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Credibility of economic reform and foreign direct investment in the former Soviet Union region

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  • Yermakov, Yuri Y.

Abstract

Economic transition from socialist to market-based economy has been the subject of intense economic research in the last two decades. However, there are very few publications that address the transitional issues from the traditional microeconomics theory prospective. This dissertation focuses on several transitional issues. The first topic is: what is the economic nature and major characteristics of economic reform? Secondly, the dissertation focuses on the relationship between the government and private sector in the reform environment. In the end, the focus of the dissertation shifts to the question of economic reform credibility and of finding the most efficient ways to support the economic reform objectives;To find the answers to the above questions this dissertation develops two models of economic reform: a pre-commitment model and a time consistent model to show that besides the traditional reasons that effect the speed and intensity of economic reform, the sequence and timing of decisions is critical to the outcomes of the reform. We show that because private agents correctly anticipate that the government has the ability to change its previously announced policy, private sector support of the government's reform efforts may be much weaker relative to what it could be if the pre-commitment mechanism existed. We also show that the absence of the pre-commitment mechanism not only effect the speed and intensity of economic reform in the future but also may effect the level of reform activity in the initial stages of economic reform. For example, we show that if there is no pre-commitment mechanism it is possible that the government could be interested in increasing the level of reform efforts during the initial stages of reform. This can increase the probability of political reversal which is of a great concern of all private investors;We show that a pre-commitment solution is more desirable comparing to the time consistent solution and that a pre-commitment mechanism is required to enhance the credibility of the pre-commitment solution. And we propose such a mechanism that together with other pre-commitment mechanism can be applied in transition economies, especially in the initial stages of the reform.

Suggested Citation

  • Yermakov, Yuri Y., 1997. "Credibility of economic reform and foreign direct investment in the former Soviet Union region," ISU General Staff Papers 1997010108000012835, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:1997010108000012835
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    References listed on IDEAS

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