The Role of the State: Government Financial Policies and Business Group Strategies

Abstract

It is increasingly recognized that if we are to understand how DBGs react to liberalization and a more open economy, we also have to understand how the groups co-evolve with their institutional settings and national policies. In this chapter we will analyze how business groups in Central America reacted to the liberalization of the banking sector and why they presented diverse responses to the entry of foreign financial conglomerates into the region during the second half of the 2000s. During the years immediately following liberalization, several business groups entered the banking sector across the region. However, by the end of the 2000s, the composition of the banking sector in Central America demonstrated considerable variation. In Costa Rica and El Salvador, most business groups had left the sector. Meanwhile, banks were still key institutions for business groups in Guatemala and Honduras. The puzzle here is to understand why the region’s business groups responded to the liberalization of the banking sector in such divergent ways. Therefore, we examine the impact of government policies on Central American business groups’ strategies in the banking sector from the early 1990s to 2010.