"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

306 Miscellanea
The economic analysis of the law does not address issues of equity or income
distribution, which certainly represent a crucial purpose of the government action.
It is well known that considerations of equity and efficiency tend to conflict; rules
established to generate incentives to efficient behavior often give rise to the ex
post temptation of altering the promised allocation of benefits in order to favor a
broader constituency (e.g., patent laws). This important aspect of economic legislation
has not been explored extensively. It concerns the reliability of the legal
rules. i.e., the degree to which the government is committed to the present set of
laws, as well as the extent of strict and neutral enforcement of these laws.
In the first part of this paper we briefly summarize some important contributions
to the normative analysis of government intervention in economic development,
without pretence of doing full justice to either the literature or to
individual contributions. In the second part we present our conjecture concerning
both the extent and the reliability of actual regulation and its impact on the
development of security markets.
I Theories of Government Intervention and Financial Development
An early explanation of the link between economic growth and development of
financial markets was contributed by the economic historian Gerschenkron
(1963). His view interprets the structure of financial intermediation in a nation to
be a reflection of the timing of development. Thus early-developed nations, such
as England, grew slowly, by promoting risky commercial ventures by merchants
and technological innovations by entrepreneurs; security markets ensured supply
of funds with a broad redistribution of risk. Late developers, on the other hand,
needed to accumulate capital investment rapidly in order to catch up; therefore
the development of banking was indispensable to rapidly expand credit to industry.
Moreover, direct or indirect government control of banks was utilized to
channel funds into large-scale investment.
This view, although certainly helpful, does not quite explain the persistence of
different financial systems beyond the initial stage of development, nor does it
fully explain the different levels of success among nations in promoting economic
growth. However, it does highlight the crucial role played by government intervention
in economic growth, and its impact on the dominant form of financing
investment.
Legislation represents an important form of government intervention. 3 The economic
policy of an individual country may be predominantly influenced by one
of the two ideal functions of the law discussed in the introduction, of either substitution
for or support of market transactions. 4 Economic policy in developing