Liberalisation

Submitted 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: 18th November 2011.

Liberalisation

Introduction
Economic activities such as production and distribution of goods and services have been carried on since ages both by private agencies such as individuals and firms as well as the state. The extent and nature of their participation depends upon the stage of economic development of the society, structure of the economy and the political ideas that rule at those periods. Generally, in more developed economies, the role of the state in managing economic affairs of the society is less. A society where the state has a relatively small role to play in the economic affairs of the people is generally described as liberal. By liberalising trade and capitalising on areas of comparative advantage, countries can benefit economically. Use of resources - land, labour, physical and human capital - should focus on what countries do best.

Liberalisation
In the closing decades of the 20th century, many developing countries experimented with the functional decentralization of revenue and expenditure to lower levels of government. For most of these countries, decentralization has been a fundamentally new experience, representing a historic break with the centralist past and setting into motion major changes in economic and political 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 developing countries has unleashed pressures for decentralization that were either dormant under or resisted by non-democratic governments. According to the second hypothesis, politicians who want to shrink the role of the state in the economy and achieve fiscal stability at the center endorse decentralization 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 will take some time before scholars can answer difficult questions about their consequences for democracy and economic performance. There is some sense that decentralization is still a moving a target and, given the confusion and disarray that changes of such magnitude inevitably involve, will continue to be so for a number of years. But decentralization defined as increases in the policy authority of lower-level state officials relative to national-level state officials is not everywhere a strictly new phenomenon. Looking at changes in revenue sharing rules implemented by both democratic and authoritarian governments and by governments that endorsed statist and liberal development models makes it possible to evaluate both hypotheses. Changes in revenue sharing rules, typically involving attempts by successive political leaders to increase or decrease the set of taxes subject to revenue sharing and/or the percentage of revenues sent to lower levels of government, can be thought of as movement along a decentralization continuum. Overall, the period between 1934 and 1999 witnessed an expansion in the number of taxes subject to revenue sharing and significant increases in the percentage of tax revenue automatically sent to sub-national governments, but there were also significant periods of recentralization.
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Liberalisation

Economic / Financial Liberalisation

Economic liberalization may be described as the freedom to engage in economic activity at home and/or abroad, a freedom subject to institutional and policy constraints needed to guarantee public interests at large. It can be also said as a virtual withdrawal of the state from economic activities. Financial liberalization (FL) refers to the deregulation of domestic financial markets and the liberalization of the capital account. The effects of FL have been a matter of some debate. In one view, it strengthens financial development and contributes to higher long-run growth. In another view, it induces excessive risk-taking, increases macroeconomic volatility and leads to more frequent crises. Financial liberalization has led to financial deepening and higher growth in several countries.

Trade Liberalisation
The process of trade liberalization and market-oriented economic reform that had started in many developing countries in early 1980s intensified in the 1990s. The reform undertaken varied in ownership and contents in different countries. The reforming countries can be classified into three groups. The first group consists of a number of countries in East Asia which continued their own dynamic industrial and trade policies initiated in 1960s. The second group includes a large number of countries, mostly in Africa, which have gone through the reform programmes designed and dictated by the IFIs. The third group comprises a number of Latin American countries that undertook economic reform since early 1980s, initially under the pressure from IFIs. Nevertheless, in 1990s they intensified their reform process without having been necessarily under pressure of those institutions in all cases. The contents and philosophy of their reform programmes were, however, similar to those designed by the IFIs which in turn have been referred to as the Washington Consensus since the early 1990s. Universal and uniform trade liberalization was a part of that Consensus. Universal implies that all developing countries are to follow the same trade policy regime-trade liberalization-irrespective of their levels of development and industrial capacities. Uniform implies that all sectors and industries are to be subject to the same tariff rates-preferably zero rate, or low rate. Apart from trade liberalization, such reform programmes included mainly: capital account liberalization, devaluation at the early stages of reform to compensate for trade liberalization, fiscal and financial reform through contractionary macroeconomic policies such as budget cuts, increase in interest rates and privatization. Trade liberalization measures, in particular, are believed to be a reaction to the failure of traditional import substitution (MS) policies of the 1950s1970s. The philosophy behind the reform programmes was that the role of government in making decisions on resource allocation should be minimized and the incentive structure should change in favour of exports through import liberalization in order to follow an export promotion (EP) path instead of MS. It was

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Liberalisation

argued that private agents, guided by the operation of market forces, would better achieve the objectives of growth and diversification of exports and output structure in favour of manufactured goods. Such objectives would in turn be attained through the expansion of investment, better channelling of resources and allocation of investment outlays to productive sectors. The change in the structure of incentives would not only lead to growth and diversification but also to the upgrading of the production structure, facilitated by imported technology and improved skills enhanced by trade. Benefits from trade liberalisation Consumers ultimately benefit because liberalised trade can help to lower prices and broaden the range of quality goods and services available. Companies can benefit because liberalised trade diversifies risks and channels resources to where returns are highest. When accompanied by appropriate domestic policies, trade openness also facilitates competition, investment and increases in productivity. Downside of trade liberalisation Trade reforms, even if beneficial for a country overall, may negatively affect some industries or some jobs and many commentators worry about negative effects on the environment. The solution to these problems is not to restrict trade. They should be tackled directly at source through labour, education and environmental policies.

Agriculture Liberalisation
In recent years, trade in agriculture has not only attracted growing attention but is being viewed as the vehicle for global growth and equity. By expanding markets and by removing distortions caused by high levels of protection in agriculture, global trade will not only facilitate competition but spur growth in an area that is linked directly to poverty and hunger. The main goal of agricultural trade has been said to be to provide an enabling environment for a majority of the world's poorest to take advantage of the enormous opportunities to improve incomes and enjoy healthy lives. The Significance of Tariffs. Tariffs and tariff-rate quotas are by far the most costly of the policies that distort world agricultural 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 of the economic burden of agricultural tariffs. Correspondingly, an agreement that does not ensure that many of those high tariffs are significantly reduced is not likely to have much beneficial effect. The plan in the Doha Round negotiations was to allow each country to choose a few sensitive products and each developing country to choose a few additional special products whose protective tariffs would be cut less than others.

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Liberalisation

The 2006 World Bank study modeled variations on a prototype scenario for agricultural liberalization in the general range of those under discussion in the Doha Round. That study found that allowing countries to designate as few as 2 percent of their tariff lines as protecting sensitive products and developing countries to designate an additional 2 percent as protecting special products could eliminate 80 percent of the economic gain that would otherwise result from the prototype 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 to benefit the countries purchasing the subsidized products and to harm the countries granting the subsidies (although their agricultural sectors benefit) and the countries that are competing agricultural exporters. Because most subsidies are granted by developed countries, export subsidies tend to benefit developing countries and to harm developed countries; and, to a lesser extent, 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 Nations Conference on Trade and Development. What is trade liberalisation and isn't it a good thing? http://www.traidcraft.co.uk/get_involved/campaign/stop_epas/faq/trade_liberalisation Accessed on 13.11.2011 Trade liberalisation, http://www.oecd.org/document/2/0,3746,en_2649_37431_41049090_1_1_1_37431,00.html, accessed on 13.11.2011. Kent Eaton (2000): Decentralization, Democratization, and Liberalization:The History of Revenue Sharing in 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/doc7690/1120-AgTrade.pdf

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