Influence of the soft state on the performance of development finance institutions
Development finance institutions put money into capital projects where conventional intermediaries are reluctant to get involved, and/or where there is a political preference for this channel of investment. In the last few decades D.F.l.s have especially proliferated in developing countries. Unfortunately experience has been disappointing. Most D.F .1.s have got into financial difficulties, and have not done much for economic growth. A number of factors can be postulated as responsible for this record. However, the concept of the 'soft' state as a causal factor has not been applied in a structured manner to the problem. The following pages isolate 'soft' state effects on D.F.1. experience via substantial Kenyan and Zimbabwean case studies. The first part of the thesis is largely theoretical. The concept of the soft state is discussed, and then a consideration of (i) the place of financial intermediation in development, (ii) the normative goals that often bias government policy and (iii) the nature of financial systems in developing countries, leads to a delineation of a role for development finance institutions. The second part investigates the major 'general' D.F.1.s in Kenya and Zimbabwe in order to test the deductions made and the hypothesis postulated in Part 1. As necessary background to the D.F.1. analysis the history, the ideological bases, the economics and the financial systems of the countries concerned are discussed. The work on the D. F. 1. s themselves leads to some preliminary conclusions as to the effect of the soft state on their operations. The third part synthesises the material from the previous chapters, and draws some conclusions as to how soft state features have affected the structures and work of D.F.1.s in Kenya and Zimbabwe. A number of recommendations related to the role and behaviour of D.F.1.s in developing countries are made at the end, and some suggestions for further research. There are three appendices after the final chapter. The first analyses the concept of rent generation by and rent extraction from companies in developing countries and the second formulates a rule as to when D.F.1.s should sell profitable investments. The third looks briefly at some other developing country D.F.1.s.