conflict trap
public funds
2
Require all heads of state, ministers, and senior
Breaking resource trap
officials to open their bank accounts to public
bottom billion resource rich, policy
scrutiny
poor no trade (Dutch disease) or

aid
Cut direct aid to individual countries in half
Lifelines for the landlocked
leaner budgets would be better managed and
B. AID - substantial scale --> no other
there would be greater competition; the saved
resources --> good governed countries
money should be channeled into supranational
like Uganda: massive
projects like regional universities or infrastructure
support; others like Chad: conditioned -> also some
Focus direct aid on four to five countries that are
Breaking reform impasse in failing states
serious about reducing poverty (Uganda,

Tanzania, Mozambique, Ghana, and Mali) vs.
cutting for Nigeria, DRC and Sudan, which are
resource rich
5
Require all countries to hold internationally-
Breaking out of the limbo enter
supervised elections
global markets
A. TRADE - critical for export
diversification and private
investment; need to protect
against Asian tigers
B. aid - big push to prevent Dutch
disease --> large but temporary --> big
push for exporting will need
a transformation within aid agencies
Promote other aspects of democracy, including a

free press and an independent judiciary
Supervise the running of Africas schools and

HIV/AIDS programs
Establish citizen review groups to oversee

government policy and aid agreements
Put more emphasis on infrastructure and regional

links
10
Merge the World Bank, IMF, and UNDP
Figure 26: Different action plans (next to MDGs, Stiglitz and Sachs) to overcome the African malaise
417
418
(Calderisi, 2006, pp. 207 - 222)

