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Abstract

This paper argues that an unpredictable regulatory environment be a major obstacle to for the success of policy reforms. This issue is discussed in principle and then applied to the case of Nicaragua after the fall of the Sandinista government in 1990. This case is emblematic of the failure of reform events in LDCs because the economy was successfully stabilized, but investment is insufficient to achieve sustainable growth. Our diagnosis for this failure to grow is the institutional instability caused by arbitrary government especially in the domain of property rights. Based on the responses to a questionnaire addressed to entrepreneurs in Nicaragua, we attempt to quantify the size of this problem. The survey results show that institutional instability in this country is very high, which leads to an overall reluctance to invest. Comparing the institutional instability in Nicaragua with that in twenty-eight other LDCs, we show that Nicaragua has the third worst rating in the whole sample. Institutional reforms strengthening property rights and reducing the discretionary power of government officials are therefore strongly recommended.

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