Liberalization

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Liberalization

  1. 1. LiberalisationSubmitted to:Sruthy Herbert,School of Social Work,Marian College,Kuttikkanam.Submitted by:Bimal Antony,II MSW, No. 111,School of Social Work,Marian College,Kuttikkanam.Date of Submission:18thNovember 2011.
  2. 2. 2LiberalisationIntroductionEconomic activities such as production and distribution of goods and services have been carriedon since ages both by private agencies such as individuals and firms as well as the state. Theextent and nature of their participation depends upon the stage of economic development of thesociety, structure of the economy and the political ideas that rule at those periods. Generally, inmore developed economies, the role of the state in managing economic affairs of the society isless. A society where the state has a relatively small role to play in the economic affairs of thepeople is generally described as liberal. By liberalising trade and capitalising on areas ofcomparative advantage, countries can benefit economically. Use of resources - land, labour,physical and human capital - should focus on what countries do best.LiberalisationIn the closing decades of the 20th century, many developing countries experimented with thefunctional decentralization of revenue and expenditure to lower levels of government. For mostof these countries, decentralization has been a fundamentally new experience, representing ahistoric break with the centralist past and setting into motion major changes in economic andpolitical life. Two salient hypotheses about the causes of decentralization can be identified.According to the first hypothesis, the return to or establishment of democracy in developingcountries has unleashed pressures for decentralization that were either dormant under or resistedby non-democratic governments. According to the second hypothesis, politicians who want toshrink the role of the state in the economy and achieve fiscal stability at the center endorsedecentralization as a policy that will further their liberal goals.One of the challenges facing these and other theories is the apparent newness of the phenomena.In most developing countries, since decentralizing changes are quite recent and ongoing, it willtake some time before scholars can answer difficult questions about their consequences fordemocracy and economic performance. There is some sense that “decentralization” is still amoving a target and, given the confusion and disarray that changes of such magnitude inevitablyinvolve, will continue to be so for a number of years. But decentralization – defined as increasesin the policy authority of lower-level state officials relative to national-level state officials – isnot everywhere a strictly new phenomenon. Looking at changes in revenue sharing rulesimplemented by both democratic and authoritarian governments and by governments thatendorsed statist and liberal development models makes it possible to evaluate both hypotheses.Changes in revenue sharing rules, typically involving attempts by successive political leaders toincrease or decrease the set of taxes subject to revenue sharing and/or the percentage of revenuessent to lower levels of government, can be thought of as movement along a decentralizationcontinuum. Overall, the period between 1934 and 1999 witnessed an expansion in the number oftaxes subject to revenue sharing and significant increases in the percentage of tax revenueautomatically sent to sub-national governments, but there were also significant periods ofrecentralization.
  3. 3. 3LiberalisationEconomic / Financial LiberalisationEconomic liberalization may be described as the freedom to engage in economic activity at homeand/or abroad, a freedom subject to institutional and policy constraints needed to guaranteepublic interests at large. It can be also said as a virtual withdrawal of the state from economicactivities.Financial liberalization (FL) refers to the deregulation of domestic financial markets and theliberalization of the capital account. The effects of FL have been a matter of some debate. In oneview, it strengthens financial development and contributes to higher long-run growth. In anotherview, it induces excessive risk-taking, increases macroeconomic volatility and leads to morefrequent crises. Financial liberalization has led to financial deepening and higher growth inseveral countries.Trade LiberalisationThe process of trade liberalization and market-oriented economic reform that had started in manydeveloping countries in early 1980s intensified in the 1990s. The reform undertaken varied inownership and contents in different countries. The reforming countries can be classified intothree groups. The first group consists of a number of countries in East Asia which continuedtheir own dynamic industrial and trade policies initiated in 1960s. The second group includes alarge number of countries, mostly in Africa, which have gone through the reform programmesdesigned and dictated by the IFIs. The third group comprises a number of Latin Americancountries that undertook economic reform since early 1980s, initially under the pressure fromIFIs. Nevertheless, in 1990s they intensified their reform process without having beennecessarily under pressure of those institutions in all cases. The contents and philosophy of theirreform programmes were, however, similar to those designed by the IFIs which in turn havebeen referred to as the “Washington Consensus” since the early 1990s. Universal and uniformtrade liberalization was a part of that “Consensus”. “Universal” implies that all developingcountries are to follow the same trade policy regime-trade liberalization-irrespective of theirlevels of development and industrial capacities. “Uniform” implies that all sectors and industriesare to be subject to the same tariff rates-preferably zero rate, or low rate. Apart from tradeliberalization, such reform programmes included mainly: capital account liberalization,devaluation at the early stages of reform to compensate for trade liberalization, fiscal andfinancial reform through contractionary macroeconomic policies such as budget cuts, increase ininterest rates and privatization.Trade liberalization measures, in particular, are believed to be a reaction to the failure oftraditional import substitution (MS) policies of the 1950s–1970s. The philosophy behind thereform programmes was that the role of government in making decisions on resource allocationshould be minimized and the incentive structure should change in favour of exports throughimport liberalization in order to follow an export promotion (EP) path instead of MS. It was