(Collier, The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It, 2007, pp. 175-192)
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Figure 27: South Africa: market risks stress tests for the Banks419
419
(Wajid, 2008, p. 53)
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Figure 28: South Africa: selected household indicators420
420
(Wajid, 2008, p. 39)
92
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Figure 29: Financial system development421
421
(Wajid, 2008, p. 48)
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Figure 30: Financial system development indicators422
422
(Wajid, 2008, p. 44)
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Figure 31: AFMI framework423
423
(AfDB, 2011)
95
ii.
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New Friends for Development
The South-East Asian engagement on the African continent is a widely and often controversially debated issue on
the agendas of 21st century panels on the global political economy. Theres no clear cut between supporters and
the opposition. Yet, within the West there seems to emerge an increasingly stronger movement of criticism
towards the approaches of the Asian tigers, foremost towards China. Despite their very different approach, the
fear of the West in an imminent age of the Rise of the Others is tangible and slowly also affects the public debate
in some of the former African colonies. Do We witness a neo-neo-colonization of sub-Sahara Africa and should be
alarmed or should we congratulate Them to a more successful and sustainable approach to development aid and
global cooperation?
The concepts of industrialization and modernization
The core of this debate seems to host the fierce polarization in a world of We and Them. The identities and history
of the respective world regions are often believed to determine their general prospect in the gamble of
globalization. The basic concepts like industrialization and modernity, which are defined to be required in the
process of globalization to be able to participate in the world game, are strongly based on this polarization.
Since the success of development aid is evaluated with just these basic concepts it is no surprise to have this
fierce debate about whether Africa can benefit sustainably from the Asian efforts or whether it should regard
them as a threat. Yet, what is needed to speak about mutually beneficial cooperation or win-win strategy? What does it
mean for Africa to be brought on a path of modernization and industrialization? And finally, is this path really what
Africa needs in order to become an equal player in world politics?
Dependency and the Others
The discussion about the West and the Others has its origins in the Great Divergence discourse. Based on three
schools, the Weberian, the Neo-Marxist and the California School of Andre Gunder Frank, it tries to argue why the
West succeeded to climb the letter of development whereas the Rest didnt. In the center of the most recent
debate among the Neo-Marxists and Californians one finds the World System Analysis with its core issue of
dependencia theory, which addresses a kind of a developmental world order in which the core has to develop
underdevelopment in the periphery in order to sustain its capitalist model. As crucial element why the West
succeeded, some identify industrialization and a modern society, some others like Frank only deduce pure
windfall and predict, following Kondratieffs cycle424, the return of the Asian region as predominant actor in the
global arena. Since Africa is almost neglected in this argument, there has to be a discussion about the
applicability of these concepts taken place transcending the pure role of a passive recipient.
What makes industrialization?
424
(Frank, 1998, pp. 259-266)
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First, of all, it is often argued, Africa needs to industrialize. Yet, what is this industrialization, which is assumed to be
the critical moment for the Western success story? Following the Great Divergence schools it the industrial
revolution was mainly an energy revolution, escaping the Malthusian constraints425 by coal. With the discovery of
the steam engine you could accumulate, store, and transport energy and use it wherever and whenever you
want. The new, capital-intensive and labor-extensive mode of production allowed a reorganization of the society,
which suddenly faced infinite growth opportunities. Imperialistic conquests further fueled the legendary leap
forward.
Following the ideas of Marx and Weber426, the Western industrialization was catalyzed by emerging capitalist
structures of an ever rising middle class, rational and secular modern science and technology demanded by the
European warfare culture427, and the modern state. All these factors interacted. The warfare state and the
installation of private property, mobile labor forces, and the nation state required a bureaucratic state apparatus,
which had to raise taxes to maintain itself, and so on. The Holy Grail for the industrial, capital-intensive world was
and is efficiency, as the ratio of the effective or useful output to the total input in any system428.
What makes modernization or modernity?
In world-systems analysis the terms 'capitalist world-economy' and 'modem world-system' are used interchangeably;
they both refer to the same social entity, which emerged in the 'long sixteenth century' and developed to encompass the
whole world in the twentieth century.429
Asking for the roots of efficiency, the capitalist idea, the middle class or the modern state it is obvious that the
industrialization can only explained by a more fundamental, culturally and socially inclusive approach. When did
this movement, which set of so many different forces, emerge and what comprises modernity? Is it a tangible or
