The Debate on Democracys Impact on Economic Development

Ways in which can democracy help and hinder economic development

According to Dixon & Monk (2014), democracy is one of the main constituents of economic development. However, Smith & Stirling (2018) contradicts this and states that democracy hinders the work of the economy and thus impedes its development. This debate has been on-going for several years now. It is largely believed that democracy and economic growth go hand-in-hand. They have a correlative and interactive relationship with one another (Weingast, 2014). It is a growing belief that economic growth and democracy are not related to one another because there are very little practical or real-life examples of it. Democracy has largely been useful for economic growth, but only in literature.


Democracy opens up many new doors for the economy to expand into and strive to achieve growth and development. This means a democratic government and such an environment within the country improves businesses opportunities which then helps the economy to grow (Hanson, 2019). One of the ways in which democracy boots economic development can be seen in terms that it brings stability to the nation, which then helps the governments to maintain a healthy and effective environment within the country, which then helps the nation to attain growth and development. Stability is a very important part of an economy and also one of the main constituents to its growth and development (Moberg, 2015). However, it is believed that democracy has very little connection or relatability to stability, as there have been very few evidence which has shown how the two relate to one another.

Over the years, there have been many authors and experts who have stated the democracy and economy cannot work together. These individuals give examples of countries such as China, which are closed economies and do not have a democratic environment, yet they are the world’s one of the leading economic superpowers (Khumalo, 2014). Due to this reason, the belief that democracy hinders economic development is gaining more attention at a very rapid pace, as more and more people are starting to believe that to attain economic prosperity, a nation does not have to be a democracy (Graham & Hjorth, 2017). Moreover, democracy hinders such development in terms that it creates more roadblocks and obstacles for the economy to freely operate and thus achieve growth and development.

Debt-Equity swaps are considered as an effective approach to debt reduction. They are a type of transactions where obligations or debts of a firm or an individual are exchanged for something of greater value and equity. In the case of publicly traded businesses, such transactions are generally made in terms of exchange of bonds for the value of the stock (Han & Yi, 2014). The value of bonds or the stocks is determined on the basis of trends prevailing in the market at the time. There can be several reasons for using debt-equity swaps. One such reason is that it enables firms to fulfil their certain contractual obligations. According to Yang & Zheng (2018), there are a number of obligations and responsibilities that companies need to achieve, such as maintaining a specific debt-equity ratio. Swapping debt and equity is one such way they can fulfil such responsibilities. It should be noted that these obligations can be self-imposed, or they could be imposed by a financial organisation which provided financial help to the firm. Another reason for making debt-equity swap could be to avoid or even delay making ‘face value’ payments on debts in the future (Hagemann, 2014). Here, instead of making huge payments for a significant sum of cash for reliving the debt payments, firms can offer stock to their debt holders.

However, there are certain arguments which have been made in against debt-equity swapping. One such argument states that issuing stocks or equity to repay the debts can be a risky and dangerous situation for the organisation (Erić & Stošić, 2015). This is particularly true in situations when the concerned firm is facing financial issues. In such scenarios, prices of shares of the firm are already very low, and when the company issues stocks to pay off its debts, it ends up hurting the share prices even more (Han & Zhou, 2015). Taking such a decision not only reduces the number of shareholders of the firm, but it also shows the lack of effective financial management style of the company. Augustin & Subrahmanyam (2014) states that, due to this reason, the image of the company gets affected, which could bring even worse results for the firm.

Another argument mage against debt-equity swapping is that a company, regardless of the industry of its operations, should not take on too much debt (Schüler & Dirschedl, 2016). This is mainly due to the fact that debt is relatively cheap, and obtaining debt is a much simpler process. However, it dilutes the shareholders of the company. As per Jian (2018), a certain amount of debt is good for the company. However, it must not exceed a certain threshold.

