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

308 Miscellanea
capital investment (and government budget deficits) at subsidized rates. They also
insisted that excessive regulation and restrictions were the causes of the limited
extension of financial markets, in particular security markets. 6
The “financial deepening” school has succeeded in attracting interest in the
advantages of generating increased savings in LDC countries; their recipe for
policy was very successful in certain circumstances where it was applied in a
controlled fashion (such as Korea). However, most historical attempts to broaden
financial deregulation aimed at promoting domestic savings and investment have
not been successful; see Diaz (1985) or Dornbusch and Reynoso (1989). The
development of domestic financial markets in countries which liberalized their
financial legislation was very short-lived, and compounded the LDC debt
problem when it allowed a vast flight of private capital before and during the
crisis. It would therefore appear that something besides freedom to transact is
necessary to support the success of domestic capital markets in channelling funds
to investment.
Another important variable is believed to be the effect of cultural values over
economic organization. To suggest that growth requires a favorable institutional
framework is to restate a frequently repeated claim which has failed to become
explicit. Our ambition is to add some content to this notion by focusing on some
economic consequences of legislation. 7
We attempt a characterization of an underdeveloped institutional framework
and offer a partial analysis of its economic consequences, in particular for the
emergence of a developed security market.
There are important questions to be answered. What will explain the different
size and liquidity of security markets in different economies? What accounts for
the more limited size of these markets in developing nations, and for the dominant
role of credit institutions in their capital markets? Why is there such a
propensity for noncontractual, long-term relations in certain systems? Even more
fundamental, what is the role of security markets in economic development?
II Government Intervention and the Character of Legal Rules
Legal rules are a common good: their use by an agent does not limit the access
of another. They are indispensable to economic exchange: individuals need them
to write and enforce private arrangements, in order to be able to bind themselves
credibly to future actions. The existence of an explicit, neutral code of law which
upholds private arrangements permits enforcement of commitments to contractual
performance and allows desirable coordination of individual actions.
Normative welfare economics postulates that this function is offered by an
enlightened, selfless ruler, programmed to produce the maximum economic