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This paper studies the role of governments and its link to trust. We argue that the public’s trust strongly depends on governments delivering on their core tasks in a market economy. In some economies, a neglect of core tasks can be observed and there seems to be some erosion, notably in terms of securing sound rules of the game in industrialised countries. We find very little correlation between government expenditure and trust but a strong correlation with delivering on core tasks. This leads us to conclude that it is not government spending per se that needs to increase to build trust, but rather better focused government activities.

The extraordinarily good performance of the Peruvian economy in the last 10 years, in the midst of a worldwide crisis, has been termed by many “the Peruvian miracle”, given the spectacular outcomes shown by diverse economic variables, such as the rate of growth of GDP, the low rate of inflation and of unemployment, the increase in exports and the solidity of the financial system.

We are concluding the day with the topic of fiscal policy challenges in transition countries. I would like to limit my introductory remarks mainly to headlines and then draw a little on OECD experiences, as the field of fiscal policy seems to be one of those areas in which the indicators in the transition countries — and I am mainly talking about the more advanced transition countries — can hardly be distinguished from the figures for OECD countries. To some extent one can also say that fiscal policy is an area in which unfortunately it seems that some transition countries are about to repeat some of the errors that have been experienced in the OECD countries.

In Chapter 16 alternative future pathways for Mauritius to 2050 are developed and discussed. The analysis shows how PDE Mauritius can be applied, how scenarios can be created, and which results the model can provide. These scenarios of the future can help Mauritian decision makers to evaluate some possible policy actions concerning the population, the economy, and the environment.

As we reviewed in detail in Chapter 5 and mentioned at other points, the very rapid changes in prices and wages that have been observed, particularly in the seventies and in the eighties, have presented difficulties for models that are strongly constrained so as not to produce unacceptable behavior in the long run. What is needed is a model that can permit rapidly changing wages and prices in the short to medium run, but which does not lead to explosive behavior in the long run. One way of dealing with this problem is to assume a business cycle perspective and to formulate a model that permits changes in regime.

The main aim of this chapter is to examine the role of reelection efforts of politicians for the explanation of actual government behavior. As was discussed in Chapter 2 elections play an important role in the literature. A highly seminal work stressing the importance of the reelection motive for the explanation of government behavior is Downs (1957). Downs formulated as a fundamental hypothesis that “parties formulate policies in order to win elections, rather than win elections in order to formulate policies” (op.cit., p.29). A very well-known model in the Downsian tradition is the so-called Frey and Schneider (FS) model. The attractiveness of this model is due to various reasons. First, it is intuitively appealing. Second, it combines two topics from the public choice literature which are extensively studied, namely popularity functions and so-called politico-economic reaction functions. Third, the model is empirically applicable.