Market Liberalization for Developing Countries

Each developing country is unique in its own way. Though the main aim of every country is to attain a state of self-sufficiency, the means of development available for each country is different. Not every country is blessed with abundant natural resources that can enable it to have enough income for development. Moreover, different regions are endowed with different resources. On the same note, different nations are at different stages of growth thus they require different policies to induce development. Opportunities of trade that are available for any country are different. Debt crisis, which is another problem that hinders development, has different causes that require different approaches. In this regard, forms of market liberalization needed for the various developing countries are different.

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Liberalization is used to refer to a situation where various government regulations are either eliminated or reduced to allow increased trade and cooperation among nations. Market liberalization leads to opening up of a country’s boundaries for products from other countries. This means that a country relaxes the economic regulations that hitherto were in place. Liberalization essentially means that a country reduces protection policies and opens up its economy to competition from outside (Stallings, 2001). It should be noted that liberalization does not necessarily mean privatization, though the two are usually used interchangeably by many people.

Trade is important for any country because it allows each country to get what it cannot produce locally. International trade has gained significant recognition from both classical and neoclassical economists. It has been noted that trade is a necessary ingredient for development of knowledge and experience which lead to development. Developing nations are highly dependent on trade compared to developed nations. As a result, trade liberalization is important in ensuring that business restrictions are reduced to encourage trade. Countries will engage in production of commodities in which they have comparative advantage. Consequently, they will purchase commodities that they are unable to produce or those which are expensive to produce. Trade, therefore, is important for economic stimulation through division of labor and specialization (Epifani, 2003). However, every country has comparative advantage in different areas and thus will require different forms of market liberalization that will help in advancing the benefits of comparative advantage.

Trade liberalization should enhance international trade. Selling products of one country in other countries helps in increasing the market for products and thus increase national income. A country will have to reduce regulations on areas where it wants to increase foreign participation for better management of resources. While labor is abundant in developing countries, technological knowhow and other capital inputs are scarce (Litan, Pomerleano & Sundararajan, 2003). As a result, forms of liberalization needed should be able to encourage inflow of technological expertise to the developing countries. While liberalizing the markets, developing countries should take care to ensure that they gain from any relationship that may be established. Research has shown that relationships between developing and developed countries mostly benefits developed countries.

Liberalization is essentially reducing restriction to trade and enabling free trade with other countries. Trade is very vital for any country because of the immense advantages it brings. To begin with, trade provides market for local commodities. It should be noted that domestic markets alone are sometimes not enough to provide sufficient demand for all goods produced in a country. In this regard, countries need to open their boundaries to allow external trade. On the same note, trade is crucial in encouraging specialization. People will always trade on commodities which they can make profits. Similarly, when trading, countries will always strive to make gains. Therefore, resources will be efficiently allocated as every country seeks maximum gain from trade. By increasing the market, trade is able to increase the production and income levels of a country. Increase in incomes has been known to have a direct impact on consumption and hence it positively affects growth rates.

It is important to note that in order to have efficient use of idle capital, there is need to increase production. As the scale of production increases, fixed costs are shared among increased number of units thus cost per unit decreases. Consequently, trade reduces production costs by enabling countries to take advantage of economies of scale. Moreover, trade leads to increased demand which encourages producers to increase their scale of work. Capital investments then become necessary (Aksoy & Beghin, 2004). Consequently, people start saving and investing a lot thus increasing economic growth as well as development. Developing countries are in dire need of capital and other inputs of production. Trade is highly helpful in enhancing inflow of capital from developed countries. This capital is very crucial in boosting economic development in the developing countries.

Arguably, monopolies are highly inefficient in their modes of production. They always make super normal profits by charging high prices for their commodities while the quality of their commodities remain low. Trade liberalization increases competition and eliminates monopoly dominance. This increases the quality of goods that consumers get and ensures that inefficiencies of monopolies are put to check.

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Nevertheless, developing countries usually experience high price elasticity of demand and have low average incomes. On the same note, there have been bad terms of trade between developing and developed countries that lead to disadvantages on the side of developing countries. In this regard, developing nations have to consider protecting some of their domestic manufacturing industries from foreign competition. This will be vital in ensuring that economic development is achieved. Some countries have oil which is high priced in the world market. However, most developing countries depend on primary non-mineral raw materials which have highly unstable prices. Moreover, these countries need to import raw materials for various industries (Kirkpatrick, Clarke & Polidano, 2002). Consequently, developing nations will have to implement market liberalization policies that will take this into consideration.

