SHOCK THERAPY

“What a Life: Give some of us pills to stop a fit, give the rest shock to
start one.”
― Ken Kesey, One Flew Over the Cuckoo's Nest.

 What is Shock Therapy?

Shock therapy is a financial theory that believes that sudden and dramatic
change in national economic policy can turn a state-controlled economy into a
free-market one. The name, shock therapy refers to the concept of quite literally
shocking, or shaking up, the economy, with sudden and dramatic economic
policies that affect prices and employment.

Characteristics of shock therapy include the ending of price controls,

the privatization of publicly-owned entities and trade liberalization. Shock therapy
is intended to cure economic maladies such as hyperinflation, shortages and
other effects of market controls in order to jump-start economic production,
reduce unemployment and improve living standards.

 Breaking down of Shock Therapy.

Shock therapy can entail a rocky transition while prices increase from their state-
controlled levels and people in formerly state-owned companies lose their jobs,
creating citizen unrest that may lead to forced changes in a country's political
leadership. The opposite of shock therapy, gradualism, indicates a slow and
steady transition from a controlled to an open economy, which is, in general,
considered to the more responsible and effective strategy for improving an
economy.

In general, polices that support shock therapy will involve:

1. Ending price controls

2. Stopping government subsides
3. Moving state-owned industries to the private sector
4. Tighter fiscal policies, such as higher tax rates and lowered government
spending
5. Shock therapy could also include policies to reduce inflation, reduce a
budget deficit or polices that reduce current account deficits and restore
competitiveness.
Economist Jeffrey Sachs is widely associated with shock therapy. He developed
a plan of shock therapy for post-communist Poland in 1990, for post-communist
Russia in 1992 and for several other countries, including Bolivia and Chile.
Boliva, in particular, in 1985, did have success as a result of shock therapy in
ending a period of hyperinflation. Poland also initially did seem to benefit from
shock therapy as inflation was controlled, but it saw a sharp rise in
unemployment that peaked at 16.9%. Sachs did not like the term shock therapy,
which he said was coined by the media and made the reform process sound
more painful than it actually was.

 Pros and Cons of Shock Therapy.

There are those who support shock therapy for its purported benefits that
include:

1. A more efficient method to solve economic imbalances

2. Set clear expectations for consumers

On the other hand, those who oppose shock therapy see many cons to its use,
such as:

1. Creating a swift and sufficient income inequality

2. Rise in unemployment
3. Economic overwhelm
 SHOCK THERAPY OF RUSSIA AND POLLAND.
 Abstract.

A prominent theorist of Soviet and East European economics critiques the vision
of political and economic processes implicit in shock therapy, defending an
alternative, evolutionary approach. The critique of shock therapy rests on both
theoretical reasoning and examination of evidence from recent cases. An
intensive study of economic change in Poland and Russia since the late-1980s
concludes that, in both countries, shock therapy failed in its goal of implementing
top-down reforms that by-pass existing political and social forces. The
evolutionary approach, it is argued, holds the better prospect of generating
economic progress that will be sustained over the long term.