Shock therapy (economics)

In economics, shock therapy is a group of policies intended to be implemented simultaneously in order to liberalize the economy, including liberalization of all prices, privatization, trade liberalization, and stabilization via tight monetary policies and fiscal policies. In the case of post-Communist states, it was implemented in order to transition from a command economy to a market economy. More recently, it has been implemented in Argentina by the administration of Javier Milei.

Overview

Shock therapy is a program intended to economically liberalize a mixed economy or transition a planned economy or developmentalist economy to a free-market economy through sudden and dramatic neoliberal reform. Shock therapy policies generally include ending price controls, stopping government subsidies, privatizing state-owned industries, and tighter fiscal policies, such as higher tax rates and lowered government spending. ^[1] In essence, shock therapy policies can be distilled to price liberalization accompanied by strict austerity. ^{[2] : 4}

The first instance of shock therapy was the neoliberal reforms of Chile under Pinochet, ^[3] carried out after the military coup by Augusto Pinochet. The reforms were based on the liberal economic ideas centered on the University of Chicago, which became known as the Chicago Boys. The term is also applied to Bolivia's case. Bolivia successfully tackled hyperinflation in 1985 under President Victor Paz Estenssoro and Minister of Planning Gonzalo Sánchez de Lozada, using the ideas of economist Jeffrey Sachs. ^[4]

Economic liberalism rose to prominence after the 1960s and liberal shock therapy became increasingly used as a response to economic crises, for example by the International Monetary Fund (IMF) in the 1997 Asian Financial Crisis. ^[5] Shock therapy has been controversial, with its proponents arguing that it helped to end economic crises, stabilized economies, and paved the way for economic growth, while its critics including economist Joseph Stiglitz believed that it helped deepen them unnecessarily and created unnecessary social suffering. ^[6]

In post-Soviet Russia and other post-Communist states, neoliberal reforms based on the Washington Consensus resulted in a surge in excess mortality ^{[7] [8] [9]} and decreasing life expectancy, ^[10] along with rising economic inequality, corruption, and poverty. ^{[11] [12]} Isabella Weber of the University of Massachusetts said: "As a result of shock therapy, Russia experienced a rise in mortality beyond that of any previous peacetime experiences of an industrialized country." ^{[2] : 2} The Gini ratio increased by an average of 9 points for all post-Communist states. ^[11] The average post-Communist state had returned to 1989 levels of per-capita GDP by 2005, ^[13] although some are still far behind that. ^[14] In Russia, the average real income for 99 percent of people was lower in 2015 than in 1991. ^{[2] : 2} According to William Easterly, successful market economies rest on a framework of law, regulation, and established practice, ^[15] which cannot be instantaneously created in a society that was formerly authoritarian, heavily centralised, and subject to state ownership of assets. ^[16]

German historian Philipp Ther asserted that the imposition of shock therapy had little to do with future economic growth. ^[17] Notable proponent Jeffrey Sachs ^[18] has stated that he believes shock therapy should be accompanied by debt forgiveness. ^[19]

History

West Germany, 1948

Main article: Wirtschaftswunder

Background

Germany ended the European Theatre of World War II with its unconditional surrender on the 8 May 1945. April 1945 to July 1947 saw the Allied occupation of Germany implement Joint Chiefs of Staff directive 1067 (JCS 1067). This directive aimed to transfer Germany's economy from one centered on heavy industry to a pastoral one to prevent Germany from having the capacity for war. Civilian industries that might have military potential, which in the modern era of "total war" included virtually all, were severely restricted. The restriction of the latter was set to Germany's approved peacetime needs, which were set on the average European standard. To achieve this, each type of industry was subsequently reviewed to see how many factories Germany required under these minimum level of industry requirements.