comprehensively exclusive concept at all? Following the Neo-Marxist Wallerstein the cornerstone of modernity is
laid in the long sixteenth century430. Others regard the French Revolution as kick-off for modernization.
Nevertheless, there is no debate that Western Enlightenment and secularization can be seen as the triggering
movements for modernization. Whether as fount or within the process, the French and the American as well as
the Industrial Revolutions played a most crucial role therein. Subsequently, modernization was a concept mainly
driven and maintained by Western civilizations - deeply stamped by the secular and rational state, Christianity,
and industrialized societies based on the pillars of liberal democracy, market economy and capitalism431. While
Europe and America watched the Ottoman Empire crumbling and Asia falling behind, not to mention Africa, they
slowly but surely began to claim to possess the monopoly over the access to future societies. The West
represented modernity, the Rest non-modernity by definition432. Hence, the mission for imperial conquest was
425
Constraint for sustained growth of capital, living standards and population by the limiting factors of energy, land, and food, which are
competing each other. To produce energy you needed either wood, animals, or human labor which demanded either food or land which
again limited the use of these productive factors for surplus production and further growth (economically and in terms of population).
426
(Vries, 2010)
427
Caused by the geographical conditions of fragmentation and the need for conquest to shift the Malthusian constraints
428
(American Heritage Dictionary, 2005)
429
(Taylor, 1996, p. 260)
430
(Taylor, 1996, p. 261)
431
(Maalouf, 2000)
432
(Vries, 2010)
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claimed to be not only bringing Christianity but also civilization and modernity to the Rest of the World. But what
exactly makes this modernity?
It claims to combine all modern, Western values which had incrementally been achieved in several revolutions
and upheavals many times in bottom-up movements: among others the human rights charta, a vivid and active
civil society, supranational bodies like the UN, and the constitutional, democratic nation state. Often perceived as
Europeanization and Westernization respectively the Rest adopted an ambivalent approach towards
modernization433. Partly refusing the cultural and hegemonic element, especially in the post-colonial era, the
individualized modernization process targeted to adapt customized selected elements of the modernization
ideal. For Lerner, already discussing this topic in 1958, these elements should be based on () describing past
trends and clarifying the conditions of their occurrence [in order] to shape policies that can redirect the course of
history.434 Lerner furthermore highlights the importance of a shift in modes of communication435 from elitist to
mass media and pluralism among the civil society components. Most important would be urbanization to
achieve literacy via education and, as a result, create a vivid civil society and media. Based on broad involvement
and participation the society could develop first empathy and desires and second modern values, the essential
ingredients for a modern, democratic state. If modernization is the transition to participant society, then the
direction of change in public communication is toward a constantly expanding opinion area436.
Still, the question about a coherently exclusive definition of the concept of modernity is not answered yet. But
that has to be seen as major achievement for some parts of the non-Western world. At colonial times there was
no question about one single path. Globalization enabled and required the Rest to challenge Western hegemony
in modernization authoring. It had to challenge it to preserve own values and identities in the face of
modernization as foremost Americanization437. Islamic fundamentalism and terrorism are the most visible and
violent evidence for this opposition.
The tigers way
A century after the British industrialization the South-East Asian region began to re-assemble the concepts of
industrialization and modernization, applying an own approach in the combination of Western concepts with
Eastern values and in tailoring overarching ideologies to the limited capacities438 of development countries
respectively. Even though China and India pursued very different trajectories towards industrialization and
modernization, there are several features, which can be identified as similar.
Both strived to achieve industrialization by boosting literacy, both, in the beginning, rigidly protected their
economies and both sourced their growth in the rationalization and urbanization of the society with the result of
a massive, mobile power force. The major difference to the Western, more specifically European industrialization is
the availability of vast amounts of land and people. Efficiency had to be artificially established as a goal in a labor-
433
(Maalouf, 2000)
(Lerner, 1958, p. 68)
435
(Lerner, 1958, p. 45)
436
(Lerner, 1958, p. 71)
437
(Maalouf, 2000, pp. 74-90)
438
in terms of economic, political and social as well as empathic capacities
434
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intensive and capital-extensive economy. Cheap labor, so far, hindered the need in a more capital-intensive
approach of continuous, technological innovations.
After roughly half a century of transformative dynamics both nations are today increasingly acknowledged as
industrialized, and in parts, modernized societies. Lasting issues of violations of human rights and democratic
values, among others, demonstrate, They are still on their way. Yet, also industrialized and modern countries like
