A Critical Evaluation of Economic Liberalization and Poverty Reduction

This report critically evaluates the growth, employment, and poverty impacts of economic liberalization, focusing on trade liberalization, financial liberalization, and privatization. It introduces the concept of economic liberalization as the removal of controls to encourage economic development, contrasting it with government intervention and public choice theory. The report examines trade liberalization's theoretical benefits and empirical evidence, highlighting potential gains and limitations for developing countries. It also explores financial liberalization, discussing its merits and demerits, including potential over-borrowing and adverse effects on rural banking and small enterprises. Furthermore, the report analyzes privatization's role in poverty reduction, discussing how it can improve efficiency and spur economic growth, while also noting potential disadvantages like reduced employment and uncertain investment returns. The conclusion suggests that GDP growth, driven by these factors, can lead to increased production, employment, and ultimately, poverty reduction. Desklib offers a platform to access this and similar solved assignments for students.

ECONOMIC LIBERALIZATION
POVERTY REDUCTION
GROUP A
M. Ali Bin Qasim
Mateen Rizvi
Jahanzeb Khokhar
Faryal Shahid

OVER VIEW
• The present chapter critically evaluates the growth, employment and po
of three majorelementsof recenteconomicliberalization—trade liberalizat
financial liberalization and privatization.

INTRODUCTION TO ECONOMIC LIBERALIZATION
• liberalisation in short is "the removalof controls" in order to encourage
economicdevelopment.Most first world and developingcountrieshave
pursued the path ofeconomic liberalization in recentdecadeswith the
stated goalof maintaining or increasing their competitiveness as business
environment.
• Basically it refers to reduction ofgovernment regulations and restrictions in
an economy in order to encourage greater participation by private entities
• Liberalization policiesinclude partialor full privatisation ofgovernment
institutions and assets,greater labour market flexibility,lower tax rates for
businesses,less restriction on both domesticand foreign capital,open
markets etc.

GOVERNMENT INTERVENTION
• Government intervention is regulatory action taken by government that seek
to change the decisions made by individuals, groups and organisations about
social and economic matters.
• From this liberalization perspective, government intervention in markets is
seen as both inefficient and distortionary. Even if an interventionist State acts
with good intentions, it does not have that competence to manage the
economy well.

PUBLIC CHOICE THEORY
• Public choice theory is often used to explain how political decision-making
results in outcomes that conflict with the preferences of the general public.
• In civic life, politicians, bureaucrats and citizens are all considered to act
solely out of self- interest in the political arena.
• But mostly Politicians and State bureaucrats see their self-interest, use
their power and the authority of the Government to engage in rent-
seeking behaviour, which distorts the allocation of resources and results
in disincentives for private sectors and entrepreneurs.
• Therefore, the power of the State and political actors, including the
ability to intervene in the economy, should be limited.

TRADE LIBERALIZATION

TRADE LIBERALIZATION & ECONOMIC
GROWTH THEORY
• Trade liberalization is the removal or reduction of restrictions or barriers on the
free exchange of goods between nations e.g. Tariffs, Quotas
• Leads to higher income level reduces poverty
• Different countries are endowed with different resources
• Opportunity cost varies
• Resources are allocated more efficiently when barriers are removed
• Gains from International trade depend upon several factors e.g Exchange Rate
• Developing countries mostly don’t gain much
• Low Income Elasticity

EMPIRICAL EVIDENCE
• Empirical studies don’t point out significant employment generation due to
trade liberalization
• World Bank study states the more than 70% gains from complete trade
liberalization occurs to rich countries
• It widens the market for country’s producers
• The economies of Japan, Hong Kong, Republic of Korea and China have
experienced averaging GDP growth of 6% until 1965-1990
• However this success is based on free trade

FINANCIAL LIBERALIZATION

FINANCIAL LIBERALIZATION
• Defined as the complete freedom for finance to move in and out of the
country, freeing of interest rates and relaxation of credit allocation controls
and reserve.
• Categorized into two components:
1. Domestic financial sector deregulation
2. Opening of the capital account.

FINANCIAL LIBERALIZATION MERITS
• Rationale provided by McKinnon and Shaw (1973) that administratively
determined low real rates of interest were the cause for poor growth
performance of the economy.
• Deregulation of interest rates would stimulate savings and extending supply of
credit to domestic investors would lead to economic growth.
• Opening up of capital account of balance of payments would allow for more
foreign capital flowing into the country.

FINANCIAL LIBERALIZATION DEMERITS
• May lead to episodes of over borrowing due to extended lines of credit.
• Macroeconomic policies have become pro cyclical (subject to high
fluctuations).
• Deregulation lead to privatization of financial institutions established to
subsidize and direct credit to small and medium enterprises.
• Rural banking has been adversely affected due to deregulation.
• Privatization has reduced the developmental role of government, resulting in
poor performance of small and medium enterprises and agriculture. Also lead
to deindustrialization with adverse impacts on employment and poverty
eradication.

PRIVATIZATION

HOW CAN PRIVATIZATION REDUCE
POVERTY?
 Privatization is supposed to improve the efficiency of enterprises by focusing
on financial performance.
 Through better resource allocation and improved efficiency, privatization is
expected to spur economic growth and hence reduce poverty.

HOW DOES PRIVATIZATION ACTUALLY
HELP DEVELOP THE PRIVATE SECTOR?
• This remains unclear
• It could increase private investment in a sector
• It could signal government support for the private sector
• Privatization can also create an environment where the private sector
attempts to stifle competition and flout regulations in order to enhance
profits.

DISADVANTAGES
• Private firms will invest only when and where they expect to make a profitable
return.
• If revenue from privatized enterprises becomes uncertain, firms may back out
of investment projects.
• There are numerous examples of utility privatization failures. For example, in a
water supply programme in a developing country, is not normally a very
attractive proposition because it involves a large upfront investment and a
long-term pay-off.
• Private firms are also sometimes guaranteed rates of return which allow for
price or user charge increases.
• Reduced employment.

CONCLUSION
• All these above factors helps in growth of GDP so in short “once GDP
rises, it means that their will be more production in economy, more supply
that leads to more employment to create more goods hence poverty
reduces”.