Emerging Markets in an Upside Down World: Challenging Perceptions in Asset Allocation and Investment

Chapter 11

Regulation and Policy Lessons

If we want to understand how to regulate financial markets we need to start by understanding them – not just parts of them. We need to go beyond assuming that markets are naturally and perfectly competitive. We need government to help in the development and maintenance of efficient competitive markets, which do not necessarily come into being on their own. The huge volume of Benthamite legislation in 19th century Britain is a historical example of the amount of effort required to overcome anti-competitive tendencies. Yet much economic analysis has ignored institutions. It has been agnostic with regard to the role of property rights, law and government policy in creating the market competition whereby relative prices can express collective preferences and have a chance of forming other institutions and organisations.

‘Institutions change, and fundamental changes in relative prices are the most important source of that change. To the noneconomist (and perhaps for some economists as well), putting such weight on changing relative prices may be hard to understand. But relative price changes alter the incentives of individuals in human interaction, and the only other source of such change is a change in tastes.’

Douglass North (1990), p. 84

If relative prices are as important as Douglass North says, and given the likelihood they are going to be driven more and more by events in emerging markets, we need to think about how institutions may change ...