Therapy Refers to the Unexpected

¶ … Therapy refers to the unexpected discharge of price and currency controls, pulling out of state subsidies, and in need of attention trade liberalization inside a country. It more often than not also takes account of large scale privatization of formerly public owned assets. Shock Therapy is used to illustrate dominant severity procedures intended to shatter spirals of very quick price increases. In recent times, it has been used as a comprehensive expression for policies designed to change the post-socialist economies of Eastern Europe and the former Soviet Union. The second also is where the major controversies have happened.

The disagreement of attitude with reference to reform policy can be qualified in large part to the contrasting character of the tasks involved. Setting out to break inflation is unlike from looking for to under-take a wide-ranging socio-economic makeover from filed centrally designed economies into working market economies. Well-known economist Jeffrey Sachs was among the primary advocate of shock therapy for several emerging economies although others have traced the concept back even further. Occasionally the term is used to refer to any significant program of pro-market reforms. (Ko-odko, 2000).

The plan to transform Russia and the former Soviet-bloc countries from centralized socialist economies to market economies resembled many of the development schemes of the past fifty years that advocated "a generalized attack throughout the whole economy." Economists, such as Jeffery Sachs of Harvard's International Institute of International Development (HIID) were advocating "shock therapy" for Eastern Europe and Russia -- an immediate rather than gradual shift to a market economy. "You can't leap a chasm in two jumps," was one of Sachs' favorite metaphors. and, as in most other grand development schemes, it was the "people" of Russia and Eastern Europe who would benefit. but, so far, that is not the way it has turned out (Robbins, 2002, p.188).

Origins

According to Professor Sachs, shock therapy traces its roots from the trade and industry liberalization program undertaken by post war West Germany in the late 1940s. During 1947 and 1948, price controls and government support were withdrawn over a very short period. Germany had in the past had a highly dictatorial and economic domineering government and on the face of it overnight threw off these limitations and became a developed market economy. In Latin America, these types of free market reforms gained momentum during the 1980s due to a relentless debt predicament that began in August 1982.

Application

Beginning after the fall of the Berlin Wall in 1989, post-socialist governments in Central Europe went on board on economic reform programs that featured fast liberalization and broad-based privatization. It has been held by some that those who succeeded did so because they applied shock therapy. Others, notably so people from the region, have abandoned such claims, in disagreement that foreign advice had little to do with their achievements. The most important assessment of shock therapy came in the first half of 1992, when the Russian government of Yegor Gaidar sought to put into action rapid and radical systemic change. The massiveness of all prices were liberalized and state owned enterprises were informed that their life support systems, in the form of direct financial links to the state budget, would be concluded. 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.