Shock Therapy (economics)

Shock Therapy (economics)

In economics, shock therapy refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large scale privatization of previously public owned assets.

As shock policy, the term was coined by economist Milton Friedman. In time, it became absorbed into the group of ideas about economics, that are sometimes referred to as neoliberalism. The economist Jeffrey Sachs coined the sinister expression of shock therapy. The alleged difference between the two shock expressions lies only on the degree of economic liberalisation. Fundamentally cynical, neoliberalism glorifies any means that are supposed to lead towards economic stability. So, the neoliberal variant of shock therapy argues that government intervention is the cause of all economic and monetary chaos, and therefore rapid economic liberalisation -alias shock policy- is always the best answer to such chaos, and always includes the large-scale privatisation of publicly owned assets. On the other hand, Sach's ideas are based on studying historic periods of monetary and economic crisis and noting that a decisive stroke could end monetary chaos, often in a day. Whereas, Sachs' shock therapy notion views liberalisation as a necessary evil, a fast -as well as nasty- way to achieve economic stabilisation.

The first instance of shock therapy were the neoliberal pro-market reforms of Chile in 1975, carried out after the military coup by Augusto Pinochet. The reforms, dubbed a shock policy at the time by Milton Friedman, were based on the liberal economic ideas centred around the University of Chicago. Many of the Chilean economists who drafted the reforms came from there and were collectively dubbed the "Chicago Boys".

The term was truly born after Bolivia successfully tackled hyperinflation in 1985 under Gonzalo Sanchez de Lozada, using Sach's ideas. In particular Sachs and Sanchez de Lozada cited West Germany as inspiration where, during a period over 1947-48, price controls and government support were withdrawn over a very short period, kick starting the German economy and completing its transition from an authoritarian post-War state.

Neoliberalism rose to prominence after the 1970s and neoliberal 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. Neoliberal shock therapy became very controversial, with its proponents noting that it helped to end economic crises, stabilise economies and pave the way for growth, while its critics (like Joseph Stiglitz) believed that it helped deepen them unnecessarily and created unnecessary social suffering.

Sachs' ideas were applied to the post-communist states in their transition to capitalist systems with very mixed results. While some countries that used shock therapy (e.g., Poland, Czech Republic) did better than those that did not, those that applied it hardest and fastest did poorly (e.g., Russia). To further cloud understanding, China made their highly successful transition in a gradualist fashion. The prevailing opinion now is that successful market economies rest on a framework of law, regulation and established practice that cannot be instantaneously created in a society that was formerly authoritarian, heavily centralised and subject to state ownership of assets.

Read more about Shock Therapy (economics):  Applications, Theory

Famous quotes containing the words shock and/or therapy:

    Coming out, all the way out, is offered more and more as the political solution to our oppression. The argument goes that, if people could see just how many of us there are, some in very important places, the negative stereotype would vanish overnight. ...It is far more realistic to suppose that, if the tenth of the population that is gay became visible tomorrow, the panic of the majority of people would inspire repressive legislation of a sort that would shock even the pessimists among us.
    Jane Rule (b. 1931)

    Show business is the best possible therapy for remorse.
    Anita Loos (1888–1981)