THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 217

CHAPTER An Economic Analysis of Financial Structure 185 In addition, banks in many developing and transition countries are owned by their governments Again because of the absence of the profit motive, these stateowned banks have little incentive to allocate their capital to the most productive uses Not surprisingly, the primary loan customer of these state-owned banks is often the government, which does not always use the funds wisely FYI Let the Lawyers Live! Lawyers are often an easy target for wouldbe comedians Countless jokes centre on ambulance-chasing and shifty filers of frivolous lawsuits Hostility to lawyers is not just a recent phenomenon: in Shakespeare s Henry VI, written in the late sixteenth century, Dick the Butcher recommends, The first thing we do, let s kill all the lawyers Is Shakespeare s Dick the Butcher right? Most legal work is actually not about ambulance chasing, criminal law, and frivolous lawsuits Instead, it involves the writing and enforcement of contracts, which is how property rights are established Property rights are essential to protect investments A good system of laws, by itself, does not provide incentives to invest, because property rights without enforcement are meaningless This is where lawyers come in When some- one encroaches on your land or makes use of your property without your permission, a lawyer can stop him or her Without lawyers, you would be unwilling to invest With zero or limited investment, there would be little economic growth Canada and the United States have more lawyers per capita than many other countries in the world They are also among the richest countries in the world with a financial system that is superb at getting capital to new productive uses such as the technology sector Is this just a coincidence? Or could the legal system actually be beneficial to its economy? Recent research suggests the American legal system, which is based on the Anglo-Saxon legal system, is actually a big advantage for the U.S economy.* *See Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W Vishny, Legal Determinants of External Finance, Journal of Finance 52 (3), pp 1131 1150; and Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W Vishny, Law and Finance, Journal of Political Economy 106 (6), pp 1113 1155 We have seen that government regulation can increase the amount of information in financial markets to make them work more efficiently Many developing and transition countries have an underdeveloped regulatory apparatus that retards the provision of adequate information to the marketplace For example, these countries often have weak accounting standards, making it very hard to ascertain the quality of a borrower s balance sheet As a result, asymmetric information problems are more severe, and the financial system is severely hampered in channelling funds to the most productive uses The institutional environment of a poor legal system, weak accounting standards, inadequate government regulation, and government intervention through directed credit programs and state ownership of banks all help explain why many countries stay poor while others grow richer