What is Shock Therapy ?

A prominent theorist of Soviet and East European economics critiques the vision of political and economic processes implicit in shock therapy, defending an alternative, evolutionary approach. The critique of shock therapy rests on both theoretical reasoning and examination of evidence from recent cases. An intensive study of economic change in Poland and Russia since the late-1980s concludes that, in both countries, shock therapy failed in its goal of implementing top-down reforms that by-pass existing poHtical and social forces. The evolutionary approach, it is argued, holds the better prospect of generating economic progress that will be sustained over the long term. Journal of Economic Literature, Classification Numbers: E61, L33, P21, PSI. Apart from considerations of foreign policy, the attention of Russian society was at that time directed with special interest to the internal changes taking place in all departments of government. ... Meanwhile life-real everyday life, with its essential concerns of health and sickness, labor and rest, and its intellectual preoccupations with thought, science, poetry, music, love, friendship, hatred, passionwent on as usual, independent of and apart from all possible reforms (Lev Tolstoy, 1978, Volume 2, p. 156). l ust four months after the abortive coup that led to the breakup of the Soviet Union, a small group of economists began to implement a proam of radical reforms that aimed at irreversibly changing Russian society. These reforms were condoned, if not endorsed, by the International Monetary Fund; they were strongly encouraged, if only weakly aided, by Western governments; and they were promoted, if not designed, by the usual, peripatetic, Western economists. The present paper considers the Russian reforms in the wider context of the ongoing debate in the West concerning the advisability of these so-called shock therapy reforms. 1Professor of Economics, University of Maryland, College Park. The research for this paper received support from the IRIS Center at the University of Maryland and benefited from the productive environment of the Woodrow Wilson International Center for Scholars. I would like to thank Josef Brada, George Breslauer, Norbert Hornstein, Kazimierz Poznanski, and Peter Reddaway for helpful comments. Michael Svilar provided helpful research assistance.