Suppose that an imaginary country Economia has experienced two years of macroeconomic stability. Determined fiscal adjustment has reduced Economia's budget deficit to a level that can be sustainably financed from domestic savings. Economia has built up enough foreign reserves to finance three months worth of imports, its external payments are balanced, and it is experiencing no net change in foreign reserves.
The president of Economia announces a trade liberalization initiative. He declares that tariff and non-tariff barriers will be reduced so that the effective tariff on imports will fall from 65% to 15%. Moreover, exchange controls will be eliminated and banks will be able to trade foreign exchange freely. In order to avoid speculative instability in the exchange market, the president also announces that the nominal exchange rate will be maintained within a corridor of plus-or-minus five percent from its current value.
Suppose that you are an entrepreneur in the country of Economia. You need to evaluate what Economia's import tariff rate will be over the next five years in order to decide how best to allocate your resources. Thus you need to assess whether the President's announced policy initiative is credible, i.e. you need to judge the probability that the announced policy will be implemented and sustained over the next five years. Given the scenario above and what you know about policy experience around the world relating to tariff liberalization initiatives, how would you assess the credibility of the President's announced policy (click on the button corresponding to your assessment)?