Liberalization, the loosening of government controls. Although sometimes associated with the relaxation of laws relating to social matters such as abortion and divorce, liberalization is most often used as an economic term. In particular, it refers to reductions in restrictions on international trade and capital. Liberalization is often treated as synonymous with deregulation—that is, the removal of state restrictions on business. In principle the two are distinct (in that liberalized markets can still be subject to government regulations—for example, to protect consumers), but in practice both terms are generally used to refer to the freeing of markets from state intervention.

The second half of the 20th century saw a significant shift toward both liberalization and deregulation. The liberalization of trade progressed through the signing of a succession of free trade agreements such as the General Agreement on Tariffs and Trade (GATT) in 1947, the Single European Act in 1986, and the North American Free Trade Agreement (NAFTA) in 1992. By the 1970s free trade had extended to most Organisation for Economic Co-operation and Development (OECD) countries, and many developing countries followed suit from the 1980s on (including the postcommunist regimes of central and eastern Europe and, later, the People’s Republic of China). Another shift occurred toward the removal of foreign investment regulations: according to United Nations Conference on Trade and Development (UNCTAD) figures, between 1991 and 1996, 95 percent of the 599 national foreign direct investment (FDI) regulations across the world were in the direction of further liberalization. Financial markets too have been freed from state interference. The foreign exchange market was the first financial market to liberalize, in the mid-1970s, followed by the deregulation of domestic stock markets in the 1980s (for the advanced industrial nations) and the 1990s (for the newly industrializing countries).

Liberalization and deregulation played a central role in stimulating the massive rise in international trade (which grew at an average rate of 6 percent per annum between 1948 and 1997), FDI (for which stocks and inflows exceeded the rise in world trade), and foreign exchange and portfolio capital (with the average daily turnover of foreign exchange markets reaching the trillions of dollars). Liberalization and deregulation are thus both seen to have contributed to the globalization of the world economy.

There is significant controversy about the benefits of liberalization and deregulation. Both are central tenets of the “Washington consensus”—a set of market-oriented policy prescriptions advocated by neoliberal economists for developing countries to achieve economic growth. Yet critics of the Washington consensus have argued that in practice such policies are being used by corporations from wealthier countries such as the United States to exploit workers from the poorer countries. This is not least because—as activists and scholars alike have noted—markets are, in reality, neither free nor fair. For example, generous subsidies paid to cotton producers in the United States and the European Union artificially drive down prices, threatening the livelihoods of African cotton farmers. For many critics, the problem is therefore not so much the freeing of markets per se but, rather, that the wealthier countries are effectively cheating at the game they are exporting to the rest of the world.