Drobyshevsky & Bogachkova (2016) described that in relation to developing economies, interest rates and economic growth are closely related to one another. It is highly imperative for such nations that they maintain the interest rates appropriately so that the country can achieve sustainable growth and development in its economy. Movement or changes in the interest rates can have either positive or negative effects on economic performance and growth of the economy (Harvey & Kellard, 2017). However, higher interest rates are not considered for the effective and successful prosperity of the economy. This is mainly because when the interest rates are high, people tend to borrow less, as it costs more to take a loan. Moreover, people start to determine ways to reduce their expenses, so that they have more money left with them (Skare & Benazic, 2015).

Businesses also tend to operate in the same way when the interest rates are higher, as the cost of operating and running a business increases by a great margin (Ramlan, 2017). Since, to manage business functions require making expending high costs, during situations when the interest rates are higher, it becomes very difficult for businesses to control their costs and thus reduce their expenses. Due to this reason, many firms decide to ‘lay-off’ a large chunk of their employees (Lee & Werner, 2018). This further creates a havoc situation in the market, and since many people are left with no jobs, they are not able to contribute to the country in the form of taxes. As a result, this further influences the economy adversely and significantly reduces the chances of the country to achieve economic growth and development.

However, economic experts and authors such as Augustin & Subrahmanyam (2014) and Dixon & Monk (2014) believe that influence of high-interest rates on economic growth is dependent on the state of the country. This means, if the condition of the economy is already not strong enough, then higher interest rates can create an even worse situation for the country. Its propensity for attaining better economic growth and development will reduce by a great margin. Furthermore, higher interest rates encourage people to save more, which then can be invested back in the market when the interest rates are reduced back to normal or acceptable levels (Lee & Werner, 2018). Based in this it can be said that higher interest rates do not create a conducive environment for the economy to grow and develop; if the interest rates are high people and business will spend less which will result in a shortage of cash flow in the market and the economy in general. Due to this reason, the chances for the economy to gain growth development will decrease by a great margin (Schüler & Dirschedl, 2016).

Interest rate ceilings are also known as interest rate cap. It is defined as a regulatory mechanism and measure that enables banks and other financial institutions to ensure that interest above a certain is not charged by them (Hagemann, 2014). Interest rate ceilings can likewise prompt less straightforwardness about the expenses of acknowledging, as loan specialists adapt to financing cost tops by adding confounding charges to their administrations. Despite the fact that loan cost ceiling does not have the ideal impact, worries about the significant expenses of microfinance and savage loaning rehearses stay legitimate. Rivalry, be that as it may, is the absolute best approach to lessen both microcredit expenses and financing costs (Dixon & Monk, 2014).

Approaches to advance rivalry among acknowledge suppliers, joined with important customer assurance estimates like truth-in-loaning laws, can go far toward growing the scope of practical microcredit while defending purchaser interests (Han & Zhou, 2015). As of late, in any case, loan fee ceiling is regularly used to secure against financing cost hazard. That is, to secure borrowers against the hazard that loan fees may rise essentially during the life of a specific agreement. Notwithstanding indicating a most extreme financing cost level, variable-rate advances can likewise incorporate conditions for how rapidly loan fees can ascend to that greatest level. Regularly, these alleged "topped increment" arrangements will be set at generally the pace of swelling, which drifts around 2% today (Jian, 2018).

As a rule, interest rate ceiling and topped increment arrangements are especially useful to borrowers when financing costs are rising by and large. All things considered, if a maximum financing cost is reached before a credit arrives at its development, it is conceivable that the borrower will have the option to pay beneath showcase paces of enthusiasm for an extensive stretch of time (Moberg, 2015). This makes an open-door cost for the bank on the grounds that, notwithstanding the loan fee roof, they could loan their cash to another borrower at the more up to date and higher pace of premium. At the point when the Government controls the working of the market, flexibly and request cannot collaborate uninhibitedly to discover the balance amount and cost (Han & Yi, 2014). When there is a fake roof, the distribution of assets is mutilated if the harmony cost is over the roof. The outcome is individuals who need an account; however, because of their conditions does not qualify at the roof financing cost are denied get to. As this huge portion of the market cannot get to assets in the conventional economy, they need to depend on the casual economy. By constraining the loan cost chargeable, the legislature may compel numerous on-screen characters in this division underground (Skare & Benazic, 2015).

