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Concept
Shock therapy (economics)
Summary
In economics, shock therapy is a group of policies intended to be implemented simultaneously in order to liberalize the economy, including liberalization of all prices, privatization, trade liberalization, and stabilization via tight monetary policies and fiscal policies. In the case of post-Communist states, it was implemented in order to transition from a command economy to a market economy.
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 economist Jeffrey Sachs. In particular, Sachs and Sanchez de Lozada cited West Germany as inspiration where, during 1947–48, price controls and government support were withdrawn over a very short period, kick-starting the German economy and completing its transition from an authoritarian post-war state.
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.
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