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

Abstract

This paper provides theoretical background and empirical research on state’s role in financial sector development, focusing on state’s role in achieving pro-poor economic growth through its activities in development of the financial sector. To this end, in the theoretical part of the paper it is explained that pro-poor growth depends on the strong private sector, while at the same time private sector development is dependent on the degree of financial sector development. Defining pro-poor growth as a set of policies aiming to reduce poverty, it is argued that pro-poor growth is dependent on financial sector development both, directly and indirectly. Financial sector development contributes to poverty reduction directly through improvement of the access to financial products/services to the poor, and indirectly through private sector’s better access to financial sources which as a consequence impacts the overall economic growth of the country. By analyzing theoretical approaches, it is shown that government policies and actions in financial sector development might positively impact private sector development, and therefore (indirectly and directly) contributes to pro-poor growth. The empirical part of the paper discusses the role of the state in financial sector development and its contribution to economic growth and poverty reduction in Bosnia and Herzegovina (BiH), arguing that this growth needs to be pro-poor oriented as BIH is the poorest country in Europe. In order to assess state’s role in financial sector development and its implication to pro-poor growth in BIH, surveys among small and medium enterprises (SMEs) and government representatives were conducted. The aim of the surveys was to analyze the perceptions of private sector participants and of government institution employees perceptions about the government role in development of the financial sector oriented to SMEs. The research shows significant disagreement between the two surveyed groups about the efforts currently being implemented by BIH government in supporting the private sector through financial sector development. It is concluded that government needs to work more closely with the private sector as well as with the financial sector so as to better identify the private sector needs and then create policies and take actions necessary for the private sector to develop, which would consequently lead to poverty reduction.