It soon became obvious that this policy was not sustainable. Germany could not grow enough food for itself, and malnutrition was becoming increasingly common. The European post-war economic recovery did not materialise and it became increasingly obvious that the European economy had depended on German industry. ^[20] In July 1947, President Harry S. Truman rescinded on "national security grounds" the punitive JCS 1067, which had directed the U.S. forces of occupation in Germany to "take no steps looking toward the economic rehabilitation of Germany." It was replaced by JCS 1779, which instead stressed that "[a]n orderly, prosperous Europe requires the economic contributions of a stable and productive Germany." ^[21]

By 1948, Germany suffered from rampant hyperinflation. The currency of the time (the Reichsmark) had no public confidence, and thanks to that and price controls, black market trading boomed and bartering proliferated. Banks were over their heads in debt and surplus currency abounded. ^[22] Thanks to the introduction of JCS 1779 and the first Allied attempts to set up German governance, something could be done about this. Ludwig Erhard, an economist, who had spent much time working on the problem of post war recovery, had worked his way up the administration created by the occupying American forces until he became the Director of Economics in the Bizonal Economic Council in the joint British and American occupied zones (which later, with the addition of the French occupied territory, became the basis for West Germany).

Economic reforms

Currency reform took effect on June 20, 1948, through the introduction of the Deutsche Mark to replace the Reichsmark and by transferring to the Bank deutscher Länder the sole right to print money.

Under the German Currency Conversion Law on 27 June, private non-bank credit balances were converted at a rate of 10 RM to 1 DM, with half remaining in a frozen bank account. Although the money stock was very small in terms of national product, the adjustment in the price structure immediately led to sharp price increases, fueled by the high velocity of money through the system. As a result, on 4 October, the military governments wiped out 70% of the remaining frozen balances, resulting in an effective exchange of 10:0.65. Holders of financial assets (including many small-time savers) were dispossessed and the banks' debt in Reichsmarks was eliminated, transferred instead into claims on the Lander and later the Federal Government. Wages, rents, pensions and other recurring liabilities were transferred at 1:1.^{[ citation needed ]} On the day of the currency reform, Ludwig Erhard announced, despite the reservations of the Allies, that rationing would be considerably relaxed and price controls abolished. ^[22]

Results

In the short term, the currency reforms and abolition of price controls helped end hyperinflation. The new currency enjoyed considerable confidence and was accepted by the public as a medium of payment. The currency reforms had ensured that money was once scarcer, and the relaxation of price controls created incentives for production, sales and earning this money. The removal of price controls also meant shops filled up with goods again, which was a huge psychological factor in the adoption of the new currency. ^[22]

As would later also occur in the post-Soviet states, shock therapy resulted in redistribution from the bottom-up, benefiting those who held non-monetary assets. ^{[2] : 5} Although Erhard's price liberalization excluded rents and essential goods, it still caused an increase in inflation and resulted in a general strike. ^{[2] : 60–61} A turn from a free market to a social market economy followed under the Jedermann Programm, and by late 1948 "the German transition followed a dual-track pattern with a planned core and a market-coordinated periphery." ^{[2] : 61}

Chile, 1975

Main article: Miracle of Chile

Economic reforms

The government welcomed foreign investment and eliminated protectionist trade barriers, forcing Chilean businesses to compete with imports on an equal footing, or else go out of business. The main copper company, Codelco, remained in government hands due to the nationalization of copper completed by Salvador Allende but private companies were allowed to explore and develop new mines.

In the short term, the reforms stabilized the economy. In the long term, Chile has had higher GDP growth than its neighboring countries but with a noticeable increase of income inequality. ^[23]

Bolivia, 1985

Background

Between 1979 and 1982, Bolivia was ruled by a series of coups, countercoups, and caretaker governments, including the notorious dictatorship of Luis García Meza Tejada. This period of political instability set the stage for the hyperinflation that later crippled the country. In October 1982, the military convened a Congress elected in 1980 to lead choose a new Chief Executive. ^[24] The country elected Hernán Siles Zuazo, under whose term the galloping hyperinflationary process started. Zuazo received scant support from the political parties or members of congress, most of whom were eager to flex their newly acquired political muscles after so many years of authoritarianism. Zuazo refused to take extra-constitutional powers (as previous military governments had done in similar crises) and concentrated on preserving the democracy instead, shortening his term by one year in response to his unpopularity and the crisis racking his country. ^[25] On 6 August 1985, President Víctor Paz Estenssoro was elected.

