THE EVOLUTION OF DEBT AND EQUITY MARKETS IN ECONOMIC-DEVELOPMENT

As noted by Gurley and Shaw, there is a typical pattern of economic de velopment in which the evolution of the financial system is an essenti al aspect of the growth process. We focus on one component of this evo lution: the increasing importance of equity markets as an economy grow s. We develop a growth model where capital accumulation is financed ex ternally through a combination of debt and equity. We illustrate why e quity market activity might grow - often very rapidly - as an economy develops. We also illustrate why access to equity markets may not be n eeded in the early stages of economic development.