the USA and Italy are struggling with some of these basic values of modernity.
Chindias approach a second Scramble for Africa?
As with the Western powers, an increasing need for resources to fuel their development and opening up of new
markets let China and India first liberalize their economies and then expand their focus of interest to foreign
countries, especially in Africa. In a time of an increasingly pragmatic and sustainably oriented approach from the
West the emergence of Chindia implicates not only the opportunity for African countries to diversify its economic
and strategic partnerships but foremost poses a risk of uncertainty and unpredictability in international politics; it
can be even argued whether we face a newly bipolar or even multipolar world, in which Africa will be utilized as
proxy and exploited as resource supplier once more. Hence, it is absolutely essential to evaluate the goals and
approaches of the tigers in order to be able to draw a development path for Africa.
China in Africa: goals and approach
The official Chinese approach to Africa is very pragmatic. [F]oreign policy is regarded as an extension of and backing
for domestic policy. Its priorities are to secure a peaceful environment in which the national economy can grow, to
support the countrys political stability, to develop external resources and potentials, and to safeguard Chinas interests in
international affairs. Chinas internal perspective is the countrys need to secure inflows of the foreign direct investment
needed to sustain the countrys growth and to counter the risks of social/political destabilization.439 Chinese politicians
therefore claim when investing in Africa they are only driven by economic and domestic interest respectively. Still,
Chinas leaders never fully discarded Maos idea of a Chinese leadership of the South, of a union of developing
countries. These visions materialize with the politics of non-interference in countries Chinas investing in.
Combining these economic interests with the aspirations of strategic partnerships, African leaders could suddenly
find themselves in a strategically diversified and economically prosperous environment, which strongly fosters the
emancipation of the public sphere. In short, the business-oriented, non-interference policies440 of China towards
African countries could dramatically kick-off or accelerate a process of industrialization and modernization.
Apart from the official guidelines and considering the massive Chinese investments into sometimes highly
unstable countries441 one has to admit there are not many opportunities not to interfere in foreign affairs.
Following the official foreign policies China is delivering unconditioned loans to many countries the international
community was reluctant to support. The so-called infrastructure for resources deals are mainly met on a
bilateral agreement, strongly based on close state-state cooperation. The Chinese government is the major player
439
(Giessmann, 2006, p. 5)
(Malone, 2008)
441
(Nola Nouck, 2009)
440
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Moritz Hessler
in its strongly centralized, often state-directed economy and, hence, acts as an agent for the elitist corporations,
which are often linked to state representatives. In its cooperation with African leaders it conveys these structures
to African states. Like the Europeans a century ago the Chinese mainly approach Africa by more or less inducing
and transferring own instruments of governance and economics in an un-adjusted manner.
An outstanding example for this un-adjusted transfer can be seen in the Chinese special economic zones SEZ,
which are the dominant economic areas in the Middle Kingdom442. Why should something, which worked quite
successful for another developing country, China, should not also be the solution for Africa? The answer is to be
found in the implementation. Sino-African SEZ are dominated by Chinese businesses and labor forces. They are
mainly determined to extract resources and to process them before theyre mostly exported to be further
processed in the major manufacturing sites in China. Theres no absorption taking place by the surroundings in
terms of technology, knowledge and innovative spirit. The SEZ are mostly to be seen as industrialized islands in a
pre-industrial environment. The famous infrastructure deals, which perpetuate traditional resource exploitation
simply by rebranding it as joint ventures443, mainly aim in supporting Chinese interest in the region by
establishing or connecting SEZ. The USD9bn deal in the DRC verifies this assumption. While mining spots like
Kolwezi444, founded by a Belgium conglomerate during colonial times, are able to further industrialize445, the vast
majority of the country446 does not really experience any gain from this deal.
The remaining question, crucial for Chinas role in the global political economy, is, how to really help Africa to
develop. Beyond the middle-term interest of energy security and regional stability, including trade routes and
economical access in the Indian Ocean region, in order to fuel its economic development China has to adapt its
growing role as a superpower. In this role global security and stability will be the essential goals of foreign policy.
What can China give Africa to develop? Which specific features differentiated the Chinese from the Western
industrialization?
As developing countries, both regions face many challenges and constraints, particularly with regard to
modernization and traditional values; in handling reform and social stability; in balancing economic growth and
distributing wealth adequately; in resources exploitation and protecting the environment; in integrating into a
globalized world and upholding national integrity.447
