It was assumed that this shock to the system also would bring a form of therapy in its wake.
As enterprise managers became conscious that they could no longer count on involuntary subsidies from the state budget, they would be required into producing goods that could be sold on real markets, at prices that would cover up their costs. It was anticipated that within a period of one-half of one year or so the changeover should be completed. From there on the Russian economy would be growing at a strong pace, and no more foreign economic support would be needed. By the summer of 1992 it became clearly obvious that the project was failing. Enterprises had acted in response to the government's austerity measures not by refining markets, but by developing a subsequently constant practice of non-payments and losses of government subsidies were met by reduced payments on due taxes and wages. Failures to receive payments from customers were met by refusals to pay suppliers and reduced government orders were met by reductions in output, but could not result in closures since there was no bankruptcy law.
It was also understandable that the related ambitions of bringing strength to government finance had met with equal failure. Price increases was spiraling out of control, ending up at well more than 2,000% for the year as a whole, and persistent deficits in the state budget would come to haunt the government for several years to come. There was mass poverty of the population, serious crumble of the country's infrastructure, and a general widening of the technology gap against the industrialized world....
In August 1998, a brewing economic crisis produced a substantial break down, leaving investors with tens of billions of dollars in losses.
In the policy debates that surrounded the preliminary breakdowns of fast general change, two different sides emerged. One side, representing many market analysts, argued that the reason behind the initial failures was linked to deficient distress. In their view, the collapse of 1998 actually was a good thing, laying the groundwork for the economic upturn in 2000 and 2001.
Results
Consequently, during the early 1990s Sachs recommended to the newly emerging economies of Eastern Europe, the former Soviet Union and Latin America that they too release all price controls, subsidies, sell off state assets and float their currencies in order to shake off the economic lethargy of the communist era. The shocks took the form of sudden drastic radical changes to the structure and incentives within economies (Klein, 2001). As a consequence of reforms, Poland and other countries reached a level of economic development consistent with the membership in the European Union.
References
Klein, N. (2001). The Shock Doctrine: The Rise of Disaster Capitalism. New York:
Metropolitan Books, Henry and Holt Company.
Kolodko, G.W. (2000). From Shock to Therapy: The Political Economy of Postsocialist
Transformation. Oxford: Oxford University Press.
Robbins, R.H. (2002). Global Problems and the Culture of Capitalism. Boston, MA:
Allyn & Bacon, a Pearson Education Company.
