Pre-commitment mechanism and policy credibility in African trade reform

The issue of the credibility of economic policies has been the topic of many studies since the 1970s. While the theory is quite well established, little work has so far been done on its empirical applicability. This dissertation first develops a two-game model: the pre-commitment game and the time consistent game to show that, in the absence of a pre-commitment mechanism, a government's ex-ante optimal tariff choice is different from its ex-post optimal choice. We show that because of the subgame imperfection of the pre-commitment solution, forward looking private agents will find the announcement of a trade reform policy by the government at the beginning of the pre-commitment game to be time inconsistent, and therefore not credible. We further show that a pre-commitment mechanism is required to enhance the credibility of the pre-commitment solution and we propose such a mechanism that could be applied in developing countries;But it is the empirical investigation of the dissertation that constitutes its real contribution to the literature. Indeed, using data from eight African countries, we examine whether international agreements, such as the World Bank/IMF sponsored Structural Adjustment Programs, can serve as pre-commitment mechanisms which could bolster policy reforms announcements in Africa;The bootstrap technique is used to test for the real effects of adjustment agreements signed by African nations with the Bretton Woods institution on actual tariff policy. The results of the test show that we cannot reject the null hypothesis that African governments' precommitment policies had an impact on their actual tariff policies. Further, we estimated a trade flow equation, which allowed us to examine the response of the private sector to the adjustment process in Africa. Using a fixed effects approach to panel data modeling, we are able to determine country specificity in each of our empirical models;Overall, our results show that between the pre- and post-agreements periods there occurred a structural break in both the tariff and the trade models. We obtain statistical evidence that in general, African governments adhered to the announced policy reforms. But this implementation was not perfect, as reversals occurred in later years of adjustment in many countries. We also obtain clear evidence that the trade response of the private sector to the adjustment programs was positive, for the results show that there occurred a statistically significant increase in trade flows in the adjustment period. We believe that these results indicate that the private sector generally lent credence to policy adjustments in Africa. We conclude that programs such as the structural adjustment programs undertaken in Africa in the 1980s can serve as pre-commitment mechanism for government policy making, but these programs must be developed firmly on the basis of the social, political and cultural realities of each country.