The Chinese industrialization was mainly fueled by the manufacturing industry448. A cheap and rapidly increasing
amount of skilled labor enabled China to sustainably occupy a major position in the global supply chain and,
more importantly, in connecting periphery and core. The SEZ are the capitalist, almost Western-like economic
centers intersecting an elsewhere centrally directed, communist country. This rigid centrality allowed the
government to decide about and implement top-down economic and social reforms. In absence of labor unions
Chinese conglomerates were able to create a competitive edge of cheapest mass production. In 2006, the
442
(Meredith R. , 2007, p. 3)
(Whewell, 2008)
444
(Mthembu-Salter, 2009)
445
by extending the infrastructure (roads, power, internet, education, healthcare)
446
the parts without resources which can be exported
447
(Lihua, 2006, p. 23)
448
(Meredith R. , 2007, p. 4)
443
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industrial, value adding and export oriented economy contributed 43.1% to the GDP449, which demonstrates the
relatively new economical alignment created by state directives. Different to the West, where the Malthusian
constraints and continuous state competition caused bottom-up movement, the revolution in China was
induced by the state. As result, the modernization process was in parts also triggered by the government or,
when we talk about bottom-up movements, even followed industrialization. The economic prosperity, but also
the increasing amount of civic activity encompassed by the progress in terms of national development450, could
be interpreted as indicators for a successful transformation of a former pre-industrial, subsistence farming society
to an industrial nation, in which the middle class should be increasingly in charge to strengthen its efforts for a
more modern society in terms of e.g. human rights.
India in Africa: goals and approach
While China can for Africa rather be used as an example for its industrialization, India should be the patron for the
African modernization process at least from a Western perspective. Following democratic trajectories and, since
the 1990s, contracting close alliances with e.g. the USA, India is often seen as an increasingly fledging junior
partner of the West. Its goals in and approach to Africa are far not that pragmatic and compelling like the Chinese.
The main approach to Africa can be summarized with Nehruvian politics of solidarity among former colonized
and exploited societies. Yet, there is no specific foreign policy particularizing Indias goal in and relations with
Africa.
Still, Indias relations comprise a broad variety of I) cooperation especially targeting its striven leadership as well as
security and stability in the Indian Ocean area on a governmental basis, II) the need for resources mainly
operationalized by Indian corporational conglomerates, and III) a close linkage of the civil societies based on
Nehruvian policies as well as on the Afro-Indian diasporas.
In an Asia-centered century, we would naturally wish to ensure a role for India that is commensurate with its size, its
growing economic strength, its democratic stability and proven capacity to manage its enormous diversity, its
contributions to global peace and security, and its justified quest for a greater voice in a multilateral system that is
balanced, equitable, and representative of new global realities.451
Differently to China the economic sector in India developed quite independent from the political sphere. Many
corporational dynasties, often stemming from colonial times, form todays structure of major global
conglomerates. Even though they merge myriad economic sectors and activities into one corporation, the main
economic sector of growth is to be seen in (back office) services452. Based on broad education programs over
decades, like in China but with a rather technological than engineering bias, the Indian economy appears to have
skipped the dirty step of industrialization and just jumped into the white sector servicing the global economy
with outsourcing capacities.
449
(Xinhua, 2007)
HDI, access to media,
451
(Rao, 2010)
452
(Meredith R. , 2007, p. 4)
450
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Moritz Hessler
Nevertheless, the picture of a high technology economy and biggest democracy of the world neglects vast areas
of India which continue to be ruled in an almost feudalistic manner preserving ultra-traditional values and which
are almost entirely excluded from economic growth. Similar to the Chinese West, these regions symbolize are the
reminder were still dealing with states in transformation. Yet, governance and policies for these regions could be
exemplary for African development: how to unite a nation, how to integrate minorities of religion, language and
history, and how to penetrate democratic rule to the remote areas, among others.
What would be a win-win strategy for Chindia?
Summarizing goals in and approach to Africa, China and India are in many aspects quite different. Common is
their urge for energy security in reliance on African natural resources. Like in the West, industrialization increases
the need for energy exponentially. The dependency on e.g. oil imports in an environment of volatile world market
prices induced both countries to eagerly planning at more independence by Sino- or Indo-African joint ventures.
Furthermore they both strive for a predominant position in the Indian Ocean area, which is by both seen as the
access to the resources of Africa and the Middle East as well as one of the most important sea trade passages to
Europe. Hence, a win-win strategy for Chindia would definitely comprise the inflow of resources into Asia and the
outflow of consumer goods to new markets on the African continent. For both goals the Asian tigers are required
