Shock therapy (economics)

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. In essence, shock therapy policies can be distilled to price liberalization accompanied by strict austerity. The first instance of shock therapy was the neoliberal reforms of Chile under Pinochet, 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 the young Harvard economist Jeffrey Sachs. 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. 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. and decreasing life expectancy, along with rising economic inequality, corruption, and poverty. 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." although some are still far behind that. In Russia, the average real income for 99 percent of people was lower in 2015 than in 1991. German historian Philipp Ther asserted that the imposition of shock therapy had little to do with future economic growth in Europe. Notable proponent Jeffrey Sachs has stated that he believes shock therapy should be accompanied by debt forgiveness. ==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". 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 exploitation of labour. 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. 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." They recommended that the pace "must be rapid, but not reckless", and should "probably be carried out by many means". 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". In practice, the rapid application of shock therapy proved generally disastrous in the post-Soviet states. 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. 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 and that expectation was that after the command economy or planned economy was "shocked to death", the "invisible hand" might emerge. 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" 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. 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. The first experience of illusion therapy has been documented after the implementation of Iran's subsidy reform project. ==History==

West Germany, 1948 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. 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. Nearly all of the post-Soviet states suffered deep and prolonged recessions after the collapse of the Soviet Union, with poverty increasing more than tenfold. 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. 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." 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, 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. 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. 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. Moreover, the narratives of the previous paragraphs might accord too much importance to the advice given by the international financial institutions, and too little to the domestic politics of the countries actually making the decisions. Before the break-up of the USSR, the Soviet government was committed to a 'gradualist' approach to reforming state ownership; an approach to which the World Bank and IMF adapted and focused more on how to manage state enterprises effectively. Later, by 1992, the Soviet Union had been dissolved, and the new Russian government had a fear that the communists might try again to regain power; this political situation, not any external advise, let to a program of rapid mass privatisation using vouchers, an approach much more radical than anything that had been considered in 1990, in the hopes of creating a new capitalist class which would support Yeltsin's government. By contrast, in Poland were this political motive had been absent, the privatisations had been much less rushed, reckless, and inequitable than in Russia, despite the presence of other 'shock therapy' measures; in the subsequent years, Poland saw a much lower increase in inequality and more economic growth. There also were further factors in the economic collapse, like the break-up of the Soviet Union greatly hindering trade between areas previously part of the same economic zone. Even before official independence its mere possibility, suggested by declarations of autonomy, reduced trade between the Soviet Union's Republics, severing supply lines and lowering output even before the actual breakup of the Soviet Union. 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 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. Moreover, inequality in Poland actually decreased right after the economic reforms were implemented, although it rose back up again in later years. In 2006, although Poland was confronted with a variety of economic problems, it still had a higher GDP than during communist times, and a gradually developing economy. Poland was converging towards the EU in regards to income level in 1993–2004. According to The Financial Times, Poland's shock therapy paved the way for entrepreneurs and helped to build an economy that was less vulnerable to external shock than those of Poland's neighbours. In 2009, while the rest of Europe was in recession, the Polish economy continued to grow, without a single quarter of negative growth. 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. 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. Peru, 1990 India, 1991 Iraq, 2003 Argentina, 2023 During the Argentine presidential elections of 2023, Javier Milei had attained victory. Shortly after, he began conducting the most extensive liberalising reforms in the history of Argentina since the 1990s. The reforms are still ongoing. ==See also==