Economic liberalization is the situation where country withdraws all the restrictions regarding international trade and encourages the exchange of goods and services between nations without much regulations, laws, taxes, and other policies that affect the business of a country. When a nation is liberalized, the economic influence can be seen on the investors too. A degree of liberalization can be determined through evaluating how easy it is to invest and start a business in a particular nation. Each of the developed countries has been liberalized already, so today we are going to focus more on developing and underdeveloped nations.
Here are the five impacts of liberalization on the economy of a country. Read on:
Free Flow of Capital
The primary motive to introduce liberalization was to allow free flow of capital between two or more nations. It also ensures the efficient allocation of resources and advantages that are received from competitive market conditions by reducing trade laws, tariffs, and other trade barriers. Another significant effect was the cheap access of capital from investors as a result lower cost of capital enabled business owners to go for profitable projects which wouldn’t have been possible otherwise.
Diversification for Investors
Liberalization also benefits investors, they can now divide their portfolio into several portions to invest in diverse assets. People who have sufficient funds have the freedom to put their money into different projects easily and without any hassle, be it in their own country or another. Generally, the correlation between developed and emerging countries is low. The overall risk of a developing or undeveloped country might be higher, but when a low correlation asset is added to the profile, it minimizes the risk. As a country moves towards liberalization, the correlation rises over time because it integrates with the rest of the world and becomes sensitive to international events. Of course, it also leads to contagion risk where the crisis in various countries causes a crisis in the domestic nation.
Increased value of Stock Market
Another impact of liberalization is the rise in the value of the stock market. Our online economic assignment help providers explain that investors and fund managers always look for profitable opportunities that can earn them high returns, so they now have various countries available to them where they can invest their amount. The private companies that were previously unavailable to international investors are now allowed to raise capital from the foreign market.
No Barriers to International Investments
Every investor intends to put his money in emerging countries, but it gets impossible sometimes due to a number of barriers to enter the country they plan to invest in. Some of the restrictions include foreign investment restrictions, tax laws, accounting regulations, and legal issues, all of which merely make it impossible or complicated to get access to that nation. The process of economic liberalization begins with relaxation in the international trade barriers and giving some control of the economic direction to the private sector. It also involves privatization and deregulation of companies.
Reduced Political Risks
Other than the aforementioned benefits, liberalization also helps to reduce the political risk. The government of an underdeveloped nation has to strengthen areas beyond the ones mentioned above to attract more and more foreign investment. These are the sectors that encourage a willingness to set up business in the country. The legal foundation regarding disputes, fair contract laws, property laws, etc., are some of the policies that boost confidence amongst investors and businesses to operate in that country. Once the barriers are gone, and liberalization process starts, it improves government bureaucracy, and this lower political risk is the reason for the rise in the stock market.
Undoubtedly, liberalization is a beneficial and desirable step for every country with the primary objective of the unrestricted flow of capital. Furthermore, it also provides new opportunities to the citizens and investors for growth, profit, and diversification.
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