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Encyclopedia > 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. Prominent economist Jeffrey Sachs was the foremost proponent of shock therapy for several emerging economies. Wikibooks has more about this subject: Economics Wikibooks Wikiversity has more about this subject: School of Economics U.S. Economic Calendar Economics at the Open Directory Project Economics textbooks on Wikibooks The Economists Economics A-Z Institutions and organizations Bureau of Labor Statistics - from the American Labor Department Center... An economist is someone who studies Economics. ... Jeffrey Sachs Jeffrey D. Sachs (born November 5, 1954 in Detroit, Michigan) is an American economist known for his work as an economic advisor to governments in Latin America, Eastern Europe, the former Soviet Union, Asia, and Africa. ...

According to Professor Sachs, shock therapy traces its roots from the economic liberalization programme 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 During 1947 and 1948, price controls and government support were withdrawn over a very short period - this had the effect of kickstarting the German economy. Germany had previously had a highly authoritarian and economic interventionist government and seemingly overnight threw off these restrictions and became a developed market economy. These free-market reforms became the basis of neoliberal economic theory. Neoliberalism is usually a pejorative concept used for various different (and sometimes illiberal) ideologies or policies by the opponents of those policies. ...

As a result, during the early 1990s Sachs recommended to the newly emerging economies of Eastern Europe, the former Soviet Union and Latin America that they too release all price controls, subsidies, sell off state assets and float their currencies in order to shake off the economic lethargy of the communist era. The shocks took the form of sudden radical changes to the structure and incentives within economies. Pre-1989 division between the West (grey) and Eastern Bloc (orange) superimposed on current national boundaries: Russia (dark orange), other countries of the former USSR (medium orange) and other former communist regimes (light orange). ... Latin America consists of the countries of South America and some of North America (including Central America and some the islands of the Caribbean) whose inhabitants mostly speak Romance languages, although Native American languages are also spoken. ... This article is about communism as a form of society and as a popular movement. ...

Some people consider the effects to be primarily negative, such as short-term unemployment rates ranging from 20-40%, increased crime rates and increased social tensions between the poor and the rich. Others judge that the effects have been positive, or that the theory was inadequately applied.

What is not in doubt is that sudden changes to economic structure and incentives require changes to behaviour, financial flows and the structure of the economy that are not as rapid as the shocks that initiate them. It takes time for firms to be formed and built up; it takes time for human capital to change (to acquire the skills) to exploit new circumstances. Critics say that a developed Western economy rests upon and tends to take for granted a framework of law, regulation and established practice (including between parts of the domestic and international economy) that cannot be instantaneously created in a society that was formerly authoritarian, heavily centralised and subject to state ownership of assets. Even re-defining property law and rights takes time.

An interesting case study in the use of shock therapy is Poland. When democracy came to the eastern European nation, the government took Sachs' advice and immediately withdrew regulations, price controls and subsidies to state-owned industries. Though the immediate effect was negative, things eventually got better. Though many were out of work, producers that still had jobs worked harder and made more. Today, although Poland is still a relatively poor country, it is growing very quickly. But it is debatable how much of this benefit is getting to ordinary people.

See also

Gonzalo Sánchez de Lozada Bustamante (born July 1, 1930), familiarly known as Goni, is a former two-term president of Bolivia. ... See also Categories: Politics stubs | Liberal related stubs | 1947 births | Polish economists | Finance Ministers of Poland ... The Balcerowicz Plan (Plan Balcerowicza), also termed Shock Therapy was a method espoused by Leszek Balcerowicz to transition former state controlled (i. ... Yegor Gaidar Yegor Timurovich Gaidar () (also transliterated Gaider) (born March 19, 1956) is a Russian politician who served as acting Prime Minister briefly under President Boris Yeltsin in 1992 from June 15 to December 14. ... With the collapse of the Soviet Union in December 1991, the Russian Federation became an independent country. ...

External links

  • PBS - Commanding Heights: Shock therapy

  Results from FactBites:
Shock therapy - Wikipedia, the free encyclopedia (382 words)
Shock therapy is the deliberate and controlled induction of some form of physiological shock in an individual for the purpose of psychiatric treatment.
Although once common, with advances in psychiatric drugs shock therapy is now reserved for only severe cases of depression and bipolar disorder that do not respond to talk therapy or drug-based treatment.
Malarial fever therapy involves the inocculation of malarial protozoa into the bloodstream of patients, in order to provoke episodes of intense fever and unconsciousness, and, sometimes followed by convulsions.
Shock therapy (economics) - definition of Shock therapy (economics) in Encyclopedia (422 words)
Prominent economist Jeffrey Sachs was the foremost proponent of shock therapy for several emerging economies.
According to Professor Sachs, shock therapy traces its roots from the economic liberalization programme undertaken by post-war West Germany in the late 1940s.
Leszek Balcerowicz, architect of shock therapy in Poland
  More results at FactBites »



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