Prelude to Decree 21060

On 29 August, just three weeks after the election of Víctor Paz Estenssoro as President, and the appointment of Gonzalo Sánchez de Lozada, the architect of shock therapy, as Planning Minister, Decree 21060 was passed. Decree 21060 covered all aspects of the Bolivian economy, later referred to as shock therapy. In the run-up to the decree, Gonzalo Sánchez de Lozada recalled what the new government set out to do, saying: "People felt you couldn't stop hyperinflation in a democracy; that you had to have a military government, an authoritarian government to take all these tough steps that had to be taken. Bolivia was the first country to stop hyperinflation in a democracy without depriving people of their civil rights and without violating human rights." ^[26]

About the three weeks between the inauguration of the President and decree 21060, he said: "We spent one week saying, 'Do we really need to do something? Do we really need radical change?' and then another week debating shock treatment versus gradualism. Finally, we took one week to write it all up." ^[26] Once they had decided to act, de Lozada recalled of "a big discussion whether you could stop hyperinflation or inflation, period, by taking gradual steps". ^[26] He added: "Many people said you had to take it slowly. You have to cure the patient. Shock treatment means you have a very sick patient [and] you have to operate before the patient dies. You have to get the cancer out, or you have to stop the infection." ^[26] He explained: "That's why we coined the phrase that inflation is like a tiger and you have only one shot; if you don't get it with that one shot, it'll get you. You have a credibility that you have to achieve. If you keep to gradualism, people don't believe you, and the hyperinflation just keeps roaring stronger. So shock therapy is get it over, get it done, stop hyperinflation, and then start rebuilding your economy so you achieve growth." ^[26]

Decree 21060

Main article: Decree 21060

Decree 21060 included the following measures:

• Allowing the peso to float.
• Ending price controls and eliminating subsidies to the public sector.
• Laying off two-thirds of the employees of the state oil and tin companies and freezing the pay of the remaining employees and public sector workers.
• Liberalising import tariffs by imposing a uniform 20% tariff.
• Stopping the payment of foreign debt under a deal negotiated with the IMF.

Post-Soviet states

With the exception of Belarus, the Eastern European states adopted shock therapy. ^[27] Nearly all of these post-Soviet states suffered deep and prolonged recessions after shock therapy, ^{[2] : 6} with poverty increasing more than tenfold. ^[28] The resulting crisis of the 1990s was twice as intense as the Great Depression in the countries of Western Europe and the United States in the 1930s. ^{[29] [30]} The hypothesized one time jump in prices intended as part of shock therapy actually led to a lengthy period of extremely high inflation with a drop in output and subsequent low growth rates. ^{[2] : 6} Shock therapy devalued the modest wealth accumulated by individuals under socialism and amounted to a regressive redistribution of wealth in favor of elites who held non-monetary assets. ^{[2] : 5} Contrary to the expectation of shock therapy proponents, Russia's rapid transition to the market increased corruption, rather than alleviating it. ^{[2] : 231–232}

The cost to human life was profound, as Russia suffered the worst peace time increase in mortality experienced by any industrialized country. ^{[2] : 2} For the years 1987 and 1988, roughly 2% of Russia population lived in poverty (surviving on less than $4 a day), by 1993-1995, it was 50%. ^[31] According to Kristen Ghodsee and Mitchell A. Orenstein, a significant body of scholarship demonstrates that the rapid privatization schemes associated with neoliberal economic reforms did result in poorer health outcomes in former Eastern Bloc countries during the transition to capitalism, with the World Health Organization itself stating "IMF economic reform programs are associated with significantly worsened tuberculosis incidence, prevalence, and mortality rates in post-communist Eastern European and former Soviet countries." ^[32] They add that Western institutions and economists were indifferent to the consequences of the shock therapy they were advocating as their priorities included permanently dismantling the state socialist system and integrating these countries into the emerging global capitalist economy, ^[33] and that many citizens of the former Eastern Bloc countries came to believe that Western powers were deliberately inflicting this suffering upon them as punishment for defying Western ideals about liberal democracy and market economics. ^[34]

