NATIONALIZING TO LIBERALIZE - CREDIBILITY IN TRADE LIBERALIZATION

The credibility problem in trade liberalization has been studied in terms of asymmetric information between government and the private sector with resolution through reputational or signaling equilibria. This paper, in contrast, recognizes the genuine time-inconsistency problem with trade liberalization in countries where institutional underdevelopment implies tariffs are the major source of revenues. The welfare implications of the resulting credibility problem are analyzed. It is further shown that government policies can help resolve the problem. Government investment in the exportables sector is presented as an optimal commitment strategy that can lead to full credibility of the otherwise time-inconsistent optimal tariffs.