| dc.description.abstract | This thesis studies the causes and consequences of the credibility problem in trade
liberalization, with a special reference to African economies. The two necessary
conditions for credibility are found to be macroeconomic compatibility and
time-consistency, while the sufficient conditions are more difficult to identify. A
lack of credibility is typically probabilistic as private agents may be uncertain about
the government's intentions, or the future terms of trade.
The first part of the thesis develops a theory of economic behaviour in the absence
of credibility. Due to private responses, incredibility creates a welfare cost which
may arise from (i) non-optimal intertemporal substitution in consumption, (ii)
accumulation of stocks of imports, (iii) insufficient relocation of factors, and (iv)
deferral of investment. A simple consumption model and two production models are
used to assess the magnitude of the welfare cost and to derive a cost curve as a
function of the probability of default. A non-monotonic curve with kinks emerges.
Many standard results concerning the speed of liberalization change drastically
when the assumption of full credibility is relaxed. Containing consumption costs
would typically call for a gradual reform to reduce the incentive to accumulate
inventories, while, from the production point of view, a big bang or initial
overshooting are preferable. Gradualism is preferable when (i) reserves may
otherwise be depleted by speculative imports, forcing the government to abandon
the reform, (ii) only incremental devaluation is possible, or (iii) the level of the
implicit tariff is unknown.
The second part examines how liberalization episodes can be identified empirically
using a quantitative measure of trade policy. The average implicit tariff index,
which is the ratio of the domestic deflator to the world price index, is derived for
Kenya. As the domestic deflator appears to be biased, a hypothetical implicit tariff
index is derived from a Linear Expenditure System. Further, the other empirical
study quantifies the social cost of incredibility during four Kenyan reforms. Three
hypotheses are tested: (i) speculative accumulation of imports, (ii) deferral of
investment, and (iii) increased liquidity in response to perceived uncertainty about
future trade policy. The highest welfare cost was incurred during the 1980 reform
which was not coordinated with exchange rate management and was therefore
incompatible. | en |
