When a nation becomes liberalized, the economic effects can be profound for the

country
and for investors. Economic liberalization refers to a country "opening up" to
the rest
of the world with regards to trade, regulations, taxation and other areas that g
enerally
affect business in the country. As a general rule, you can determine to what de
gree a
country is liberalized economically by how easy it is to invest and do business
in the
country. All developed countries (First World) have already gone through this
liberalization process, so the focus in this article is more on the developing a
nd
emerging countries.

Economic conditions impact all businesses, though small businesses often feel th
e effect
of economic changes faster than their larger counterparts. Upswings in the econ
omy
typically provide a rush of new or expanded business opportunities for small
operations, whereas a downward economic cycle can have a severe and lasting impa
ct.

Impact of a Strong Economy

In a strong economy, nearly all businesses enjoy greater prosperity. Disposable
income
is high, unemployment is low and consumer confidence prompts people to pump the
ir money
back into the economy through the purchase of essential and nonessential goods a
nd
services. The impact of a strong economy on a small business is two-fold: as bus
iness
increases, so too does the need for a small business to keep pace with demand by
hiring
additional employees, expanding retail space or adding new product lines. While
this may
be viewed as a positive, the downside is that if the economy starts to falter,
many small
businesses find themselves overextended, which can result in mass layoffs and b
usiness
failures.

Impact of a Slow Economy

During an economic slowdown, many small businesses face a number of challenges.
Consumers

become concerned about their job stability and, in turn, are more likely to be
cautious
with expenditures, which leads to decreased revenue for small business owners.
A slow
profit stream can make it difficult for a small business to repay creditors, whi
ch can
negatively impact its long-term viability. A business facing financial struggles
is far
less likely to qualify for loans for capital expenditures and operations, which
limits
growth opportunities. Many small businesses also are forced to downsize their w
orkforce
during a slow economy. This limits their ability to serve customers and contrib
utes to
the unemployment rate, which furthers slows the economy.

Removing Barriers to International Investing

Investing in emerging market countries can sometimes be an impossible task if th
e country
you're investing in has several barriers to entry. These barriers can include t
ax laws,
foreign investment restrictions, legal issues and accounting regulations that ca
n make it
difficult or impossible to gain access to the country. The economic liberalizati
on process
begins by relaxing these barriers and relinquishing some control over the direc
tion of the
economy to the private sector. This often involves some form of deregulation an
d a
privatization of companies.

Unrestricted Flow of Capital

The primary goals of economic liberalization are the free flow of capital betwee
n nations
and the efficient allocation of resources and competitive advantages. This is u
sually
done by reducing protectionist policies such as tariffs, trade laws and other tr
ade
barriers. One of the main effects of this increased flow of capital into the co
untry
is that it makes it cheaper for companies to access capital from investors. A l
ower cost
of capital allows companies to undertake profitable projects that they may not
have been
able to with a higher cost of capital pre-liberalization, leading to higher grow
th rates.
We saw this type of growth scenario unfold in China in the late 1970s as the Chi
nese
government set on a path of significant economic reform. With a massive amount o
f
resources (both human and natural), they believed the country was not growing an
d
prospering to its full potential. Thus, to try to spark faster economic growth,
China

began major economic reforms that included encouraging private ownership of bus
inesses
and property, relaxing international trade and foreign investment restrictions,
and
relaxing state control over many aspects of the economy. Subsequently, over the
next
several decades, China averaged a phenomenal real GDP growth rate of over 10%.

Stock Market Performance

In general, when a country becomes liberalized, the stock market values also ris
e.
Fund managers and investors are always on the lookout for new opportunities for
profit,
and so a whole country that becomes available to be invested in will tend to cau
se a
surge of capital to flow in. The situation is similar in nature to the anticipat
ion and
flow of money into an initial public offering (IPO). A private company that was
previously
unavailable to an investor that suddenly becomes available typically causes a s
imilar
valuation and cash flow pattern. However, like an IPO, the initial enthusiasm al
so
eventually dies down and returns become more normal and more in line with fundam
entals.

