The University of Zambia

Institute of Distance Education

Name: MONICA MULOMBA

Computer Number: 18052868

Course Code: DEV 2250

Lecturer: Mrs R. PHIRI-MUMBA

Task: Assignment One

Due Date: 26th May, 2020

Question: The cornerstones of neo-classical economic liberalism are the notions of free
competition and free trade. Clearly discussion these notions. How far do you agree that
developing countries should wholly depend on these notions for their development and why?

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Introduction

The term neoclassical economics emerged in around 1900 to compete with the earlier theories of
classical economics. Neoclassical economics is a broad theory that focuses on supply and
demand as the driving forces behind the production, pricing, and consumption of goods and
services. One of the key early assumptions of neoclassical economics is that utility to consumers,
not the cost of production, is the most important factor in determining the value of a product or
service. Neoclassical economics stipulates that a product or service often has value above and
beyond its production costs. While classical economic theory assumes that a product’s value
derives from the cost of materials plus the cost of labour. Neoclassical economics is most closely
related to classical liberalism, the intellectual forefather of neoliberalism. In a sense, the
neoliberal movement between 1960 and 1980 represented a partial return to the neoclassical
assumptions about economic policy and partial rejection of the failed central planning arguments
of the 1930s. As far as public policy is concerned, neoliberalism borrowed from the assumptions
of neoclassical economics to argue for free trade and free competition. Thus, the cornerstones of
neo-classical economic liberalism are the notions of free competition and free trade. 

In view of the foregoing, this paper will focus on the two notions of neo-classical economic
liberalism of free competition and free trade. The paper will start by clearly discussing the
aforementioned notions. Thereafter, the paper will show how far developing countries should
wholly depend on these notions for their development and why. The paper will then end with a
conclusion where the main points highlighted in the main body will be summarised.

Main Body

Free Trade

Free trade is a largely theoretical policy under which governments impose absolutely no tariffs,
taxes, or duties on imports, or quotas on exports.  In this sense, free trade is the opposite
of protectionism, a defensive trade policy intended to eliminate the possibility of foreign
competition. Since the very beginning of the gradual emergence of economics as an independent
academic disciple, the overwhelming majority of its practitioners have believed in the virtues of
free trade for achieving national economic prosperity (Aldrich, 2004). In the last three decades,
free trade has made steady progress in the real world. An insurmountable amount of free trade

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agreements and initiatives have been launched, negotiated and signed throughout the world.
Powerful regional trading blocs have emerged, and influential international organizations like the
World Trade Organization (WTO), the North American Free Trade Agreement (NAFTA)
Common Market for Eastern and Southern Africa (COMESA), European Union (EU) just
mention a few have been created with the explicit purpose of advancing the free-trade agenda
among its member states.

One of the advantages of free trade includes stimulation of economic growth. Even when limited
restrictions like tariffs are applied, all countries involved tend to realize greater economic
growth. For instance, as a consequence of recent developments in regional trading blocs, the
amount of commodities exchanged internationally has increased to an unprecedented level. In
addition, another advantage of tree trade is that it helps consumers. Trade restrictions like
tariffs and quotas are implemented to protect local businesses and industries. When trade
restrictions are removed, consumers tend to see lower prices because more products imported
from countries with lower labour costs become available at the local level. Further, free trade
increases foreign investment: When not faced with trade restrictions, foreign investors tend to
pour money into local businesses helping them expand and compete. Furthermore, free trade
encourages technology transfer. In addition to human expertise, domestic businesses gain access
to the latest technologies developed by their multinational partners (Morales, 2010).

However, free trade is not without shortcomings. As such, economists have not been particularly
successful in convincing non-economists that governments should not intervene in the voluntary
exchange of commodities and services among countries. This is due to the fact that free trade
causes job loss through outsourcing. Tariffs tend to prevent job outsourcing by keeping product
pricing at competitive levels. Free of tariffs, products imported from foreign countries with lower
wages cost less. While this may be seemingly good for consumers, it makes it hard for local
companies to compete, forcing them to reduce their workforce (Irwin, 2005). In addition, free
trade encourages theft of intellectual property. Many foreign governments, especially those in
developing countries, often fail to take intellectual property rights seriously. Without the
protection of patent laws, companies often have their innovations and new technologies stolen,
forcing them to compete with lower-priced domestically-made fake products. Another problem
with free trade is that it reduces revenues. Due to the high level of competition spurred by

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unrestricted free trade, the businesses involved ultimately suffer reduced revenues. Smaller
businesses in smaller countries are the most vulnerable to this effect (Irwin, 2005).