Arguments exist whether these adverse outcomes were due to the general collapse of the Soviet economy (which began before 1989) or the policies subsequently implemented or a combination of both. Sachs himself resigned from his post as advisor, after stating that he felt his advice was unheeded and his policy recommendations were not actually put into practice. ^{[35] [36]} In addition to his criticism of the way in which Russian authorities handled the reforms, Sachs has also criticized the U.S. and the IMF for not providing large-scale financial aid to Russia, which he felt was integral to the success of the reforms. ^[37]

Advocates of shock therapy view Poland as the success story of shock therapy in the post-communist states and claim that shock therapy was not applied appropriately in Russia, while critics claim that Poland's reforms were the most gradualist of all the countries and contrast China's reforms with those of Russia ^[6] and their vastly different effects. Some research suggests that the very fast pace of 'shock therapy' privatization mattered and had a particularly harsh effect on the death rate in Russia. ^[38]

Background in Poland

After the failure of the Communist government in the elections of June 4, 1989, it became clear that the previous regime was no longer legitimate. The unofficial talks at Magdalenka and then the Polish Round Table talks of 1989 allowed for a peaceful transition of power to the democratically elected government.

The economic situation was that inflation was high, peaking at around 600%, and the majority of state-owned monopolies and holdings were largely ineffective and completely obsolete in terms of technology. Although there was practically no unemployment in Poland, wages were low and the shortage economy led to a lack of even the most basic foodstuffs in the shops. Unlike the other post-communist countries, however, Poland did have some experience with a capitalist economy, as there was still private property in agriculture and food was still sold in farmers' markets. ^[26]

In September 1989 a commission of experts was formed under the presidency of Leszek Balcerowicz, Poland's leading economist, Minister of Finance and deputy Premier of Poland. Among the members of the commission were Jeffrey Sachs, Stanisław Gomułka, Stefan Kawalec and Wojciech Misiąg.

Balcerowicz Plan

Main article: Balcerowicz Plan

On October 6 the program was presented on public television and in December the Sejm passed a packet of 11 acts, all of which were signed by the president on December 31, 1989. These were:

1. Act on Financial Economy Within State-owned Companies, which allowed for state-owned businesses to declare bankruptcy and ended the fiction by which companies were able to exist even if their effectiveness and accountability was close to none.
2. Act on Banking Law, which forbade financing the state budget deficit by the national central bank and forbade the issue of new currency.
3. Act on Credits, which abolished the preferential laws on credits for state-owned companies and tied interest rates to inflation.
4. Act on Taxation of Excessive Wage Rise, introducing the so-called popiwek tax limiting the wage increase in state-owned companies in order to limit hyperinflation.
5. Act on New Rules of Taxation, introducing common taxation for all companies and abolishing special taxes that could previously have been applied to private companies through means of administrative decision.
6. Act on Economic Activity of Foreign Investors, allowing foreign companies and private people to invest in Poland and export their profits abroad.
7. Act on Foreign Currencies, introducing internal exchangeability of the zloty and abolishing the state monopoly in international trade.
8. Act on Customs Law, creating a uniform customs rate for all companies.
9. Act on Employment, regulating the duties of unemployment agencies.
10. Act on Special Circumstances Under Which a Worker Could be Laid Off, protecting the workers of state firms from being fired in large numbers and guaranteeing unemployment grants and severance pay.

Privatization of companies was left until later.

Results in Poland

In the short term, the reforms smothered the building hyperinflation before it reached high levels, ^[39] ended food shortages, restored goods on the shelves of shops and halved the absence of employees in the work place. ^[40] However, the reforms also caused many state companies to close at once, leaving their workers unemployed, and government statistics show this change as unemployment rose from 0.3% in January 1990 (just after the reforms) to 6.5% by the end of that year, ^[41] and a shrinking in the GDP for the next two consecutive years by 9.78% in the first and 7.02% (see main article).

