The country of Economia has an economy with sharp geographic distinctions. The southern region of Economia is relatively prosperous and includes the capital city. This city is the center of banking and finance in Economia, which has had strict controls on the inflow of foreign capital for the past decade. The northern region of Economia is relatively poor and includes a large ethnic minority that historically has been disadvantage with respect to some important economic opportunities.
Fearing social polarization and the growing strength of an opposition party, the government of Economia seeks policies to narrow the welfare gap between the two regions. Economists have long pointed out that the structure of capital markets in Economia plays an important role in generating the regional disparities. Central government budget deficits are financed through short-term hard-currency notes currently paying 20% per year. These notes, which foreign investors are not allowed to buy, account for almost 50% of domestic bank assets. Another 45% of banks assets are loans to industry and agriculture in the southern region. Because of ethnic, geographic, and historical reasons, only 5% of bank financing goes to enterprises in the northern region.
The government decides to set up a development bank to finance businesses in the northern region. The development bank itself will be capitalized through additional government borrowing. The government declares that this new policy will narrow the income disparity between the northern and southern regions and foster social and economic stability.
Suppose that you are a city official in the northern region and you are considering how to exert your political influence to promote development in the northern region. How would you assess the likelihood that the government's policy will foster its stated objectives, i.e. how would you assess the credibility of the government's policy? Click on the button corresponding to your assessment.