  4. 4. 4Liberalisationargued that private agents, guided by the operation of market forces, would better achieve theobjectives of growth and diversification of exports and output structure in favour ofmanufactured goods. Such objectives would in turn be attained through the expansion ofinvestment, better channelling of resources and allocation of investment outlays to productivesectors. The change in the structure of incentives would not only lead to growth anddiversification but also to the upgrading of the production structure, facilitated by importedtechnology and improved skills enhanced by trade.Benefits from trade liberalisationConsumers ultimately benefit because liberalised trade can help to lower prices and broaden therange of quality goods and services available. Companies can benefit because liberalised tradediversifies risks and channels resources to where returns are highest. When accompanied byappropriate domestic policies, trade openness also facilitates competition, investment andincreases in productivity.Downside of trade liberalisationTrade reforms, even if beneficial for a country overall, may negatively affect some industries orsome jobs and many commentators worry about negative effects on the environment. Thesolution to these problems is not to restrict trade. They should be tackled directly at sourcethrough labour, education and environmental policies.Agriculture LiberalisationIn recent years, trade in agriculture has not only attracted growing attention but is being viewedas the vehicle for global growth and equity. By expanding markets and by removing distortionscaused by high levels of protection in agriculture, global trade will not only facilitate competitionbut spur growth in an area that is linked directly to poverty and hunger. The main goal ofagricultural trade has been said to be to provide an enabling environment for a majority of theworlds poorest to take advantage of the enormous opportunities to improve incomes and enjoyhealthy lives.The Significance of Tariffs.Tariffs and tariff-rate quotas are by far the most costly of the policies that distort worldagricultural trade as they account for 80 percent to 90 percent of the total cost. Moreover,extremely high tariffs on a few selected products cause a disproportionately large percentage ofthe economic burden of agricultural tariffs. Correspondingly, an agreement that does not ensurethat many of those high tariffs are significantly reduced is not likely to have much beneficialeffect. The plan in the Doha Round negotiations was to allow each country to choose a fewsensitive products and each developing country to choose a few additional special productswhose protective tariffs would be cut less than others.
  5. 5. 5LiberalisationThe 2006 World Bank study modeled variations on a prototype scenario for agriculturalliberalization in the general range of those under discussion in the Doha Round. That study foundthat allowing countries to designate as few as 2 percent of their tariff lines as protecting sensitiveproducts and developing countries to designate an additional 2 percent as protecting specialproducts could eliminate 80 percent of the economic gain that would otherwise result from theprototype liberalization scenario.The Effects of Subsidies.Domestic subsidies are the second most costly of the policies distorting agricultural trade,followed by export subsidies. Unlike tariffs, which tend to harm all countries, subsidies tend tobenefit the countries purchasing the subsidized products and to harm the countries granting thesubsidies (although their agricultural sectors benefit) and the countries that are competingagricultural exporters. Because most subsidies are granted by developed countries, exportsubsidies tend to benefit developing countries and to harm developed countries; and, to a lesserextent, the same pattern is true for domestic subsidies.References:S.M. Shafaeddin (2005): TRADE LIBERALIZATION AND ECONOMIC REFORM IN DEVELOPING COUNTRIES:STRUCTURAL CHANGE OR DE-INDUSTRIALIZATION?, Discussion Paper No.179, Untited NationsConference on Trade and Development.What is trade liberalisation and isnt it a good thing?http://www.traidcraft.co.uk/get_involved/campaign/stop_epas/faq/trade_liberalisation Accessed on13.11.2011Trade liberalisation,http://www.oecd.org/document/2/0,3746,en_2649_37431_41049090_1_1_1_37431,00.html, accessedon 13.11.2011.Kent Eaton (2000): Decentralization, Democratization, and Liberalization:The History of Revenue Sharingin Argentina, 1934-1999. New Jersey: Center for International Studies, Princeton University.Devinder Sharma (2005): Trade Liberalization in Agriculture: Lessons from the First 10 Years of the WTO.Brussels: APRODEV.Bruce Arnold (2006): Agricultural Trade Liberalization, ECONOMIC AND BUDGET ISSUE BRIEF,Novermber 20, 2006. Washington: CBO. obtained from http://www.cbo.gov/ftpdocs/76xx/doc7690/11-20-AgTrade.pdf

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