to share not only their experience, but also profits gained during the developing period. Crucial in this respect will
be how both countries succeed in fostering domestic growth based on capitalist development without
exploiting underdevelopment elsewhere.
The example of Somalia shows what missing prospects and a weak state apparatus can cause and how such a
conflict can affect stability on- and offshore. Furthermore, for their geopolitical interest in e.g. the UN Security
Council, both need the support of the African countries to truly challenge the Western hegemony.
Which path to development?
The Western engagement to Africa is well known. Early missions in pre-colonial times, mainly operating from the
economically annexed coastal areas of slave trade, were determined to civilize and foremost Christianize the
black barbarians. Colonialism after the Berlin Conference should finally bring the framework and tools, in terms
of the nation state and the bureaucratic state, to Africa to eventually modernize the backward continent. In fact
exploitation dominated until the end of WWII, when the whole global political economy changed. In the mist of
broad human rights and democratization movements Africa got a modernization and industrialization process
prescribed. In Africa the period of nationalism at this time was soon replaced by authoritarian rule of the age of
developmentialism during the Cold War. Without really reviewing development aid in a global challenge of the
ideological systems neither the capitalist nor the communist bloc seemed to really be interested in modernizing,
which was carefully held in underdevelopment453. With the fall of the iron curtain eventually pragmatism set in
453
This was necessary for the first and second world to meet own demands in (African) resources and to be able to use African countries as
proxy actors.
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Moritz Hessler
and the international community began to monitor closer, what was happening on the African continent. Still, till
today Africa is often regarded as hopeless continent, citing an Economist article of 2000.
The main theories of the World System Analysis or Jared Diamonds geographical determination support this
image. You can rightly ask, where in Kondratieffs cycle would Africa be positioned? There seems to be a long time
balance between the East, speak Asia, and the West.
But where is Africa? Why is African development mostly discussed outside the continent in panels of the Bretton Woods
institutions, the G20, the BRIC, [W]hy is it supposed that Africans can contribute so little in their own cause?454 And
why do even the Africans adopt this assessment and accept their marginalization? What essential African development
needs are should be discussed by Africans, shouldnt it?
One example, which should be mentioned, is the expectations of the Western world in their approach to Africa.
Nobody even doubted in the early years of post-colonialism that Africa could industrialize and modernize quickly
when it just followed the Western checklist. The revolutions already fought by Europeans and Americans wouldnt
be necessary another time, since the ideal structure already existed. The rapid progress the Asian tigers made later
even enforced and, at the same time, disillusioned these expectations. Singer, who analyzed the problems in
1970, identified not only an increasing external dualism as gap between core and periphery, but foremost an
internal dualism in developing countries in Africa, which based on mistaken an un-adjustedly imposed concepts
of modernization and development455. How effective can you implement a Western tax system in an
underdeveloped environment of a vast and fragmented African state like the DRC?
The fundamental and violent bottom-up struggle for the Western, modern and industrial societies lasted several
centuries and yet, they expect from the Africans to copy this process in a very compressed period of time and an
entirely different environment. So, if the Western approaches didnt succeed, is there more hope for the Asian
approach?
Considering the basic principles of modernization and industrialization like urbanization in Europe and Asia, it has
again to be questioned whether already existing concepts are applicable. Nigeria, for example, has one of the
biggest, urban populations worldwide. Lerners argument that urbanization would kick-off literacy which would
be followed by mass media, participation, civil society engagement as well as economic prosperity doesnt work
there. Nor would be a Chinese or Indian growth model based on labor-extensive SEZ applicable, wouldnt it?
Apart from the question whether industrialization would be able to fulfill the demands of a modern society and
economy, which has to be embedded in global networks, at all, we have to discuss whether Africans should
define an own approach borrowing from the Asian industrialization more targeted on high-tech manufacturing
and services as well as from a global modernization movement. This movement is indeed existent and not only
rests on Western pillars anymore. Often neglected or forgotten are African or Asian forerunners and philosophers,
like Gandhi or the most recent winner of the Nobel Price for Peace Xiaobo, are shaping and diversifying the
modernization process alike. But Africa definitely needs to stand up and emancipate from its role as recipient. The
attempts by the former South African president Mbeki can be seen as such stand up, when he advocated for an
African renaissance456. The African Union would be an appropriate framework to design comprehensive reforms
and monitor their implementation. There are many ideological questions still open apart from the main
454
(Lonsdale, 2005, p. 380)

