Was Shock Therapy Really a Shock?

Abstract

The shock therapy model derived its name from Poland’s stabilization and liberalization program, initiated on January 1, 1990, which became known as “shock therapy” or “big bang.” The countries that followed with the shock therapy approach were Czechoslovakia (starting January 1991), Bulgaria (February 1991), Russia (February 1992), Albania (July 1992), Estonia (September 1992), and Latvia (June 1993). In summary, the shock therapy model was a neoclassical model of transition advocating the immediate implementation of the necessary reforms to establish a free market economy. The shock therapy model of transition, the dominant model of transition, was attractive to transition governments, international financial institutions, and mature market economies due to its simplicity and narrow transition policies recommended. “Get prices right” and the remaining elements of a market capitalist system would, more or less, fall into place was an antithesis to an institutionalist approach to transition. The shock therapy approach abstracted from the more insightful and complicated institutionalist dimensions of the transition process. The transition process was characterized by uncertainty and the absence of any historical paradigms. Hence the Economist’s metaphor about the transition process was that there was no known recipe for unmaking an omelette (“No Halfway House” 1990, 18). Few economists attempted to approximate the initial conditions of centrally administered economies with the stabilization programs initiated in the mature market economies. For example, Jeffrey Sachs (1993, 3) argued “the prototypical case in Europe that I will refer to is that of Spain, which in many ways provides a kind of guidepost to the path that the economies of Eastern Europe should follow.” Sebastian Edwards (1992, 131)