Academic journal article Journal of Economic and Social Studies

Role of the State in Financial Sector Development and Achieving Pro-Poor Growth: Evidence from Bosnia and Herzegovina

Academic journal article Journal of Economic and Social Studies

Role of the State in Financial Sector Development and Achieving Pro-Poor Growth: Evidence from Bosnia and Herzegovina

Article excerpt

Introduction

The year 2015 was set as the target year by the United Nations (UN) to implement the Millennium Development Goals (MDGs), with halving absolute poverty set as the first most important goal. Unfortunately, evidence shows that in many developing countries, mostly in Sub-Saharan Africa and Oceania, this goal would not to be met (UN, 2015). In order to reduce poverty, governments need to take necessary actions to assure what in academic literature is referred as the pro-poor economic growth.

Broadly, pro-poor economic growth can be defined as one that enables the poor to actively participate in and significantly benefit from economic activity. Promoting pro-poor growth requires a strategy that is deliberately biased in favor of the poor so that the poor benefit proportionally more than the rich (Kawani 2000:3).

Pro-poor economic growth can be achieved through private sector development (e.g. promotion of entrepreneurship) as the generator of work places. Government role in private sector development is of crucial importance, since the government is responsible for policies and regulations promoting positive environment for private sector development. One of the aspects of promoting pro-poor growth through private sector development is by means of support and development of the national financial system (creating adequate financial market structure and stable financial institutions, as well as assuring adequate prudential supervision). Financial system development requires government support to provide stable and favorable environment for different types of financial institutions to develop, and furthermore, to provide incentives for financial institutions to create financial products/services tailored to the needs of private enterprises and of poor people to be able to self-employ.

The main goals of this paper are twofold. The first goal is to investigate the role of the state in financial sector development with the main focus to establish the link between government efforts to achieve sustainable pro-poor growth and its efforts to develop the financial system which will be in the function of pro-poor growth.

The second goal is to analyze the current state of government intervention in the financial sector oriented to poverty reduction in Bosnia and Herzegovina (BH). Also, the paper is to provide guidelines and recommendations for the improvement of government policies regulating financial sector and for greater involvement of the state in providing financial support to private sector development.

BH is a rather dysfunctional country with a relatively high poverty rate. According to UNICEF's poverty measure ARO PE (At-Risk-of-Poverty and Social Exclusion), BH has the greatest risk of poverty and social exclusion among European countries. ARO PA for BH is 58.6% (of population), and it fairly deviates from the EU-27 ARO PE that totals to 24.2% as well as from the new member countries whose ARO PE totals to 30.6%. This evidence shows that BH needs the shift in current economic policies.

The first part of the paper provides the theoretical background on the financial sector impact on poverty reduction. It focuses on establishing the link between state's role in financial sector development and state's role in contributing to poverty reduction by creating policies (among other policies) that ensure the development of the financial sector. In the second part of the paper a review on the existing literature and previous research on the subject is presented. In the third part of the paper empirical research results on the state's role in financial sector development in BH are presented.

Using discriminant analysis, it was found that a huge gap exists between government perceptions of their influence on financial sector development and perceptions of private sector participants on the government role in financial sector development.

Theoretical Background on State's Role in Poverty Reduction through Financial Sector Development

Economic growth, which is in the function of poverty reduction, requires macroeconomic stability, efficient investment in human and physical capital including infrastructure, regulation of enterprises and well-functioning financial sector (financial institutions as well as financial markets). …

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