Credibility of Government Policy: Lessons for Economies in Transition

A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Funke, Norbert Article — Digitized Version Credibility of government policy: Lessons for economies in transition Intereconomics Suggested Citation: Funke, Norbert (1993) : Credibility of government policy: Lessons for economies in transition, Intereconomics, ISSN 0020-5346, Nomos Verlagsgesellschaft, Baden- Baden, Vol. 28, Iss. 2, pp. 73-78, http://dx.doi.org/10.1007/BF02928107 This Version is available at: http://hdl.handle.net/10419/140391 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu SYSTEM TRANSFORMATION totalled between 900,000 and 1.1 million a year. The level conceivable in order to offset the decline in the potential of immigration described above as being required in the labour force in Germany and the EC. coming years is therefore already met by the existing flow [] In the decade after that it might make sense to grant of immigrants. freedom of movement for Turkish workers, as the negative The majority of immigrants now come from Eastern effects of the population decline would have to be offset Europe (ethnic Germans and non-German Eastern throughout the Community. At the same time, the Europeans); Turks make up only a small part of the present slowdown in population growth in Turkey should begin to net migratory flow-just under 50,000 a year between 1989 affect the potential labour force in that country. and 1991. In the next few years the press of immigrants Finally, it should be noted that the employers of the from Eastern Europe and the new L&nder is expected to be future will be looking increasingly for skilled workers? 6 If considerable: between 300,000 and 400,000 people a Turkey wanted to actively enhance the emigration year are expected to move West from the new L&nder for opportunities of its population, this factor would have to be the next four or five years, up to 250,000 ethnic Germans taken into consideration, by improving the country's will arrive and at least another 150,000 non-Germans from occupational training system, in particular, but also by Eastern Europe will come until the year 2000. teaching foreign languages. However, it is not likely that To summarise, this means that: Turkey will make expensive investment in the educational system in order to give skilled workers a better chance in [] in this decade, there is no great scope for additional labour markets abroad. As mentioned above, there is a Turkish immigrants, even in the Community context, as for danger that the very people who would be interested in political reasons alone it would be difficult to turn away emigrating are those who are desperately needed for the immigrants from Eastern Europe, especially ethnic economic development of their own country. Germans. [] In the first decade of the next century a controlled 16 Friedemann Stoo6 and Inge Weidig: Der Wandel der immigration of people, including Turks, would be T&tigkeitsfelder und -profile bis zum Jahr 201 O, MittAB No. 1/1990. SYSTEM TRANSFORMATION Norbert Funke* Credibility of Government Policy: Lessons for Economies in Transition Reforms have to be credible in order to fully reveal the intended positive effects. This important lesson for economies in transition is illustrated by recent experiences in developing countries. The following article discusses several possible ways of enhancing credibility. he ongoing transformation process in Central and that can be learned from these experiences is that a lack of T Eastern European countries still requires reforms in credibility of government policy may be a serious obstacle many areas. Although the challenges facing the post- to successful reforms) This paper shows that it is not the socialist countries are somewhat unique, most of the appropriate policy measure per se but only a credible individual tasks of socialist economy reform have been government policy that is the source of efficiency gains. 2 tackled before in many developing countries. One lesson The analysis of the credibility of government policy has been a central topic in economic theory since the late * The Kiel Institute of World Economics, Kiel, Germany. This paper 1970s2 In contrast to its theoretical importance, the reports research undertaken in the project "The Role of Stabilization, Liberalization and Privatization in the Process of Transformation in credibility of policy measures seems to play only a minor Central and Eastern Europe". Financial support provided by the role in everyday policy-making. However, based on Volkswagen Foundation is gratefully acknowledged. I thank Peter Nunnenkamp for helpful comments on an earlier draft. theoretical insights, the fear is that the desired positive INTERECONOMICS, March/April 1993 73 SYSTEM TRANSFORMATION effects of government activities will not be fully revealed, present. Consumers have an incentive to stock up on will fail to appear, or will even cause the initial economic imported consumer durables as long as their prices are situation to deteriorate as long as these policy measures cheap. These additional imports may result in an do not appear sustainable. This is true for single policy undesired reduction of savings and can put pressure on areas such as tax/debt policy, monetary/disinflation policy, the current account balance. From an empirical point of exchange-rate policy, and trade policy, but seems to be view, the above description is not a bad explanation for even more relevant in the case of comprehensive reforms. what took place in Chile in the late 1970s and in Mexico in In particular, the neglect of credibility aspects may have 1988. Although an incredible trade liberalization gets far-reaching negative consequences for economies in current relative prices right, it distorts intertemporal transition. The possible effects of a lack of credibility are relative prices. The overall effect is at least ambiguous. manifold; a lack of credibility To reduce the uncertainty about future activities of the [] has effects similar to macroeconomic distortions. state, rational economic agents will gather costly Thus, the effects are similar to those of regulations, information until the expected marginal benefits equal the subsidies or taxes that do not aim to correct a market marginal costs of obtaining an additional unit of failure; information. Obviously, the reduction of uncertainties and therefore the enhancement of credibility could [] can cause additional costs for private agents to gather substantially reduce these costs.' information; and Beside these additional costs of gathering information, [] stimulates the counterproductive activities of special economic agents have an incentive to form new special interest groups. interest groups or increase the activities of existing The analogy between a lack of credibility and economic interest groups. The potential success of interest group distortions can be easily demonstrated by looking at trade activities is higher if the objectives of the government are liberalizations.' Beside direct consumer benefits, trade unclear or its commitment to reform is low. reform aims at an efficient allocation of resources. It works In contrast, the example of the newly industrialized only to the extent that it moves resources from one sector countries (NICs) in Southeast Asia illustrates the to another, typically from import-substituting industries to advantages of credible policies. Compared to many Latin export-oriented sectors, according to international price American countries, the NICs found it relatively easy to signals. However, moving capital and labour in and out of obtain external credits to diminish the negative sectors may entail considerable adjustment costs, such as consequences following the external shocks of the last labour-training costs or sunk costs due to sector-specific decade (highly volatile interest rates, changing machinery. The willingness of entrepreneurs to bear these commodity prices and world demand)6 (see Table 1). costs depends on the perceived sustainability of the trade reform. The private sector tends to postpone necessary Empirical analysis by Hiemenz, Nunnenkamp et al. 7 and beneficiary adjustment in order to avoid a wasteful supports the argument that one objective of reforms, the shifting of resources back and forth. The effects of a lack of promotion of investment activities, is better achieved if credibility are comparable to a tax on new investment. reforms are credible.

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