Very Short Question Answer

1.Define the meaning of privatization.

Privatization means the transfer of government assets and activities to the private sector. In other words, it is the involvement of private sector in the management of the public enterprise, or to sell, or lease it, or transfer government ownership to private ownership.

2. Define the meaning of economic liberalization.

Economic liberalization is defined as the process of release the economy from the hold of the government and provide the platform for the enhance role of the private sector in economic activities.

3.What do you mean by globalization?

Globalization means the integration of national economy into the international economies through trade, foreign direct investment, capital flows, migration and the spread of technology.

4. Point out benefits of foreign direct investment.

The benefits of foreign direct investment are follows:

Economic development
Employment generation
Resource and knowledge transfer
Increase productivity of labour
Access to foreign market

5. What do you mean by foreign employment?

Working abroad for earning money is called foreign employment. Labor migration for overseas employment has rapidly increased, particularly after globalization.

Short Question Answer

1. What is privatization? What are its benefits?

Privatization is the transfer of government assets and activities to the private sector. In other words, it is the involvement of private sector in the management of the public enterprise, or to sell, or lease it, or transfer of government ownership to private ownership.

The benefits of privatization are as follows:

i. Increased competition: Most of the public enterprises operate with monopoly power. Therefore, imperfect competition exists in the market. When government sells its enterprises, monopoly power will disappears and there will be competition among the private sector firms. The increases in competition increases efficiency which will benefit consumers in the form of cheaper price and high quality goods.

ii. Reduction in cost push inflation: In the public enterprises, rise in wages is not matched by rise in productivity. Even without rise in productivity of labour, wage rate is raised. This results cost push inflation. But in the private sector, rise in wage rate in matched by rise in productivity. Therefore, privatization helps in reduction of cost push inflation.

iii. Wider share ownership: The broadening of share ownership is another aim of privatization policy of the government. By selling share of public enterprises, small savings can be encouraged, which will help in further capital formation.

iv. Raising revenue for the government: Privatization not only raises the revenue but also helps to reduce budget deficit in the developing countries like Nepal. The revenue gained from the sale of public enterprises can be used in the development of infrastructure. Similarly, extra government revenue can be generated imposing corporate tax to the privatized enterprises.

v. Generation of employment opportunities: The privatized enterprises operate efficiently because of reduced interference of the government. Due to free entry, price deregulation etc, number of enterprises will also increase. This will result increase in employment opportunities in the country.

vi. Increases efficiency and innovation: Private ownership can stimulate innovation. Competition forces private firms to develop innovative and efficient methods for providing goods and services in order to keep costs down and keep contracts. These incentives, for the most part, do not exist in the public sector.

vii. Streamline and downsize government: Privatization is one tool to make bureaucracies smaller and more manageable. Large private corporations often sell off assets that are underperforming or proving too difficult to manage efficiently. Under new owners and leaner management, such divisions often receive a new lease on life. Entrepreneurial governments can replicate this experience.

2. Define the concept of privatization. What are its defects?

DEFINITION OF PRIVATIZATION
Please refer to Q. No. 1.

The defects of privatization are as follows:

i. Fear of emergence of private monopoly: People oppose the privatization because it creates private monopoly in the place of public monopoly. This problem has emerged even in the countries like France, Britain etc. having developed capital market. Main cause behind emergence of private is economies of scale enjoyed by large size privatized firms.

ii. Increase in inequality: Privatization may create inequality. The government sells off state assets (owned by everyone) to a wealthier subset of the population, thereby increasing the gap between the rich and the poor. Although it can be argued that the poorer have gained through improved services, this is not true for all utilities and those at the top end have got ridiculously wealthy.

iii. The loss of economies of scale: One of the major advantages of nationalized industries is that their big size allows them to take advantage of economies of scale. Privatization normally involves the break-up of a large entity into many smaller ones. These smaller units will not be able to take advantage of economies of scale.

iv. Job losses: Privatization forces the new private companies to be efficient, or ( at least find some way of reducing their costs in order to make a profit given the strict pricing formulae used by the regulators. By far the most popular way of cutting costs for these firms is to lay off labour in large quantities.

v. Profit motive: Private sector is always guided by profit motive. Since, their objective is to make profit by hook or by crook, they raise prices unnecessarily, reduce quality standard, create artificial shortage situation and adopt various other devices. Consumers in general are exploited to serve profit motive.

vi. Not conducive to public welfare: There are some goods that should be produced to promote public welfare. But private sector is not interested in producing such goods. Only goods that bring maximum profit are produced. Even harmful goods are produced for profit.

vii. Essential services: There are some essential services that should be provided to the people in general, whether or not these yield profit. Even some losses become necessary to be borne. Such services are neglected by private sector.

3. What is economic liberalization? Explain its benefits.

Economic liberalization is defined as the opposite of economic regulation by the state and includes deregulation of markets, deregulation of prices, The privatization of public enterprises, delicensing and removal of quota system in foreign trade. It is pursued through reducing public expenditures, privatizing government owned-enterprises, deregulation and delicensing and curtailing grant and subsidy provided by the government to different sectors of the economy.

