Advantages and Disadvantages of Liberlization

Advantages and Disadvantages of Liberlization

Advantages of Liberlization

(a) Increase in foreign investment: If a country liberalises its trade, it will make the country more attractive for inward investment. Inward investment leads to capital inflows but also helps the economy through diffusion of more technology, management techniques and knowledge.

(b) Increase the foreign exchange reserve: Relaxation in the regulations covering foreign investment and foreign exchange has paved way for easy access to foreign capital.

(c) Increase in consumption: Liberalization increases the number of goods available for consumption within a country due to increase in production.

(d) Control over price: The removal of tariff barriers can lead to lower prices for consumers. This would be particularly a benefit for countries who are importers.

(e) Reduction in external borrowings: Liberalization reduces the dependence on external commercial borrowings by attracting more foreign investments.

Disadvantages of Liberlization

(a) Increase in unemployment: Trade liberalisation often leads to a shift in the balance of an economy. Some industries grow, some decline. Therefore, there may often be structural unemployment from certain industries closing.

(b) Loss to domestic units: With fewer entry restrictions, it has been possible for many entrants to make inroads into the country, which poses a threat and competition to the existing domestic units.

(c) Increased dependence on foreign nations: Trade liberalisation means firms will face greater competition from abroad. When competition is not automatically enhanced, it can lead to domination by big institution that has market controlling powers.

(d) Unbalanced development: Trade liberalisation may be damaging for developing economies which cannot compete against free trade. The trade liberalisation often benefits developed countries rather than developing economies.