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Today corruption is one of the leading issues for the world economy. It has significant negative effects on the economy, and due to this reason, it has become imperative for countries and their governments to determine ways to reduce or even eliminate corruption altogether. The issue of corruption is significantly rampant in developing nations such as India. If such nations are able to curb on this problem and reduce it to the lowest levels, then it can major positive influence on their economies, along with leading towards growth and prosperity (Skare & Benazic, 2015).

Rampant corruption reduces the benefits of globalisation. In this regard, organisations and institutions such as the IMF and World Bank, along with regional and local banks of the developing nations are responsible for promoting economic growth (Lee & Werner, 2018). However, as the level of corruption increases, the benefits of globalisation reduces proportionately. This is mainly due to the fact that these international bodies stop or reduce their investments or support to the developing economies (Harvey & Kellard, 2017). Reduction in the international direct investment poses significant issues for the developing nations, due to which their chances of attaining growth and development reduce greatly. International investors have to pay bribes, which increases their costs and, in most cases, they do not get effective returns for their investments. Due to this, sometimes many of the international investors refrain from investing in a corrupt developing nation, which then adversely influences the economy of such a nation. In addition to this, corruption also brings economic instability to these nations (Han & Yi, 2014).

However, over the years, various measures and techniques have been developed to reduce corruption. One such way is to cut red-tapism and bureaucracy completely. Since these are some of the main reasons for the widespread corruption in many of the developing nations, putting an end to them will greatly help in reducing corruption. Apart from this, such nations should also focus on making the economy and its various operations as transparent as possible (Khumalo, 2014). By bringing transparency to economic operations will discourage any corrupt individual or organisation from giving or accepting bribes, because of the fear of getting caught.

The theory of unavoidable losses expresses that as pay expands, there is a reducing peripheral utility. Redistributing pay can prompt a net government assistance gain for society. In this way, pay redistribution can be legitimised from a utilitarian point of view (Hagemann, 2014). In a free market, the imbalance can be made, not through capacity and handwork, yet benefit and restraining infrastructure power. Without government mediation, firms can misuse imposing business model capacity to pay low wages to labourers and charge significant expenses to buyers. Without intervention from the government, an increase in monopoly power can be observed; however, if there is government intervention, then the balance in the market can be maintained, along with regulating monopolies and also promote healthy competition. In this way, government intercession can advance more noteworthy uniformity of pay, which is seen as more attractive (Drobyshevsky & Bogachkova, 2016). Regularly the contention is made that individuals ought to have the option to keep the prizes of their difficult work. In any case, if riches and salary and opportunity rely upon being naturally introduced to the correct family, which is not right. A riches assessment can lessen the abundance of the most extravagant, and this income can be utilised to spend on training for the individuals who are conceived in poor conditions (Yang & Zheng, 2018). Rawls' implicit agreement expressed that the perfect society is one where one would be glad to be conceived in any circumstance, not knowing where one would wind up.

On this basis, a great many people would not decide to be conceived in a free market on the grounds that the prizes are packed in the hands of a little minority of the populace (Hanson, 2019). On the off chance that individuals had no clue where they would be conceived, they would be bound to pick a general public with a level of government intercession and redistribution. In an unregulated wasteful market, cartels and different sorts of associations can employ monopolistic force, raising section expenses and constraining the advancement of the framework. Without a guideline, organisations can create negative externalities without result (Lee & Werner, 2018). This all prompts reduced assets, smothered development, and limited exchange and its relating benefits. Government mediation through guideline can straightforwardly address these issues.


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