Consider, for example, the supply of savings. The expected return on savings depends on more than just the posted rate of interest at the bank. Some governments do not offer secure property rights to savers. That is, saved funds are not immune from later confiscation, freezes, or other restrictions.

During the financial crisis beginning in December 2001, for example, the Argentine government partially froze bank accounts for a year. Many of the banks subsequently went under, which meant that Argentine citizens lost their bank-based savings. This event was not a complete surprise. The Argentine government had a history of freezing bank accounts, such as during 1982 and 1989. Other countries in the region, such as Brazil in 1990, had also frozen bank accounts. Obviously, this repeated pattern means that Argentines and Brazilians save less than they otherwise might wish to. Why save when those funds are simply being put up for grabs? Ana, a 40-year-old teacher from Argentina, kept her savings in dollars in her house and then exchanged them for pesos to pay her bills. She said, “You just can’t put your money in banks here.”5 Ana is right, but unlike money in the bank, which can be lent out to fund investment, money under a mattress does not contribute to economic growth.

If individuals expect that contracts will be broken, they will be reluctant to invest in stock markets as well. For instance, the Russian government often does not respect the rights of minority shareholders and at times it has confiscated or restricted the value of their shareholdings, as in the case of the private energy company Yukos. The result is that many foreign investors are unwilling to put money into Russian ventures. They simply do not trust the Russian government, nor do they believe that Russian courts will enforce contracts impartially.

Law is one side of the equation, but custom and informal trust are another. In a healthy economy, shareholders expect that managers are interested in building their long-run reputations, rather than ripping off the company at every possible opportunity. When managers look only to short-run gains, it is hard to run a business enterprise, as investors will not entrust managers with the control of resources. Systems of monitoring and accounting, no matter how well developed, cannot overcome high levels of mistrust. This is a common problem in developing countries around the world but the Enron, WorldCom, and Madoff scandals demonstrate that the United States is also not immune to such problems. Trust is an important asset throughout the world.