5.4 Policies and Economic Liberalization

In this topic we will go more in-depth in our discussion about the process of Economic Liberalization and how nations deal with it. Economic liberalization is part of the Neoliberalism ideology (aka Modern Capitalism) and it is an important movement that still shapes the economic landscape of many nations today. We will also analyze the negative impacts of liberalization, which include but are not limited to inequality, environmental degradation, and decrease of social welfare. 

For this topic, it is important that you also learn how to analyze data 👩‍💻 properly, and that you are able to make inferences that relate to the course countries' political regimes, systems and institutions. 

Economic Liberalization and its effects

As mentioned by previous guides, the process of economic liberalization consists of the deregulation of the government over the economy. There are many economic liberalization policies that countries may adopt, including: 

• Free Market mechanisms - we mentioned in previous guides that the idea of "free market" consists of letting the market run by itself, or rather, without government intervention. These mechanisms incentivize a free flow of traded goods between countries through the reduction of subsidies and tariffs. 💡Remember: Subsidies consist of a financial help by the government to support a specific activity and/or industry that are seen as social/economically beneficial. Tariffs are taxes imposed on imported goods by the government to protect domestic industry and collect revenue. 

• Privatization - process of transferring ownership from the state to private actors. It is important for liberalization because it allows for individuals to take over great companies that are crucial for the state, and it allows for certain industries to let go from government goals and expectations.

• Opening for FDI - Foreign Direct Investment is a crucial piece of Liberalization today, as it generates a lot of economic growth to receiving countries, and creates a more active market across the globe.

How to compare political economic systems?

Now that you know more about some of the strategies used for economic growth in the modern world, you will learn how to compare the economic states of different countries! There are several indicators that we can use to analyze the economic status of a country, and it is important that you know what each one of them imply: 

• Economic Growth - different scholars will prioritize different measures of economic growth over others. One common one is annual GDP, which consists of the measure of all goods and services that a nation has produced in a year. The IMF provides a measure of real GDP growth of every country here, in case you want to explore and compare nations. In the year of 2022, among the course countries, the one that had the highest growth was China, with a percentage of 4.4%. The lowest was Russia with a -2.3%. 

• Human Development - this measure takes a look into standards of living of different populations. You can check the annual report here. Even having the highest GDP growth, China's Human Development Index is still below many other more developed nations. This suggests that the economic status of a country does not only rely on GDP, but on other humanitarian and social factors as well.

• Inequality - the distribution of the wealth of a nation also matters. Countries that have high level of inequality can indicate lack of government efficiency and life quality for its citizens. The OECD (Organization for Economic Co-Operation and Development) publishes an annual report on income inequality, which you can check here. The Gini Coefficient is one of the most used indexes to capture inequality, and it provides a range from 0 (equal) - 1 (most unequal).

Liberalization: Expectation vs. Reality

Countries usually adopt liberalization policies with the objective of remedying common economic issues, such as unemployment and lack of productivity, and even trade deficits. But, economic liberalization has caused negative impacts in many countries across the globe, for example: 

• Persistent political corruption - Neoliberalism gives more powers to private enterprises, which motivates corporation owners to gai even more power by infringing the laws and/or buying support from politicians. This can become a pattern that contributes to government inefficiency in a nation.
• Exacerbation of political tensions - liberalization can lead to division within politics, and create rivalry between parties and/or political institutions. The idea of decreasing government intervention can be controversial, and disagreements on this can lead to great polarization.
• Environmental issues - economic growth takes a lot of resources, leading to pollution and other types of environmental degradation. There are also other phenomena that have occurred due to liberalization: - Urban sprawl 🌆- the urbanization of areas that were previously underdeveloped.- Migration flows can contribute to urban sprawl. For instance, as the Northern part of Mexico 🇲🇽 became super industrialized, more people decided to go there for job opportunities, leading to the expansion of cities and urban areas in the region.