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The investment response to imperfectly credible trade liberalisation with endogenous probability of reversal

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  • Richard Mash

Abstract

Many trade liberalisations and other economic reforms in developing countries, particularly in Africa, have been reversed. In addition to the loss of benefits from reform as such this tendency has led to concern that the response to reform, particularly from investment, may be weakened by the perception that it may be reversed and in turn that weak investment may itself lessen the chances of successful reform. These themes have been discussed extensively in the literature, the current paper's contribution being to develop a much more complete model of the investment response than previously available and to use it to partially endogenise the probability of reform reversal so the two are simultaneously determined. With respect to the reversal probability the argument presented is that a strong investment response in the favoured sector will of itself tend to discourage reversal of the reform (through a lobbying mechanism or simply by the existence of a larger constituency opposed to reversal) while the gradual depreciation of capital in the nonfavoured sector will weaken opposition to reform continuation.

Suggested Citation

  • Richard Mash, 1998. "The investment response to imperfectly credible trade liberalisation with endogenous probability of reversal," CSAE Working Paper Series 1998-13, Centre for the Study of African Economies, University of Oxford.
    • Handle: RePEc:csa:wpaper:1998-13
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    References listed on IDEAS

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    1. Van Wijnbergen, Sweder, 1985. "Trade reform, aggregate investment and capital flight : On credibility and the value of information," Economics Letters, Elsevier, vol. 19(4), pages 369-372.
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