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

312 Miscellanea
sector need to establish long-term relationships, be closely related by kin, or
develop complex bonding schemes, such as cross-holdings, to ensure compliance.
The absence of public capital markets is in particular an obstacle to the growth
of small entrepreneurial firms. Their expansion is constrained to be financed with
internal funds (which in general will not correspond to the investment opportunities
available) or with expensive bank intermediation. The disadvantages of
bank credit lie in its lack of risk sharing, the vast bargaining power of local institutions
with information advantage over other lenders, and especially in its incapacity
to support rapid expansion based on future prospects as opposed to current
net worth. It is unsuitable for emerging industries where widely held risk capital
is essential to redistribute the idiosyncratic risk of new ventures, and for sectors
where the costs of financial distress are considerable.
Credibility of Macroeconomic Policy
The reputation of a financial center as a reliable locus for transacting is therefore
crucial to its success. Its prerequisites include a reliable political environment in
which a consistent economic policy ensures macroeconomic stability and reduces
damaging uncertainty, such as on future freedom of movement of capitals. At the
microeconomic level, a first obvious requirement is the absence of discrimination
among the participants, including market outsiders, small investors, and
foreign institutions.
Government credibility concerns macroeconomic as well as microeconomic
policy. A sound monetary and fiscal policy is necessary to avoid discrediting
the value of the currency and ensuring its constant convertibility. Ready
acceptance of government-issued money is also a public good. It also requires
some restraint of government influence on the credit market, which can be accomplished
by ensuring central bank independence and independence of the banking
system. 14
The decision to transfer control of credit market institutions to private ownership
and management is a particularly crucial test of the political will to ensure
an independent future for the financial market. Privatization of these institutions,
as well as of productive firms which have no reason to belong to the public sector,
is a first obvious step to commit to a credible policy of restraint by political interests
in the control of credit. This decision offers the possibility to reduce budget
deficit, multiply the capitalization and liquidity of the domestic market, and
promote widespread share ownership. However, to avoid increasing the concentration
of control that creates market power and discourages small investors, privatization
must be combined with a strong regulatory code that supports
competition, and with limitations on the acquisition of dominant stakes by large
private groups.