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The Rules of the Game and the Development of Security Markets 307
countries has traditionally been biased toward a direct involvement of government
in the economy. This historic tendency toward an active role of the State
has been justified in the context of an industrializing nation, where rapid capital
accumulation to incorporate known technological knowledge may best be
achieved ex imperio. Moreover, whenever there are large externalities in investment,
so that the private benefit does not coincide with the social benefit, there
is a strong rationale for direct government intervention.
This view is predominant in recent developments in growth theory, sparked
by Romer’s contribution (1986). This literature suggests that growth is selfperpetuating
due to increasing returns to knowledge (interpreted as accumulated
human capital). Knowledge is produced under traditional decreasing returns to
scale, and gives rise to short-term competitive advantage; however, unlike most
goods, its benefits are easily captured by other agents in the economy, generating
aggregate increases in productivity which further increase the incentive to
innovate. (For a survey of this literature, see Solow, 1990.)
This literature maintains that it can account for the radically different rates of
growth achieved by LDC nations, a fact that contrasts with the neoclassical prediction
of economic convergence. Eckaus (1989) has criticized this claim. He
questions the implicit assumption that the beneficial spillover effect of investment
stops at national boundaries. If language is not an unsurmountable barrier,
why should the spillover not spread to neighboring countries, thus equalizing
growth rates? 5
The presence of an externality suggests that a government could promote longterm
growth by taking appropriate action. In some models it could do so by supporting
the accumulation of knowledge, and in others by providing an initial
impulse on the demand side (Murphy et al., 1989).
However, the historical evidence does not fully endorse the view that government
intervention ultimately delivers the good of faster growth. The generalized
failure of centrally planned economies has brought forward the view that decentralized
decision-making is ultimately more successful at producing economic
development.
An important expression of this view has come from the early “financial deepening”
literature on financial deregulation. This school of thought, developed in
the late sixties by Stanford economists McKinnon (1972) and Shaw (1973), maintained
that government regulation of financial and money markets, although justifiable
in principle, damages the capacity of an LDC economy to harness its full
growth potential. Their neoclassical analysis led to an emphasis on the great economic
benefits that may derive from financial liberalization. In particular, they
highlighted the small incentives given to promote individual savings which were
caused by the LDC governments’ inclination to force savings into financing