The benefits of economic liberalization are as follows:

i. Rapid economic growth: Economic liberalization plays a crucial role in economic growth of an economy. The experiences show that economic liberalization has resulted rapid growth in the production of goods and services in the economy with increased labour productivity. World Bank states that China has been the fastest growing economy in the world since the market reforms and liberalization began in 1978.

ii. Improvement in living standards: Economic liberalization is an instrument to increase living standards of people of a country. It has helped to improve in living standard of the people of the countries adopting liberalization policy. This is due to the increase in economic activities and consequently an increase in employment opportunities.

iii. Increase in exports: Economic liberalization helps to increase exports and earn valuable foreign exchange. Many liberalized economies have been successful in opening their economies and reorient their exports to world markets. Exports have penetrated western markets previously considered beyond them. The liberalization of foreign trade helps to link a country with rest of the world, which helps to boost exports.

iv. Improvement in state enterprises: Public enterprises have been a burden to almost all countries due to their inefficiency. With liberalization, state enterprises have responded to reform. The market competition and tight budget constraints have encouraged them to deep cost cutting and restructuring within firms. Consequently, they are able to achieve their objective of uplifting the economic welfare of people.

v. Emergence of new businesses: Liberalization leads to the emergence of new businesses. It increases private sector economic activities, promotes investment and employment. After liberalization, private sector economic activities have remarkably increased in Nepal. The growth of private sector firms in the field of finance, e.g., bank, air service; insurance business, etc. in Nepal is quite remarkable. Besides, the foreign investment particularly in the form of joint venture has remarkably increased.

vi. Foster competition: Liberalization promotes competition, which in turn, leads to efficiency in production. The consumers may substantially benefit from improved products and lower prices. Besides, competition leads to innovation and research and efficient use and allocation of resources.

vii. Benefits to consumers: Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services. The increased competition ensures goods and services, as well as inputs are supplied at the lowest prices.

4. What is economic liberalization? What are its defects?

DEFINITION OF ECONOMIC LIBERALIZATION
Please refer to Q. No. 3

The defects of economic liberalization are as follows:

i. Structural unemployment may occur in the short term: The removal of trade barriers can impact upon large numbers of workers, their families and local economies. Often it can be difficult for these workers to find employment in the growing industries. In this situation, government assistance is necessary.

ii. Increases domestic economic instability from international trade cycles: Economies become dependent on global markets. This means that businesses, employees and consumers are more vulnerable to downturns in the economies of trading partners which lead to decreased demand for exports, leading to falling export incomes, lower GDP, lower incomes, lower domestic demand and rising unemployment.

iii. Difficult for new industries: Developing or new industries may find it to become established in a competitive environment with no short-term protection policies by governments. It is difficult to develop economies of scale in the face of competition from large foreign industries.

iv. Pollution and other environmental problems: As companies fail to include environmental costs in the price of goods in trying to compete with companies operating under weaker environmental legislation in some countries, various pollution and environmental problems occur.

v. Harmful to developing countries: Liberalization prescribes free trade policy. But free trade policies are beneficial only to the medium and high income countries, not to the poor countries like Nepal. It cannot compete with medium and high income countries in terms of price and quality. Consequently, import increases and export decreases leading to the foreign trade deficit. Thus, liberalization is harmful to the developing countries like Nepal.

5. Define globalization. What are its benefits?

Globalization is defined as the integration of national economy into the international economies through trade, foreign direct investment, capital flows, migration and the spread of technology. In other words, globalization is also a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology

The benefits of globalization are as follows:

i. Free trade: Free trade is a way for countries to exchange goods and resources. This means countries can specialize in producing goods where they have a comparative advantage (this means they can produce goods at a lower opportunity cost). When countries specialize, there will be several gains from trade:

a. Lower prices for consumers
b. Greater choice of goods
c. Bigger export markets for domestic manufacturers
d. Economies of scale through being able to specialize in certain goods
e. Greater competition

ii. Free movement of labour: Increased labour migration gives advantages to both workers and recipient countries. If a country experiences high unemployment, there are increased opportunities to look for work elsewhere. This process of labour migration helps to reduce poverty and geographical inequality and it also helps countries with labour shortages fill important posts.

iii. Increased economies of scale: Production is increasingly specialized. Globalization enables goods to be produced in different parts of the world. This greater specialization enables lower average costs and lower prices for consumers.

iv. Promotion of economic growth: The developing countries like China, Thailand, and India are getting large international market for export due to globalization. Increasing export means increase in output and income leading to higher economic growth. Higher economic growth helps to reduce poverty and improve living standard of people.

v. Increased investment: Globalization has also enabled increased levels of investment. It has made it easier for countries to attract short term and long term investment. Investment by multinational companies can play a big role in improving the economies of developing countries.

6. Define globalization. What are its benefits?

DEFINITION OF GLOBALIZATION
Please refer to Q. No. 5.

The defects of globalization are as follows:

i. Free trade can harm developing economies: Developing countries often struggle to compete with developed countries; therefore it is argued free trade benefits developed countries more. There is an infant industry argument which says industries in developing countries need protection from free trade to be able to develop. However, developing countries are often harmed by tariff protection.

ii. Environmental costs: One problem of globalization is that it has increased the use of non renewable resources. It has also contributed to increased pollution and global warming. Firms can also outsource production where environmental standards are less strict

iii. Labour drain: Globalization enables workers to move more freely. Therefore, some countries find it difficult to hold onto their best skilled workers, who are attracted by higher wages elsewhere. Currently, Nepal is facing the problem of labour drain.

iv. Loss of domestic market: Globalization has resulted into hard competition in trade. The local companies cannot compete with the large scale and financially strong multinational companies.. Consequently, local industries lose their domestic market.

v. Tax competition and tax avoidance: Due to globalization, multinational companies are establishing in many countries of the world but these companies pay very little tax in the countries where they do most of their business. This means governments have to increase taxes on VAT and income tax. It is also seen as unfair competition for domestic firms who don’t use same tax avoidance measures. The greater mobility of capital means that countries have sought to encourage inward investment by offering the lowest corporation tax.

Leave a Reply

Your email address will not be published. Required fields are marked *