(Singer, 1970)
456
(Dedering, 2002)
455
103
Moritz Hessler
industrialization and modernization issues: among others the question whether development or democracy
should be prioritized457 and the issue of how to gain an own powerful voice not dependent anymore of either-or
decisions in a bipolar world.
What would be a win-win situation for Africa?
Eventually, what is needed to speak about mutually beneficial cooperation or win-win strategy? There are plenty
examples of Chinese and also Indian investment on the African continent. Most of them can be criticized in the
short term for being too little or too much politically biased as well as for not being sustainably oriented. The
issue of the maintenance of infrastructure, let it be roads or technology, is an often un-debated problem. Will the
TAZARA Railway, for example, contribute to sustainable development? What does it mean when the Indians claim
to design their foreign policies towards Africa on the basis of cooperation and knowledge transfer? What do
Africans do with this knowledge? Will they be able to accumulate it to, for example, further improve technology,
foster innovative capacities or simply spread this knowledge?
Again, the examples of Somalia and the DRC seem to be predestined to circumscribe what Africa needs from a
partnership with Asia. The absence of a strong state caused piracy, which in turn was used by the society to build
communities of proto-states. Funded by piracy these communities erected patron-client networks as well as
health and education infrastructures. Wouldnt an appropriate approach be able to turn these bottom-up
structures into a vivid society? Still, what would be the appropriate approach? The African Union adopted
Western patterns of rather engaging militarily than pursuing a strategy of prevention. The Chinese with their
authoritarian approach would also disqualify. Furthermore, it can be questioned, whether the Indian system
would help.
The DRC is an example for the rather economical perspective. It is mainly exporting primary commodities. The
value is often added in the West and increasingly in China and India. The main approach to change that would be
a genuine cooperation in terms of corporational training for locals and the installation of manufacturing sites. SEZ
have to be used to spread knowledge, modern values and prosperity, not to isolate and export it. As Moeletsi
Mbeki demands Africa needs a bourgeois revolution like it happened in Europe up till the 19th and in Asia during
the 20th century458. This revolution has to emerge out of a bottom-up movement, which should borrow its
methods from the West as well as the East.
Call in the past, benefitting from the crisis
The Financial Crisis of 2008 hit most of Africa even worse than the rest of the globe. But, like the Asian countries
reformed themselves after their financial crisis at the end of the 1990s, Africa should use the opportunity to
emancipate now. Especially now, since many reforms and the emergence of new powers seem to open up a long
457
Quite successful examples of a non-party democracy in Uganda and similar systems elsewhere in order to first stabilize a country in its
transformative process are similar to the Chinese approach while there are also countries relying on democracy first and hence can be
ideologically be closer positioned to India.
458
(Mbeki, 2009, p. 175)
104
Moritz Hessler
time closed global political economy, Africa shouldnt hesitate to strengthen the AU to be the voice for Africa in
the global arena. For this issue of regional cooperation of development countries theres no better partner than
the Chinese.
Economically, the crisis could be a big chance as well. The failure of modern investment products induced an
increasing number on investors to rethink their investments. Natural resources like gold are in such times the
secure haven for investments. The all-time high gold price at the moment supports this assumption. Furthermore
an increasing amount of investors are looking for private equity investment opportunity into African businesses.
Especially Indian businessmen seem to be interested in business-to-business joint ventures and venture capital
deals.
The Role of External Partners
Apart from the discussion whether China and India are New Friends for Africa, it can be questioned whether they
are New Friends for Development at the moment. Even claiming the patronage of a Southern union of
developing countries doesnt change the fact that their energy requirements as their own basis of development
demand to put development aid aside. Yet, there are also industrialization and modernization attempts, which go
beyond the main interest of transformation of the resource rich into industrial areas and therewith pure resource
extraction. Especially corporational and civic cooperations apart from state agreements as well as a governmental
corporation on a regional basis could bring the aspired leap forward for both sides. Africa has to pull the trigger
itself this time and kick-off fundamental reforms on a regional-multilateral scope. Otherwise the Asian tigers, but
also other developing countries, it could even be African states like South Africa, will increase the discussion
about a second scramble for Africa in their efforts to develop following the capitalist way. What is needed arent
further adjustment programs but rather the enforcement of a united, African voice, speaking up for the continent
in the global arena.
Sustainable development in Africa should be based on this political framework. It is difficult to predict which
concept of modernity and industrialization would work in which respective African country. Consulting the
history in terms of e.g. analyzing domestic trends and identify appropriate solution from any world region as well
as borrowing procedures from the Chinese, the Indians, and the Brazilians, to deduce own concepts from the
main doctrines, is, in my opinion, the only way in a transformation process, which is essentially needed to survive
as a state in the 21st century. In the channel of the Asian boom African economies should try to follow as junior
partner of China and India. Who knows, where the next manufacturing hub and back-office center will be, when
wages in those countries rise.
105
VI.
Moritz Hessler
Statutory Declaration
Hiermit versichere ich, dass ich die Masterarbeit selbstndig und lediglich unter Benutzung der angegebenen
Quellen und Hilfsmittel verfasst habe. Die aus fremden Quellen direkt oder indirekt bernommenen Gedanken
sind als solche kenntlich gemacht.
Die Arbeit wurde bisher weder in gleicher noch in hnlicher Form einer andern Prfungsbehrde vorgelegt und
auch noch nicht verffentlicht.
Ich bin damit einverstanden, dass ein Exemplar meiner Masterarbeit in der Bibliothek ausgeliehen werden kann.
Karlsruhe, den 1. August 2011
Moritz Hessler
106

