Globalization, Economic liberalization, Market failure

Economic Liberalization

It means the process of shifting the economy from government control to market economy. In a market economy, economic activities are performed freely by the private sector to set into the economic activities on a competitive basis by reducing government’s interface is called economic liberalization. The process of liberalization includes the program such as removing government control from domestic as well as foreign trade and privatization of public enterprises.

Role of economic liberalization in Nepal

i. Reduce Budget deficit: Public enterprises failed to get required return owing to the inefficiency of the management and government control. Government interference in the activities of public enterprises increases the financial burden on the government. This results in the increase in the budget deficit and hence increases public debt. Therefore, the privatization of these enterprises curtails government expenditures and help in reducing the budget deficit.

ii. Increase in competition: The policy of liberalization increases the involvement of the private sector in the industry. This creates the environment for domestic as well as foreign competition. Thus, the enterprises are encouraged to produce quality goods at lower costs. This is beneficial for both the people and the country.

iii. Efficient use of resources: The private sectors are mostly profit oriented. So, they concentrate on the efficient use and proper allocation of resources in the production of goods and services. The increase in efficiency means an increase in production and also increase in profits. The private sector will be more active in economic activities.

iv. The resource mobilization by the government in other sectors: The government can divert its resources in other sectors of the economy in two ways. Firstly, the government receives funds directly from the sale of public enterprises. These funds can be utilized in other development works. Secondly, the reduction in government expenditures on public enterprises reduces the extra burden on the government. This enables the government to invest in other sectors for public welfare. Further, the revenue collected by the government in the form of direct and indirect taxes from the privatized enterprises can be used in development works.

v. Increase in production: National product increases with the establishment and operation of private enterprises. More production means more profit. So, private enterprises are initiated to increase production.

Globalization

Globalization refers to the process in which activities of a large number of business enterprises is carried out in many different setting crossways national boundaries. More simply, globalization is more than just exporting or importing from one country to another country. True globalization involves one firm obtaining a form, producing or developing or manufacturing in, and selling in many different countries in the world. There has been an increasing trend in the world towards globalization is characterized by trends such as:

• Increased trade across national boundaries.
• One business having subsidiary businesses and plants in many countries.
• One business obtaining raw material required from various countries.
• One business selling its products or services in various countries in the world.
• Growth or increasing of joint ventures as well as technical collaborations between business from different countries.
• Lowering or decreasing of trade barriers and simplified export and import procedures

Globalization is a process that promotes:

1. Economic interdependence between the countries in the world
2. Integration of national economies into one global economy.
3. Free movement of products across borders
4. Free flow of capital, labor, management and technology across borders internationally.

Forms of globalization

i. Economic Globalization: As an economic philosophy, globalization means integration with the world economy. Economic globalization interlinks of markets in goods, services, capital, and finance. It is possible through the policy liberalization, privatization, and deregulations.

ii. Political Globalization: In political terms, globalization means integration of global community in terms of ideas, norms, and values. There is an exchange of views and experience between nations regarding the establishment of the legal system, sustainable development pattern of governance and so on. Thus, political globalization is many nations joining hands through union or regional grouping which aims at a macro-political framework for development.

Globalization is considered as an important element of the modern business environment. Globalization offers many advantages to the people and businesses. These includes:

• Better employment opportunities for competent human resources.
• Easily availability of a greater variety of goods as well as services to the consumers.
• More competitive price to the competitors in the market.
• The ability of business to achieve lower costs.
• Access to larger markets to business firms.
• Wider as well as a faster spread of new technologies across the world.
• Professionalization of management.
• Increase the scope of the market for the product through the reduction in tariff and non-tariff barriers.

Globalization has some disadvantages also

• Unrestricted globalization can obstruct the industrial development of less developed or developing countries.
• Smaller firms may lack the adequate resources to fight or compete internationally and hence may be forced out of business in the market.
• Countries become increasingly dependent on other countries for meeting their needs for goods and services. This can become a major disadvantage in situations like war.
• An adverse economic condition in one country can escalate to other countries and may even adopt global proportion.
• Globalization may also lead to faster spread of infectious disease, for people animals and plants. Such infection may be carried through, people or goods.

Market failure

It exists when free market forces of demand and supply fail to produce the amount of goods and services that are socially optimal and price of the product reflect the marginal utilities. This means market failure is said to exist if mechanism fails to allocate resources efficiently. This occurs when there is an inefficient allocation of resources in a free market. Market failure can occur due to a variety of reasons, such as monopoly (higher prices and less output), negative externalities (over-consumed) and public goods (usually not provided in a free market)

Reference

Bernake and Abel, Macroeconomics, Singapore, Pearson Education latest edition