Economic liberalization

Economic liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities; the doctrine is associated with classical liberalism. The arguments for economic liberalization include greater efficiency and effectiveness that would translate to a "bigger pie" for everybody.Thus,liberalisation in short refers to "the removal of controls", to encourage economic development..

Most first world countries, in order to remain globally competitive, have pursued the path of economic liberalization: partial or full privatisation of government institutions and assets, greater labour-market flexibility, lower tax rates for businesses, less restriction on both domestic and foreign capital, open markets, etc. British Prime Minister Tony Blair wrote that: "Success will go to those companies and countries which are swift to adapt, slow to complain, open and willing to change. The task of modern governments is to ensure that our countries can rise to this challenge."

In developing countries, economic liberalization refers more to liberalization or further "opening up" of their respective economies to foreign capital and investments. Three of the fastest growing developing economies today; Brazil, China and India, have achieved rapid economic growth in the past several years or decades after they have "liberalized" their economies to foreign capital.

Many countries nowadays, particularly those in the third world, arguably have no choice but to also "liberalize" their economies in order to remain competitive in attracting and retaining both their domestic and foreign investments. In the Philippines for example, the contentious proposals for Charter Change include amending the economically restrictive provisions of their 1987 constitution.

The total opposite of a liberalized economy would be North Korea's economy with their closed and "self-sufficient" economic system. North Korea receives hundreds of millions of dollars worth of aid from other countries in exchange for peace and restrictions in their nuclear programme. Another example would be oil rich countries such as Saudi Arabia and United Arab Emirates, which see no need to further open up their economies to foreign capital and investments since their oil reserves already provide them with huge export earnings.

Liberalisation of services in the developing world

Potential benefits of trade liberalisation

The service sector is probably the most liberalised of the sectors. Liberalisation offers the opportunity for the sector to compete internationally, contributing to GDP growth and generating foreign exchange. As such, service exports are an important part of many developing countries' growth strategies. India's IT services have become globally competitive as many companies have outsourced certain administrative functions to countries where costs are lower. Furthermore, if service providers in some developing economies are not competitive enough to succeed on world markets, overseas companies will be attracted to invest, bringing with them international best practices and better skills and technologies. The entry of foreign service providers is not necessarily a negative development and can lead to better services for domestic consumers, improve the performance and competitiveness of domestic service providers, as well as simply attract FDI/foreign capital into the country. In fact, some research suggest a 50% cut in service trade barriers over a five- to 10-year period would create global gains in economic welfare of around $250 billion per annum.

Potential risks of trade liberalisation

Yet, trade liberalisation also carries substantial risks that necessitate careful economic management through appropriate regulation by governments. Some argue foreign providers crowd out domestic providers and instead of leading to investment and the transfer of skills, it allow foreign providers and shareholders to capture the profits for themselves, taking the money out of the country. Thus, it is often argued that protection is needed to allow domestic companies the chance to develop before they are exposed to international competition. Other potential risks resulting from liberalisation, include:

• Risks of financial sector instability resulting from global contagion
• Risk of brain drain
• Risk of environmental degradation

However, researchers at thinks tanks such as the Overseas Development Institute argue the risks are outweighed by the benefits and that what is needed is careful regulation. For instance, there is a risk that private providers will ‘skim off’ the most profitable clients and cease to serve certain unprofitable groups of consumers or geographical areas. Yet such concerns could be addressed through regulation and by a universal service obligations in contracts, or in the licensing, to prevent such a situation from occurring. Of course, this bears the risk that this barrier to entry will dissuade international competitors from entering the market (see Deregulation). Examples of such an approach include South Africa's Financial Sector Charter or Indian nurses who promoted the nursing profession within India itself, which has resulted in a rapid growth in demand for nursing education and a related supply response.

Historical examples

• Economic liberalisation in India
• Chinese economic reform
• Perestroika (Soviet Union)
• Baltic Tiger (Estonia, Latvia, Lithuania, c. 2000–present)
• Economic history of Brazil in the 1980s and 1990s
• Miracle of Chile
• Đổi Mới (Vietnam)
• Economy of Cuba, starting in 1994 and accelerating under Raúl Castro

See also

• Capitalism
• Economic liberalism
• Free market
• Globalization
• Liberalization
• Neoliberalism
• Privatization