In the long term, the reforms paved the way for economic recovery, with the GDP growing steadily to about 6–7% between 1995–7, falling to a low of 1.2% in 2001 before rising back up to the 6–7% region by 2007, ^[42] often led by small service businesses, long suppressed by the Communist government. ^[43] However, despite GDP indicating prosperity for Poland, the unemployment rate continued to rise steadily, peaking at 16.9% in July 1994 before steadily falling down to a low of 9.5% in August 1998 before rising once more to a high of 20.7% in February 2003, from which it had fallen until the year 2008. ^[41] During the early years, the unemployment rate is thought to have been lower due to many of those claiming unemployment working in the grey (informal) economy, although this can account for no more than 5% of the unemployment rate. ^[43]

Ownership of consumables (cars, TVs, VCRs, washing machines, refrigerators, personal computers, etc.) boomed, as did consumption of fruit and vegetables, meat and fish. ^[43] However, the huge economic adjustment Poland underwent created massive anxiety. ^[43]

As of 2008, the GNP was 77% higher than in 1989. ^[44] Moreover, inequality in Poland actually decreased right after the economic reforms were implemented, although it rose back up again in later years. ^{[45] [46]} Today, although Poland is confronted with a variety of economic problems, it still has a higher GDP than during communist times, and a gradually developing economy. ^[47] Poland was converging towards the EU in regards to income level in 1993–2004. ^[48] According to Financial Times, ^[49] Poland's shock therapy paved the way for entrepreneurs and helped to build an economy that was less vulnerable to external shock than Poland’s neighbours. In 2009, while the rest of Europe was in recession, Poland continued to grow, without a single quarter of negative growth.

Results in Russia

Due to rampant hyperinflation, famine, poverty, and the depression of 1990-1991 in the Soviet Union, Russian leaders attempted to implement shock therapy to the economy. ^{[50] [ when? ]} This was not well-received by the Russian public, as it worsened issues and contributed to the rise of Russian oligarchs. ^[50] The downfall of shock therapy in Russia was marked by widespread social dislocation, economic instability, and the rise of oligarchs, contributing to public criticism and eroding trust in the government's neoliberal reform agenda. It also contributed to the support for the rise of Vladimir Putin and his brand of authoritarianism. ^[51]

Peru, 1990

This section is an excerpt from Economic policy of the Alberto Fujimori administration § Fujishock.[ edit ]

During his first term in office, Fujimori enacted wide-ranging neoliberal reforms, known as Fujishock. During the presidency of Alan García, the economy had entered a period of hyperinflation and the political system was in crisis due to the country's internal conflict, leaving Peru in "economic and political chaos". ^[52] It was Fujimori's objective to pacify the nation and restore economic balance. This program bore little resemblance to his campaign platform and was in fact more drastic than anything Vargas Llosa had proposed. ^[53] Nonetheless, the Fujishock succeeded in restoring Peru to the global economy, though not without immediate social cost. ^[54]

The immediate target of the first Fujimori Administration, was to stop the runaway course of inflation. Beyond that, the goals included repudiating protection and import substitution, returning to full participation in the world trading and financial systems, eliminating domestic price controls and subsidies, raising public revenue and holding government spending strictly to the levels of current revenue, initiating a social emergency program to reduce the shock of adjustment for the poor, and devoting a higher share of the country's resources to rural investment and correction of the causes of rural poverty. In practice, new measures came out in bits and pieces, dominated by immediate concern to stop inflation; actions taken in the first year did not complete the program. ^[55] Reforms have permitted an economic growth since 1993, except for a slump after the 1997 Asian financial crisis. ^[56]

Fujimori's initiative relaxed private sector price controls, drastically reduced government subsidies and government employment, eliminated all exchange controls, and also reduced restrictions on investment, imports, and capital flow. ^[54] Tariffs were radically simplified, the minimum wage was immediately quadrupled, and the government established a $400 million poverty relief fund. ^[54] The latter measure seemed to anticipate the economic agony that was to come, as electricity costs quintupled, water prices rose eightfold, and gasoline prices rose 3000%. ^{[53] [54]}