Most developing countries depend on foreign aid from developed countries to carry out some development projects. On the other hand, developed countries do not require these grants. It is important to note that foreign aid sometimes come with some conditions from the issuing country. These conditions influence the way a country operates. Due to the lack of resources, a country cannot avoid getting the foreign aid. Foreign aid is vital in augmenting capital for investment which is limited in developing countries. Shortage of domestic investment and capital equipment are factors that reduce development in developing countries (Epifani, 2003). However, the raw materials that each country requires for development are very different. Consequently, these countries will need diverse liberalization methods to cater for their diverse needs.

The most important reason why each developing country needs different market liberalization forms is because sources of growth and development are different. To begin with, natural resources available in different countries are not the same. It is important to note that natural resources are the principle ingredients for development of any country. In this regard, any policy that is taken by governments should take into consideration how to utilize the natural resources. However, in many developing countries the natural resources are not utilized, underutilized or miss utilized.

Various countries are endowed with different natural resources. There are countries that have oil and they can easily earn enough money from this mineral. On the same note, there are other countries which are endowed in other minerals other than oil. These countries will have different policies and requirements compared to countries that have oil. The United Arab Emirates (UAE) has a lot of oil deposits. Therefore, its economy is highly dependent on oil. Consequently, UAE will require different policies compared to countries that do not have oil (Ahmed & Islam, 2010).

Another category of natural resources that countries have is agricultural resources. Countries that are well endowed with agricultural resources usually export raw materials. These commodities fetch little income on international markets. On the same note, they require different types of inputs and technological knowhow compared to countries which do not depend on agriculture. For that reason, while countries that have oil will want to have prices fetched from oil increase, agricultural nations may want to have volume of agricultural trade increased. In this regard, these countries will need different forms of market liberalization based on the diversity of natural resources.

Similarly, all developing countries do not have the same capital stock. Capital stock is defined as the produced means of production. It refers to the forms of production that are available for utilization in each country. Equipment, technological knowledge, investment, plant and machinery are classified as capital stock. The process of capital formation takes time and it is different in different countries. Capital formation takes place in three stages (Ocampo & Stiglitz, 2008). The first stage is where the country starts to have national savings and increases them over time. It is important to note that unless a country has real savings it cannot have investments. The second stage involves availability of credit and financial institutions to mobilize savings. This is crucial because without financial institutions to help in savings, personal savings will be less. The last stage is direction of savings into various investment opportunities especially on capital investments.

Capital formation in a nation is directly influential on growth and development of a country. This is because by increasing its capital stock, a country is able to increase not only its production, but also its employment opportunities. To some countries, electricity is their area of priority while to others it may be transport, education or water. Consequently, countries at different stages of capital development require different forms of market liberalization. For a country whose priority is electricity, the market liberalization forms the country will require are quite different from a country whose priority is transport (Stallings, 2001).

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Moreover, domestic environment of each country is different. Growth and development of every country highly depends on domestic economical as well as political conditions. The way every government carries out its activities is unique bringing about difference in policies. On the same note, cultural background of a country plays a great role in growth and development. The culture and attitudes of people are depicted through social institutions present in the country. It is important to note that social institutions are highly influential in determining consumption patterns of people, models of economic organizations and labor efficiency.

Consequently, the social environment determines economic activities and their rates. The social and economic institutions should be integrated to ensure that infrastructure required for development is available. Since the social institutions are different in each nation and they highly influence the political institutions, countries cannot have similar policies (Litan, Pomerleano & Sundararajan, 2003). Taking into consideration the prevailing local conditions, each country will need to implement the necessary policies that can spur development.

Any policy that can lead to social changes need to be implemented strategically to avoid conflict and rejection from the society. All developing nations will need to change their social institutions at one point in time. However, these changes cannot be the same because the social institutions are not the same. The institutional barriers that each country faces are different and unique. Every country has different objectives and different means through which the objectives can be met. The psychological, sociological and even cultural changes needed are quite different in each case (Kirkpatrick, Clarke & Polidano, 2002). Consequently, each developing nation will require a different approach of market liberalization. Taking Sub-Saharan Africa as an example, people from countries in the east are majorly Christians while towards the north countries are majorly Islamic. Given the different religious restrictions, countries from these two regions will have different forms of market liberalization.

On the same note, political and administrative issues are somewhat different in each country. The political system of a country has great influence in determining development projects that can run by the government and the ones to be left on the hands of private business people. It is the political leaders who determine allocation of national resources. The political system will determine the sectors that will be liberalized and those that will not. The sectors that account for the highest percentage of the Gross Domestic Product (GDP) will most probably not be fully liberalized. It is upon the government to implement the basic monetary and fiscal policies that will determine the social economic environment of a country. As a result, difference in political systems means difference in economic structures and modes of governance (Ahmed & Islam, 2010). Therefore, the countries will have different development priorities. These countries will thus need different market liberalization forms.