Free Competition

Free competition entails a system in which supply and demand control prices, income, etc.
freely and without government involvement. Competition, the process of rivalry between
firms striving to gain sales and make profits, is the driving force behind markets. Competition
is central to the operation of markets, and fosters innovation, productivity and growth, all of
which create wealth and reduce poverty (Lewis, 2004). Competitive markets allow a nation’s
resources to be used to best effect in the production of goods and services. For example, both
theoretical and empirical research in recent years has emphasised the productive and dynamic
efficiency gains from competition. Competition gives firms continuing incentives to make their
production and distribution more efficient, to adopt better technology, and to innovate (Cook,
2007). This will definitely result in increased economic growth

However, markets do not always work well, and uncompetitive markets are often those that
matter most for the poor. When competition makes people less cooperative, it promotes
selfishness and free-riding, reduces contributions to public goods, and leaves society worse off
(Malhotra et al. 2008). In addition, market competition does result in some parties “losing.”
This loss could come in the form of a company bankruptcy. Whole industries may be destroyed.
Jobs are lost. People suffer the financial and emotional toll of those job losses. These are
examples of the negative effects of competitive markets that should not be ignored or flippantly
belittled (Stucke, 2013).

Evaluation for Developing Countries

Developing countries should fully embrace the two notions of free trade and free competition for
their development. This is because, as challenging as negative effects of free trade and free
competition are, the net, long-term benefits are much greater. In terms of free trade, developing
countries can benefit by increasing their amount of or access to economic resources. Nations
usually have limited economic resources. Economic resources include land, labour and capital.
For instance, many developing and isolated countries benefit from an influx of money from U.S.
investors (Morales, 2010). In addition, developing countries can use free trade to improve their

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production efficiency. Most nations are capable of producing some type of goods or service.
However, a lack of knowledge or proper resources can make production inefficient or
ineffective. Free trade allows developing countries to fill in the gaps regarding their production
processes. Individual citizens may also visit foreign countries to increase education or
experience in specific production or business methods. These individuals can then bring back
crucial information about improving the nation’s production processes (Weinstein, 2007)

In terms of free competition, new products and services are created and vastly improve living
standards. Many developing countries should prioritize growth in their national poverty
reduction strategies. Because effective competition is a driver of productivity, competition policy
should be an essential component of any pro-poor growth strategy. Crucially, competition
facilitates greater equality of opportunity by breaking down the barriers to fair competition that
often help to protect incumbent elites. Competitive markets allow a nation’s resources to be used
to best effect in the production of goods and services. These sources of productivity
improvement lead to Growth and poverty reduction (Dollar and Kraay, 2001)

Conclusion

As challenging as these negative effects of free trade and free competition are, the net, long-term
benefits are much greater. With free trade, total world output can increase. As such, free trade is
the most suitable international trade policy for developed as well developing countries for
achieving sustainable economic growth and development. With effective free competition, new
products and services are created and entire nations will enjoy the fruits of wealth creation. This
greatly reduces poverty and vastly improves living standards in developing countries.

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References

Aldrich, J. (2004). The Discovery of Comparative Advantage. Journal of the History of

Cook, P. et al. (2007). Competitive Advantage and Competition Policy in Developing

Dollar, D. & Kraay, A. (2001). Growth is Good for the Poor. World Bank Policy Research
Working Paper no. 2587, Washington: World Bank.

Malhotra, D., Ku, G. and Murnighan, J. K (2008). ‘When Winning Is Everything.’ Harvard
Business Review.

Irwin, D. A. (2005). “Free Trade Under Fire.” Princeton University Press.

Lewis, W. (2004). The Power of Productivity. University of Chicago Press

Morales Meoqui, Jorge (2010). Classical Free Trade: A Policy Towards Economic Growth
and Development. Doctoral thesis, WU Vienna University of Economics and Business.

Stucke, M. E. (2013). Is Competition Always Good? Journal of Antitrust Enforcement, Vol.

Weinstein, D. (2007). Utilitarianism and the New Liberalism. Cambridge: Cambridge