The IMF was impressed by these measures, and guaranteed loan funding for Peru. ^[57] Inflation began to fall rapidly and foreign investment capital flooded in. ^[57] Fujimori's privatization campaign featured the selling off of hundreds of state-owned enterprises, and the replacing of the country's troubled currency, the inti, with the Nuevo Sol. ^[52] The Fujishock restored macroeconomic stability to the economy and triggered a considerable long-term economic upturn in the mid-1990s. ^[58] In 1994, the Peruvian economy grew at a rate of 13%, faster than any other economy in the world. ^[58]

India, 1991

This section is an excerpt from Economic liberalisation in India.[ edit ]

The economic liberalisation in India refers to the series of policy changes aimed at opening up the country's economy to the world, with the objective of making it more market-oriented and consumption-driven. The goal was to expand the role of private and foreign investment, which was seen as a means of achieving economic growth and development. ^{[59] [60]} Although some attempts at liberalisation were made in 1966 and the early 1980s, a more thorough liberalisation was initiated in 1991.

The liberalisation process was prompted by a balance of payments crisis that had led to a severe recession, dissolution of the Soviet Union leaving the United States as the sole superpower as well as the need to fulfill structural adjustment programs required to receive loans from international financial institutions such as the IMF and World Bank. The crisis in 1991 served as a catalyst for the government to initiate a more comprehensive economic reform agenda, including Liberalisation, Privatisation and Globalisation referred to as LPG reforms.

The reform process had significant effects on the Indian economy, leading to an increase in foreign investment and a shift towards a more services-oriented economy. The impact of India's economic liberalisation policies on various sectors and social groups has been a topic of ongoing debate. While the policies have been credited with attracting foreign investment, some have expressed concerns about their potential negative consequences. One area of concern has been the environmental impact of the liberalisation policies, as industries have expanded and regulations have been relaxed to attract investment. Additionally, some critics argue that the policies have contributed to widening income inequality and social disparities, as the benefits of economic growth have not been equally distributed across the population.

Argentina, 2024

Argentina's economy has always been unpredictable. Once hailed as one of the richest nations per capita in 1913, it quickly deteriorated by the 1930s when a military junta seized power. ^{[61] [62] [63]} Argentina’s immense periods of growth were frequently undone by the consequences of its own policies. There is an old saying among economists: “Throughout history there have been only four kinds of economies in the world: advanced, developing, Japan, and Argentina." ^[64]

Starting in 2019, Argentina introduced exchange controls to curb increasing inflation. ^[65] On june 2020, the peronist government of Argentina sanctioned strict rent controls as a way to keep the rent down. Although this did suppress the prices in the short term, the cost of rent surged only 2 years later as the rental housing supply started faltering, reaching a decade low on september 2023, where it fell by 80% when compared to 2015. ^[66] In 2021, the government implemented capital controls and tightened the currency, leading to two diverging exchange rates: the official and the parallel exchange rate. The official exchange rate is a government-controlled rate often used in statistics (like poverty statistics) and formal transactions like trade and official economic measures, while the parallel exchange rate reflects the true supply-and-demand-driven market value of the currency, often significantly differing due to government restrictions or economic instability. ^{[67] [68]} By 2022, inflation had risen from 2.4% per month to a peak of 25% per month in December 2023, propelling the nation into hyperinflation. Over the last 123 years, Argentina has recorded a budget deficit in 113 of them. ^[69] Lucas Romero, the head of Synopsis, a local political consulting firm and Andrei Roman, CEO of Brazil-based pollster Atlas Intel believe that Javier Milei’s victory in the 2023 elections was not only a result of popular approval of his ideas but rather stemmed from widespread dissatisfaction with the political establishment, which had been strongly left-wing in its economic approach. The people thus wanted change. ^{[70] [71] [72] [73]} After taking office, Milei enacted drastic measures, including severe budget cuts, downsizing the government by firing 24,000 federal employees, and setting a goal to cut 50,000 more. ^{[74] [75]} Milei also devalued the official currency by 50% to reduce the gap between the official and parallel exchange rates, continuing with a policy of monthly devaluations of 2% until the gap is closed. ^{[76] [77]} Seeking to make the market freer, Milei vowed to dismantle existing capital controls and regulations, as well as eliminate 90% of current taxes (not a 90% reduction in tax rates). ^[78]