"Making Finance Work For Africa" After The Financial Crisis

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Making Finance Work for Africa after

the Financial Crisis

An African case study by Moritz Hessler

Faculty of Social Science and Philosophy, University of Leipzig

Making Finance Work for Africa after the Financial Crisis

Table of Contents ................................................................................................................. i

Table of Figures................................................................................................................... iii

South Africa Needs an Own Financial Ideology ............................................................ 8

Challenges of the global financial system ................................................................................................................................. 15

The financial market as a complex, global bio-cybernetic system ................................................................................. 17

The South African financial system 1994 2007/8................................................................................................................ 19

2.2 Identity and Individualism .............................................................................................................................................................................. 22

Macro-level opportunities and risks ............................................................................................................................................. 30

2.5 Future Oriented Policing ................................................................................................................................................................................. 34

Towards an information society? .................................................................................................................................................. 34

Regional aspirations and integration into the global economy ..................................................................................... 36

Taking Africa Beyond Aid................................................................................................. 38

A Crisis as Catalyst for Development ............................................................................. 43

African Financial System Idea & Infrastructure ........................................................ 50

Market ideology and capacity ........................................................................................................................................................ 53

Information and communication technologies and innovation ................................................................................... 55

Universitt Leipzig | Erasmus Mundus Global Studies 2011

Making Finance Work for Africa after the Financial Crisis

5.2 Institutions: Agents, Legal and Regulatory Infrastructure ........................................................................................................... 56

Restructuring the banking sector .................................................................................................................................................. 57

Legal and regulatory institutions................................................................................................................................................... 60

Preventing an African-born crisis................................................................................................................................................... 64

5.3 Rules and Agreements: Policy-Framework........................................................................................................................................... 64

The New Growth Path program..................................................................................................................................................... 65

Challenges of monetary policing................................................................................................................................................... 67

Reshaping fiscal aspects .................................................................................................................................................................... 69

Acknowledging a broader perspective........................................................................................................................................ 69

5.4 Regional Financial Integration ..................................................................................................................................................................... 70

Conclusion: Evaluation and Outlook ............................................................................. 72

Further figures ........................................................................................................................................................................................................ 86

New Friends for Development .................................................................................................................................................................... 96

Statutory Declaration .................................................................................................... 106

Universitt Leipzig | Erasmus Mundus Global Studies 2011

Making Finance Work for Africa after the Financial Crisis

Figure 1: Clusters of African economies ........................................................................................................................................................................9

Universitt Leipzig | Erasmus Mundus Global Studies 2011

Making Finance Work for Africa after the Financial Crisis

Universitt Leipzig | Erasmus Mundus Global Studies 2011

Making Finance Work for Africa after the Financial Crisis

African Development Bank

African Financial Market Initiative

African National Congress

African Peer Review Mechanism

Black Economic Empowerment

Bank of International Settlements

Group of Brazil, Russia, India, China, South Africa

Centre for Science, Technology and Innovation Indicators

Conference of South African Trade Unions

European Central Bank

Foreign Direct Investment

Group of the 20 most powerful (industrialized and emerging) economies worldwide

Gross Domestic Product

Gesellschaft fr International Zusammenarbeit

Group of emerging democracies India, Brazil, and South Africa

Information and Communication Technologies

International Labor Organization

International Monetary Fund

Millennium Development Goal