Diversification is an important factor with regards to liberalization. Diversification is a way used by economists that reduces the firm’s risk by allocating investments variously. It helps firms try to maximize returns, because by allocating in different areas, there is a different reaction to the same event.
A worldwide policy that is used in many countries specifically less developed countries like India, is Import Substitution, this states that the countries try to rely less on imports from other countries, and try to produce more local goods and services. A reason that Import Substitution is unsuccessful could be through the example of Infant Industries. Protectionism is needed in Infant Industries, as these industries take place in less developed countries, and don’t have the economies of scale advantages that the more developed industries have. However less developed countries, or countries with Infant Industries, are usually very inefficient, are unlikely to develop quickly.
The impact of liberalization on Infant Industries is that it won’t benefit countries with emerging economies China and India, but it will benefit countries with developed industries like Europe and the USA. Another reason that Import Substitution is unsuccessful could be that the benefits of Import Substitution go to foreign firms, because foreign firms are able to use taxes and subsidies to their advantage, as well as placing their industries behind the tariffs. So Import Substitution won’t benefit LECD’s but the MEDC’s will benefit.
Employment is a key factor that is affected when liberalization occurs. When companies outsource, and there is liberalization, firms will choose to move to cheaper places, in turn hiring workers at cheaper areas e.g. LECD’s, whereas the MEDC’s unemployment rate will rise.
When Liberalization occurs, companies are affected because they have no more/less limits placed on their production of goods and services, in most cases, companies tend to move their production to places where the cost of production is less, when this occurs, workers that work in these area’s which are usually LECD’s tend to have a better chance on getting employed, and the MEDC’s have less workers that are employed. This affects the income gap between the rich and the poor nations because as liberalization occurs the poor have more employment, and the rich have less, however it still seems that the gap between the rich and the poor is still large, even though there are many jobs available for the poor if liberalization occurs.
When liberalization occurs and tariffs are removed, the supply of goods and services would increase without any limit, countries are able to export and import more, therefore producers are able to price their goods and services cheaper than when there were tariffs in place.
Liberalization takes a toll on the competition within a market. When there is liberalization competition increases. This is because as liberalization occurs, producers can produce more at a lower cost of production. When this happens, there are more firms that want to enter the market because of the low price that consumers are paying and producers are paying for. Therefore when liberalization occurs, the competition within a market increases significantly.
Liberalization affects the balance of payments within a country. The balance of payments (BOP) is the measurement of the payments between one country and the other countries that that specific country trades with. It is the total of all transactions, and is determined by the countries exports and imports of all goods and services as well as financial capital and transfers. So we can see that as liberalization takes place, the exports and imports have no more trade barriers placed on them, therefore supply will increase, and the balance of payments within two countries trading will increase as the imports and exports will increase respectively.
Liberalization also causes many social and cultural consequences as countries are characterized by what they sell. For countries in Asia, they produce rice, tea etc. For countries like South America, they specialize in coffee, cocoa etc. Liberalization causes a bigger export rate for these specific products to other countries, also increasing diversity within each country, therefore causing a positive effect socially. However, if a country exports many of their ‘signature’ goods, then the cultural aspect of their country is less enhanced, as when liberalization occurs, now many countries will be able to have that same product, and the producers lose cultural aspects.
