This paper by Dani Rodrik explores the impact of policy uncertainty on private investment in heavily-indebted developing countries. The author argues that while policy reforms are necessary for sustainable economic recovery, they often face a dilemma: entrepreneurs, workers, and farmers must respond to the signals generated by the reform, but rational behavior by the private sector may lead to withholding investment until the uncertainty about the reform's success is eliminated. This paper demonstrates that even moderate levels of policy uncertainty can act as a significant tax on investment, potentially rendering otherwise sensible reforms damaging. A simple model is developed to link policy uncertainty to the private investment response, showing that the size of the implicit tax depends on the subjective probability of the reform collapsing and the magnitude of irreversibilities in the investment process. The paper also discusses how the probability of reform collapse can be endogenously determined, leading to multiple equilibria where pessimistic expectations can be self-fulfilling. Empirical evidence from various studies supports the proposition that policy instability is detrimental to private investment, particularly in manufacturing sectors. The main message is that policy reforms that appear desirable economically may backfire if they induce doubts about their sustainability, emphasizing the importance of stability and sustainability in reform packages.This paper by Dani Rodrik explores the impact of policy uncertainty on private investment in heavily-indebted developing countries. The author argues that while policy reforms are necessary for sustainable economic recovery, they often face a dilemma: entrepreneurs, workers, and farmers must respond to the signals generated by the reform, but rational behavior by the private sector may lead to withholding investment until the uncertainty about the reform's success is eliminated. This paper demonstrates that even moderate levels of policy uncertainty can act as a significant tax on investment, potentially rendering otherwise sensible reforms damaging. A simple model is developed to link policy uncertainty to the private investment response, showing that the size of the implicit tax depends on the subjective probability of the reform collapsing and the magnitude of irreversibilities in the investment process. The paper also discusses how the probability of reform collapse can be endogenously determined, leading to multiple equilibria where pessimistic expectations can be self-fulfilling. Empirical evidence from various studies supports the proposition that policy instability is detrimental to private investment, particularly in manufacturing sectors. The main message is that policy reforms that appear desirable economically may backfire if they induce doubts about their sustainability, emphasizing the importance of stability and sustainability in reform packages.