Arguably, before any country implements liberalization policies in any sector, infant and other vital industries should be taken care of. Countries will need to protect the industries in areas where they have comparative advantage. Liberalization of trade exposes countries to external competition. Sometimes the competition is unfavorable because it involves imports from developed countries which are cheaper than locally produced goods. If competition is allowed to go on unregulated in this sectors, domestic industries will be driven out of business. Consequently, it is not peculiar to find regulations still in place in various sectors of the economy where local industries are given an upper hand. However, each country has comparative advantage in different sectors. As a result, governments will have different protection rules for they will be protecting different industries. It, therefore, goes without saying that various countries will need different forms of market liberalization (Ocampo & Stiglitz, 2008).

Similarly, developing countries face very diverse challenges to their development projects. Agricultural countries like Zambia and Kenya face protectionist tendencies from developed countries. Developed countries have the ability of subsidizing their agricultural sectors. Moreover, they can use advanced technology which is easily available. In this regard, developing countries that heavily depend on agriculture find it difficult to sometimes drive up their agricultural exports through simple trade liberalization. Though liberalization is vital in eliminating barriers that hinder development in a country, not every form of liberalization can lead to the same results in every country. In a move to increase its volume of exports, Chile implemented import liberalization policies as well as exchange rate devaluation. Interestingly, instead of import liberalization bearing the results, it is the exchange rate devaluation that increased the rate of exports (Epifani, 2003). For the case of East Asian countries, liberalization of technology and education sector has proved to increase exports and thus economic development.

It is important to note that development takes place in stages. Each stage is slightly different from the other and requires different policies to spur further development. As Rostow’s growth theory states, the five stages of growth have different characteristics and require different structural changes to move to another stage. Since all countries cannot be at the same stage of development at the same time, they all need different policies and approaches to development. Consequently, even on business matters different developing countries will need unique approaches to policies because they will be at different stages of development.

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Saying that liberalization has no disadvantages will be a lie. Firstly, liberalization exposes an economy to various trade risks. Any economic crisis that occurs in any country of the world is able to have effects all over the world. This is the case because countries are very much liberalized and thus they highly depend on international trade. On the same note, liberalization brings cheap products from other countries into a country. These products reduce the demand for locally produced goods and this is likely to negatively impact local industries. Moreover, due to advanced technology, developed countries are able to produce high quality goods (Aksoy & Beghin, 2004). This reduces local ingenuity and entrepreneurship. Furthermore, if private companies are big enough to control huge market share, they can monopolize the market in places where there is trade liberalization. There has also been debate on whether market liberalization benefits developed or developing nations. Studies have shown that developed nations are the greatest beneficiaries of market liberalization at the expense of developing countries.

Market liberalization is a necessary evil that countries have to deal with. It leads to increase in exports and volume of trade in general. It is important for technological advancement of a country especially developing countries. However, every developing nation has different policies that require different market approaches. Each country is unique in its own way. Countries have diverse natural resources as well as political systems. In this regard, a uniform mode of market liberalization cannot work for all countries. Developing countries need to identify individual areas where liberalization is needed and those which require regulation. It is only through this way that sustainable benefits can be received from market liberalization.

References

Ahmed, A. D. & Islam, S. M. (2010). Financial Liberalization in Developing Countries: Issues, Time Series Analyses and Policy Implications. New York: Springer.

Aksoy, M. A. & Beghin, J. C. (2004). Global Agricultural Trade and Developing Countries. Washington, DC: World Bank Publications.

Epifani, P. (2003). Trade Liberalization, Firm Performance, and Labor Market Outcomes in the Developing World: What Can We Learn From Micro-level Data? Washington, DC: World Bank Publications.

Kirkpatrick, C. H., Clarke, R. & Polidano, C. (2002). Handbook on Development Policy and Management. Northampton: Edward Elgar Publishing.

Litan, R. E., Pomerleano, M. & Sundararajan, V. (2003). The Future of Domestic Capital Markets in Developing Countries. Washington: Brookings Institution Press.

Ocampo, J. A. & Stiglitz, J. E. (2008). Capital Market Liberalization and Development. Oxford: Oxford University Press.

Stallings, B. (2001). Globalization and Liberalization: The Impact on Developing Countries. New York: United Nations Publications.

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