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The Investment Response to Imperfectly Credible Trade Liberalisation with Endogenous Probability of Reversal

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  • Richard Mash
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    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 non- favoured sector will weaken opposition to reform continuation.

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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/1998-13.

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    Date of creation: 01 Aug 1999
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    Handle: RePEc:oxf:wpaper:wps/1998-13

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