Democracy and Economic Reforms

Democracy has been widely accepted to be the most effective, sustainable and just system of governance. While many countries have followed the democratic system for a long time, many socialist countries have opened up to the democratic system during the post communist era.
The effectiveness of a democracy, in terms of sustaining economic growth, however, lies not only with the people who work towards making it successful but also with the mechanisms within the democratic system. The results of liberal democratic system in the wake of economic reforms have been debated by economists.

The pro-liberalization and anti-liberalization economists have aired conflicting views in this regard. However the examples of two countries indicate that democracy and economic reforms have been a successful endeavor, when implemented consistently and in a well planned manner – USA, the world’s oldest democracy, has always adopted liberal economic structure with little or almost no state control.
To this end they have adopted several liberal policies over a long period of time and much earlier than other nations took up economic reforms. Today they are rated as the most developed economy in the world.
India, on the other hand, a third world developing nation, is considered to be the world’s largest democracy. India has adopted extensive economic reforms with an eye to liberalization, privatization and globalization since the late 1980s and with greater intensity during the 1990s. Today Indian economy is deemed to be not only one of the fastest growing economies in the world but as an emerging economic giant in the arena of world economy.

A democracy has to accommodate certain important changes into its mechanism in the context of economic reforms.

The major changes in this regard include –
Reallocation of government/state power with respect to economic activities.
Disengaging itself from the economic sector.
Shifting from the welfare state concept.

At the initial stages such measures can be unpopular with the people, thus causing hindrance to the democracy in adopting economic reforms. Democracy being a people oriented, non-autocratic structure, needs to attach paramount importance to the opinion of the people. Many have argued that a certain degree of autocracy is congenial to the implementation of economic reforms. However many democracies have registered success stories by the implementation of economic reforms. In actuality, the initial insecurities and crisis blows off soon and a period of high growth and prosperity sets in. The benefits that accrue to the people then, are manifold. Some of them being
Better standard of living
Lower prices of goods and services
Growth in employment
Rise in income
One of the major concerns facing democracy and economic reforms is the probable conflict between individual liberty and economic prosperity. While democracy fosters individual independence, economic reforms are supposed to lead towards growth and prosperity. The conflict, between the objectives of democracy and that of economic reforms, if arises, can fail the system. The biggest question facing democracy is whether it can sustain and promote economic reforms better than any other system of governance. In this respect, a comparative study between Indian and China in the years ahead would provide great insight. China has adopted reforms much earlier and has progressed more than India. However the reforms have been implemented in an autocratic regime. India, on the other hand has introduced economic reforms very recently under a democratic set up.
The interactions between democracy and economic reforms can be summarized as –

  • Economic reforms can be strongly and positively effective in a democratic set-up.
  • Economic reforms strengthen democracy which in turn paves the way for further reforms, thus expediting liberalization and economic growth.
  • Since democracy is conductive to economic reforms, it has a positive impact on growth.


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Last Updated on : 26th June 2013

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