Economics Essay 60: Liberalisation and Development

How effective are moves towards more free-market based systems involving internal and external liberalisation likely to be in raising living standards in LEDCs?

Before addressing the question, let's define the key terms:

1. Liberalisation: Liberalisation refers to the process of reducing government regulations and restrictions on economic activities, with the aim of promoting market competition and increasing economic freedom. It involves removing barriers to trade, deregulating industries, and opening up markets to domestic and international competition.

2. Living Standards: Living standards refer to the overall quality of life and well-being of individuals within a society. It encompasses various factors such as income levels, access to basic necessities, education, healthcare, housing, and overall social and economic conditions.

Now, let's evaluate the effectiveness of moves towards more free-market-based systems involving internal and external liberalisation in raising living standards in Less Economically Developed Countries (LEDCs):

1. Internal Liberalisation: Internal liberalisation involves removing barriers and regulations within the domestic economy to promote market competition and efficiency. This can include measures such as reducing red tape, simplifying business regulations, promoting private sector development, and encouraging entrepreneurship. Internal liberalisation can create a more favorable business environment, attract investment, and stimulate economic growth. This, in turn, can lead to job creation, higher incomes, and increased access to goods and services, thereby improving living standards.

2. External Liberalisation: External liberalisation involves reducing barriers to international trade and encouraging participation in the global economy. This can include the removal of import tariffs, quotas, and other trade restrictions. By opening up to international markets, LEDCs can benefit from increased access to larger markets, technology transfer, and foreign direct investment. External liberalisation can stimulate exports, generate foreign exchange earnings, and promote competitiveness. These factors can contribute to economic growth, employment opportunities, and improved living standards.

However, the effectiveness of liberalisation in raising living standards in LEDCs is contingent on various factors:

1. Institutional Capacity: LEDCs may lack the institutional capacity, regulatory frameworks, and governance structures necessary to effectively implement and manage liberalisation policies. Weak institutions and corruption can undermine the potential benefits of liberalisation, leading to unequal distribution of gains and perpetuating existing inequalities.

2. Social Safety Nets: Liberalisation can lead to economic restructuring, market volatility, and job displacements. Without adequate social safety nets and support mechanisms in place, vulnerable groups may face hardships and see their living standards decline. It is crucial for LEDCs to invest in social welfare programs, education, and healthcare to ensure that the benefits of liberalisation are more inclusive and reach all segments of society.

3. Market Distortions: In some cases, liberalisation may exacerbate existing market distortions and inequalities. Industries that were previously protected may struggle to compete with international players, leading to job losses and income disparities. Careful planning, targeted interventions, and appropriate transition policies are needed to address these challenges and ensure a more equitable distribution of benefits.

In conclusion, moves towards more free-market-based systems involving internal and external liberalisation have the potential to raise living standards in LEDCs. By creating a conducive business environment, promoting competitiveness, and integrating into the global economy, LEDCs can attract investment, stimulate economic growth, and improve access to goods and services. However, the effectiveness of these moves depends on addressing institutional challenges, implementing appropriate social safety nets, and managing market distortions to ensure that the benefits of liberalisation are shared by all members of society.