Trade reforms, credibility, and development

This paper analyzes the implications of uncertainty regarding the future course of trade liberalization on investment and policies. Uncertainty concerning the future tariff rate is shown to depress saving, and to operate as a subsidy (tax) on inward (outward) investment. We identify the need to tax (subsidize) private investment in the importable (exportable) sector. The elimination of sectorial private investment policies calls for a rise (drop) in the public/private capital ratio in the outward-oriented (inward-oriented) activities. In the presence of an external credit ceiling, a higher degree of risk aversion increases the magnitude (without changing the nature) of the policies.