In the first months of Milei's administration, the poverty rate spiked from 41.7% in late 2023 to 52.9% in early 2024, although poverty had already been increasing substantially before he took office, so to what extent we can attribute the poverty increase to Milei is debatable. ^[79] By the third quarter of 2024, the poverty rate declined to 38.9%, with projections indicating further reductions as Milei’s policies took effect. ^[80] By repealing rent controls, the rental housing supply shot up by 170% as real rent prices decreased by 40% (adjusted for inflation). ^{[81] [82]} Milei’s downsizing of the government resulted in Argentina's government spending being reduced by 30%, achieving its first budget surplus in 12 years. ^{[83] [84]} By November 2024, inflation returned to 2.4% per month. Factoring in the 2% intended monthly devaluation, the underlying monthly inflation rate was only 0.4%. ^{[85] [86]}

A December 2024 Gallup poll showed improved public perception: 53% of Argentinians believed their standard of living was improving, reaching levels not seen since 2015, and 41% believed the economy of their city was improving. ^[87]

JP Morgan revised its GDP growth projections for Argentina from 2% to 8.5%, reflecting optimism about the economic trajectory under Milei’s reforms. ^[88] His policies have also improved Argentina's standing with the IMF, raising hopes for further assistance. ^[89]

Theory

Origins of the term "shock therapy"

The term was popularized by Naomi Klein. In her 2007 book The Shock Doctrine , she argues that neoliberal free market policies (as advocated by the economist Milton Friedman) have risen to prominence globally because of a strategy of "shock therapy". ^[90] She argues these policies are often unpopular, result in greater inequality and are accompanied by political and social "shocks" such as military coups, state sponsored terror, sudden unemployment and the suppression of labor.

The economist Jeffrey Sachs (sometimes credited with coining the term) says he never picked the term "shock therapy", does not much like it, and asserts that the term "was something that was overlaid by journalism and public discussion" and that the term "sounds a lot more painful in a way than what it is". Sachs' ideas on what has been referred by non-economists as "shock therapy" were based on studying historic periods of monetary and economic crisis and noting that a decisive stroke could end monetary chaos, often in a day. ^[26]

Pace of privatization

Shock therapy proponents Sachs and Lipton argued in 1990: "The great conundrum is how to privatize a vast array of firms in a manner that is equitable, swift, politically viable, and likely to create an effective structure of corporate control." ^{[2] : 4} They recommended that the pace "must be rapid, but not reckless", and should "probably be carried out by many means". ^{[2] : 4} In the view of shock therapy proponents, trade liberalization requires domestic price liberalization first; thus a "big bang" in price liberalization underlying both privatization and trade liberalization forms the "shock" in the moniker "shock therapy". ^{[2] : 4}

In practice, the rapid application of shock therapy proved generally disastrous in the post-Soviet states. ^{[2] : 4–6}

Departure from "the invisible hand"

Although economists have sometimes referred to shock therapy "creating" markets, Isabella Weber contends that shock therapy does not in fact create such new structures or institutions. ^{[2] : 5} She writes that the hope among shock therapy proponents is instead that the destruction of a command or planned economy would automatically result in a market economy ^{[2] : 5} and that expectation was that after the command economy or planned economy was "shocked to death", the "invisible hand" might emerge. ^{[2] : 5–6}

According to Weber, expectations that a market economy would emerge following the imposition of shock therapy differ from Adam Smith's original metaphor of the "invisible hand" ^{[2] : 6} and interprets Smith as thinking that the market as emerging slowly as the institutions that facilitate market exchange develop, and with the "invisible hand" the price mechanism could emerge. ^{[2] : 6}

Illusionary shock

Illusion therapy refers to the imposition of shock economic policies on economy in a way that the society doesn't feel the shock or assumes that the dramatic change in policies is not as shocking or radical as it is in the real world. ^[91] The first experience of illusion therapy has been documented after the implementation of Iran's subsidy reform project. ^[91]

