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]
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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.[20] Although Erhard's price liberalization excluded rents and essential goods, it still caused an increase in inflation and resulted in a general strike.[21] 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."[22]
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".[51] 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.
CHILDS: That's his story. But as the efforts fell apart, a chorus of people started to blame shock therapy and Jeff Sachs for Russia's financial crisis. Like, they tried to change too much too fast, and they'd put too much faith in free markets. Jeff has been thinking about what happened in Russia for the last three decades, and he still thinks it was worth a try. But for him, this wasn't really even shock therapy. His playbook had worked in Poland. They'd balanced the budget. They'd gotten inflation under control, and the West had thrown money at them. In Russia, those things didn't happen. Jeff says the budgetary and monetary reforms were just not enough. And when the West did send some money, it was too little, too late. Jeff still believes his playbook works. It just didn't work in Russia because it wasn't actually his playbook.
Under the Russian "shock therapy" program, Yeltsin phased out state subsidies, freed prices, reduced government spending and privatized state businesses. shock therapy, relinquished control over the ruble, and freed prices, which had been held artificially low, on consumer goods but kept prices fixed in oil, timber and minerals.
The overall quality of evidence was moderate. The panel judged the desirable effects (shock resolution, vasopressor free days) to outweigh the undesirable effects of low dose corticosteroid. This observation, when taken into consideration with the resources required, cost of the intervention, and feasibility supported a weak recommendation in favour of using low dose corticosteroid therapy in septic shock.
Eastern European intellectuals, even most social democrats, have tended to embrace shock therapy as part of a radical free market model. In part, their radicalism reflects their fears that if planning is not entirely exorcised, the ghost of Communism may revive. In part, it reflects the fact that most Western economic ideas that permeated the "Iron Curtain" before the reforms were ultra-market ones. Not even Keynesianism, let alone the new East Asian model of a capitalist "developmental state," was widely known. Shock therapy has also been mandated by the Bretton Woods institutions--the International Monetary Fund (IMF), which presides over bankrupt countries' cash flow problems, and the World Bank, which oversees their "structural adjustment." Loans from the Bank have been contingent on governments meeting stipulated conditions regarding market liberalization, deregulation, and privatization-- the holy trinity of World Bank policies. If these conditions are rejected, countries usually can't raise foreign private capital on their own.
W hat is noteworthy about all these bottlenecks--size, quality, technology, and capital--is that they cannot easily be rectified by the shock introduction of market forces. Shock therapy's main answer to raging inflation and industrial stagnation has been to lower wages. As expected, falling aggregate demand and the freeing of restrictions on firms to lay off workers have led to rising unemployment, which, in turn, has further depressed pay rates. Despite lip service to "free" markets, Eastern European governments have also intervened with special measures designed to hold nominal wage increases below price increases. Such controls in Hungary and Poland have been imposed on state-owned enterprises only. Such selectivity has been designed to induce public-sector workers to become champions of privatization as the only way to end restraints on their pay.
T he road to recovery in Eastern Europe must begin in Washington for two simple reasons. First, it is here where the World Bank is located, and the World Bank has exerted a dominant influence on Eastern Europe's restructuring policies. If Eastern Europe is to chart a new course, Bank policies must change. The bank is a major lender and often administers the special credits extended to Eastern Europe by sovereign governments. The conditionality the Bank attaches to its structural adjustment loans has effectively prevented supposedly independent postsocialist governments from supplying investment credits to their own state-owned firms or departing from the model of shock therapy. The Bank's large economic staff and its privileged access to data by dint of its lending operations also give it monopoly power to manipulate information. "Confidential" Bank reports have on occasion been leaked to the press with unverifiable claims that, as the New York Times reported, Eastern Europe has "stood on the brink of hyperinflation" unless, it "slashed social spending, raised taxes, and ended the role of workers in managing state-owned factories." The high salaries the Bank pays local consultants reinforces their free market ideological preferences.
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