Liberalization is a very sensitive topic because it affects so many people and that is the reason why the government thinks many times before taking any steps regarding liberalization. Liberalization is an economic term that refers to the process or steps by which government reduces its control and makes it less restrictive for private players to do business. In simple words, liberalization ensures that there are no restrictions on the part of the government and private companies are free to do their business. In order to understand this concept, one should look at some of the advantages and disadvantages of liberalization –
Advantages of Liberalization
Removal of Bureaucracy and Red Tapism
The biggest advantage of liberalization is that it leads to the removal of bureaucracy and red-tapism which is associated with the working of the government departments and that is the reason why once liberalization in a particular sector happens that sector grows very fast due to fast track mechanism and efficiency showed by the private companies. In simple words due to the bureaucratic working style, the sector which was moving like a tortoise starts due to move like a rabbit once the liberalization related to that sector is done.
Increased Confidence of Foreign Investors
A developing country cannot become a developed nation without the help of funds and that funds are provided by foreign institutional investors in the form of foreign direct investment through stock markets or directly and once these foreign investors get to know that government is also interested in liberalizing its economy then their confidence in the working of the government and towards the economy of the country rises which in turn leads to more inflow from these foreign investors thus giving a developing nation the much-needed funds to grow.
General Improvement of Peoples Life
Liberalization not only helps the particular industry but it also helps the people associated or working in those industries because once the industry starts to grow it helps in improvement in the income of all whether they are the owners of the company, shareholders of the company, employees of the company or suppliers of the company. In simple words, there is a general improvement in the standard of living of people due to the booster received by the industries in the form of liberalization.
Disadvantages of Liberalization
Biased Development
The biggest drawback of liberalization is that while it does lead to a general improvement in the standard of living of the people but there is a huge difference between the development of the owners of the company and the development of other people. In simple words, just like in the case of birthdays the kid having the birthday gets the biggest piece of cake while others get small pieces of cake in the same way in case of liberalization few people get the biggest piece of development while others share small pieces thus one can say that liberalization leads to biased development of few people.
No Fulfilment of Social Responsibility
Another drawback of liberalization is that while government companies tend to do works towards society by fulfilling social responsibility but when it comes to private companies they tend to work only for profits and social responsibility is last on their agenda. Hence take the example of the banking sector where private banks will open many branches in urban or metro areas but will never open the branches in far-flung rural areas whereas government banks are present in every corner of the country whether its rural area or urban area.
Domestic Small Companies Suffer
When government liberalizes a particular sector then it paves the way for foreign companies to enter the country and that is where the small companies working in the sector will find it difficult because foreign or multinational companies have a size and capital benefit as they can afford to have thin profit margins due to the size and availability of capital but domestic small companies do not have that luxury which in turn leads to those small companies getting closed or being taken over by big companies.
As one can see from the above that liberalization has pros as well as cons and that is the reason why any government taking a step towards liberalizing its economy should carefully read the above points and then only should take any decision whether to go ahead with liberalization or avoid it.