Political Risks Reduced

In addition, liberalization reduces the political risks to investors. For the go
vernment
to continue to attract more foreign investment, other areas beyond the ones ment
ioned
earlier have to be strengthened as well. These are areas that support and foster
a
willingness to do business in the country such as a strong legal foundation to s
ettle
disputes, fair and enforceable contract laws, property laws, and others that al
low
businesses and investors to operate with confidence. Also, government bureaucrac
y is
a common target area to be streamlined and improved in the liberalization proce
ss.
All these changes together lower the political risks for investors, and this low
er
level of risk is also part of the reason the stock market in the liberalized cou
ntry
rises once the barriers are gone.

Diversification for Investors

Investors can also benefit by being able to invest a portion of their portfolio
into a
diversifying asset class. In general, the correlation between developed countrie
s such
as the United States and undeveloped or emerging countries is relatively low. Al

though
the overall risk of the emerging country by itself may be higher than average, a
dding a
low correlation asset to your portfolio can reduce your portfolio's overall ris
k profile.

The Bottom Line

Economic liberalization is generally thought of as a beneficial and desirable pr
ocess for
emerging and developing countries. The underlying goal is to have unrestricted c
apital
flowing into and out of the country in order to boost growth and efficiencies wi
thin the
home country. The effects following liberalization are what should interest inve
stors as
it can provide new opportunities for diversification and profit.

Economy-Related Business Opportunities

Some types of small businesses thrive in a slow economy. For example, companies
that are
involved in facilitating home foreclosures and vehicle and property repossession
s find
their businesses on an upswing during a slow economy. Additionally, small busine
ss owners
with solid and substantial financial backing may see an increase in expansion
opportunities by buying out their struggling competitors or absorbing the custom
er bases
of out-of-business competitors.

Economic Adaptation
Small businesses have an advantage over large businesses when it comes to adapti
ng to
economic swings. Small businesses typically have a smaller decision-making base
in terms
of leadership. Whereas a large company may need to call numerous stockholder me
etings
to discuss changes in business strategy and direction, a small business is much
more
nimble in the decision-making process. Typically, a small business can make fast
er
decisions to change course, increase or decrease workforce or product offerings
or
significantly change the company image to adapt to a changing economy.

There is a general economic decline during recession. The economy has a tremendo
us setback.
The purchase of the people comes down due to low salaries or lack of sufficient
income.
This results in slump in market with goods and services not being availed of by
people.
Production slows down and in turn prices go up. In fact during recession, many
firms are
forced to sell their products at throw-away prices and suffer from losses as a r
esult.

Recession impact on the economy

Slump in the market
Goods and services are difficult to be sold as the purchasin
g power
of the people comes down.
Stock prices come down Investment suffers. The industrial production is badly af
fected
as investors avoid investing in companies that might suffer losses during recess
ion.
Bigger companies are able to withstand the setbacks but smaller companies have a
tough
time and some may end up closing down.
Increase in unemployment People are thrown out of jobs. They are left in the lur
ch.
They are unable to meet both ends. Many goods and services are not within their
reach.

Depression Recession causes depression if it persists for a long time. Negative

trends
are visible in the stock market and rapid unemployment is there. Companies need
to be
bailed out by the government. Public spending suffers a set back.
National debts on the rise
Increase in national debts means less money can be sp
ent
by the government on development. Money gets diverted in bailing out companies.
The
recent recession in the U.S. indicates how banks have to depend upon federal aid
for
their survival. Taxpayers money is being spent in giving these banks a boost.

Recession is definitely bad for economic growth and development. It slows down t
he economy. Investors hesitate to invest, and producers are unable to churn out

products. Consumer lack the necessary money due to unemployment and cannot there
fore buy goods available in the market.
Recession is something to be dreaded by producers as well as consumers. Both suf
fer during these hard times. Both need each other. In case, consumers do not hav
e the purchasing power, then production suffers. Less production means less prof
its for producers who will find it difficult to run their business houses.
The economic scenario during recession is pathetic. It is interesting to note ho
w the economy suffers during such traumatic times as it affects us all.