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LGR : Liberal Governance Regimes

In Liberal Governance Regimes the market plays the dominant role in allocating resources. They are concentrated in so-called Anglo-Saxon economies; all LGRs are currently in developed markets barring South Africa.

Definition

Equity markets

Relatively high levels of market cap to GDP with a generally high proportion of free float. Equity markets have played a major role in company financing, although there has not been such a big external financing requirement since the GFC. The separation of ownership and control provides management with a relatively high level of autonomy. Control is generally diffuse or dispersed, although the rising market capitalisation of software companies, which tend to be closely controlled by their founders, is increasing the proportion of listed companies subject to concentrated control by entrepreneurs, especially in the US.

Markets play a dominant role in the allocation of resources before any redistributive taxation. The tradition of common law prioritises rights of ownership and a strong and flexible institutional base. Labour markets are relatively flexible. The social framework is characterised by relatively high levels of individualism (best reflected in inheritance laws) and social trust. LGRs tend to have relatively high levels of innovation, including radical innovation, as is very evident in the breakdown of the US equity market. Flexible, market- based currency regimes, relatively low trade barriers.

Broader economy

Challenges
and potential change factors

Agent based issues; so-called short termism, costs of financial intermediation which is inexorably leading to disintermediation. The rising proportion of founder-controlled technology companies is leading to changes in the ownership and financial structures. Rise of indexation and other passive ETF-based structures. Increasing concern at perceived levels of inequality driven by ‘winner takes all’ ethos and the impact of globalisation and technological advance on relatively open economies. The main source of potential instability and transparency issues in LGRs has been and remains the identification and regulation of increasing levels of leverage and complexity within the financial sector.

Markets