The global movement towards social cultural and economic policy reforms has not always produced the results that were expected of it. Not infrequently, policy reforms have led to economic recession, political chaos and social disintegration. Taking Sri Lanka as a case study, we have examined the process of economic reforms and its interaction with socio-political institutions, asking how liberal economic reforms produce the results they did in this specific setting. The voluminous literature that exists on Sri Lankan economic policy assumes, almost as a matter of course, that subsequent socio-political decay has had nothing whatever to do with its economic reforms. It has held back its beneficial effects.