References

1. Kenton, Will. "Shock Therapy". Investopedia. Retrieved February 15, 2021.
2. Weber, Isabella (2021). How China Escaped Shock Therapy: the Market Reform Debate. Abingdon, Oxon: Routledge. ISBN   978-0-429-49012-5. OCLC   1228187814.
3. Grandin, Greg (2006). Empire's Workshop: Latin America, the United States, and the Rise of the New Imperialism. Henry Holt and Company. ISBN   9781429959155.
4. Klein, Naomi (2007). The Shock Doctrine: The Rise of Disaster Capitalism. Henry Holt and Company. ISBN   9781429919487.
5. Bazbauers, Adrian (2014). "Reviving the neoliberal discourse: The world bank responds to East Asia in Crisis". Journal of Third World Studies. 31 (2): 129–150 – via ResearchGate.
6. Joseph Stiglitz, Globalization and Its Discontents , Penguin 2003
7. Privatisation 'raised death rate'. BBC, 15 January 2009. Retrieved 24 November 2018.
8. Rosefielde, Steven (2001). "Premature Deaths: Russia's Radical Economic Transition in Soviet Perspective". Europe-Asia Studies . 53 (8): 1159–1176. doi:10.1080/09668130120093174. S2CID   145733112.
9. Ghodsee, Kristen; Orenstein, Mitchell A. (2021). Taking Stock of Shock: Social Consequences of the 1989 Revolutions. New York: Oxford University Press. pp. 195–196. doi:10.1093/oso/9780197549230.001.0001. ISBN   978-0197549247. In the mortality belt of the European former Soviet Union, an aggressive health policy intervention might have prevented tens of thousands of excess deaths, or at least generated a different perception of Western intentions. Instead, Western self-congratulatory triumphalism, the political priority to irreversibly destroy the communist system, and the desire to integrate East European economies into the capitalist world at any cost took precedence.
10. Ghodsee, Kristen (2017). Red Hangover: Legacies of Twentieth-Century Communism. Duke University Press. pp. 63–64. ISBN   978-0822369493.
11. Scheidel, Walter (2017). The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century. Princeton University Press. p. 222. ISBN   978-0691165028.
12. Weber, Isabella (2021). How China escaped shock therapy : the market reform debate. Abingdon, Oxon: Routledge. pp. 231–232. ISBN   978-0-429-49012-5. OCLC   1228187814.
13. Appel, Hilary; Orenstein, Mitchell A. (2018). From Triumph to Crisis: Neoliberal Economic Reform in Postcommunist Countries. Cambridge University Press. p. 36. ISBN   978-1108435055.
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24. See also article for Bolivia
25. See also article for Hernán Siles Zuazo
26. Up for Debate: Shock Therapy: Bolivia, Poland, Russia. Same Policies-Different Results – Interviews with Gonzalo Sanchez de Lozada (former President of Bolivia), Moisés Naím, Jeffrey Sachs, Polish economist Leszek Balcerowicz, Yegor Gaidar (former Prime Minister of Russia), Mikhail Gorbachev (former President of Russia), Joseph Stiglitz – who are influential figures in the world of shock therapy, PBS
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33. Ghodsee, Kristen; Orenstein, Mitchell A. (2021). Taking Stock of Shock: Social Consequences of the 1989 Revolutions. New York: Oxford University Press. p. 196. doi:10.1093/oso/9780197549230.001.0001. ISBN   978-0197549247. In the mortality belt of the European former Soviet Union, an aggressive health policy intervention might have prevented tens of thousands of excess deaths, or at least generated a different perception of Western intentions. Instead, Western self-congratulatory triumphalism, the political priority to irreversibly destroy the communist system, and the desire to integrate East European economies into the capitalist world at any cost took precedence.
34. Ghodsee, Kristen; Orenstein, Mitchell A. (2021). Taking Stock of Shock: Social Consequences of the 1989 Revolutions. New York: Oxford University Press. p. 195. doi:10.1093/oso/9780197549230.001.0001. ISBN   978-0197549247. Many former socialist citizens, as well as political leaders like Vladimir Putin, believe that the chaos and pain of the transition process was deliberately inflicted by the West on its former enemies, as punishment for the East's long defiance of liberal democratic norms and market freedoms.
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