The political economy of financial inclusion: Working with governments on market development

This paper examines the tensions that exist in financial inclusion policy between donor approaches founded on market modernism and governments with more activist leanings. It draws on political economy analysis – now frequently used by donors themselves – to demonstrate the underlying dynamics at play. It discusses how donor policy for microfinance has moved from disengagement to increasing engagement, as visions for financial inclusion require government involvement in building markets. We argue that there are opportunities for finer-grained understanding of the space for engagement and that, as a result, there are approaches to donor engagement, which may push the envelope of feasible strategies. In particular, the policy goal of inclusion may be achieved by a variety of means that go beyond the current orthodoxy. Finding policy that fits involves understanding the conditions under which activist governments are more likely to achieve developmental outcomes rather than to assume they cannot.