Shock-Therapy in Post-Communist Regimes

Shock Therapy

Shock therapy is the belief that sudden and significant changes in a country’s economic policies can transform a state-run economy into a free-market economy.

Shock therapy is used to improve living conditions, boost economic productivity, and boost employment rates.

Removing price limits and state subsidies can help with shock treatment.

Shock treatment has the potential to devastate the economy by increasing unemployment and triggering widespread unrest.

Shock-Therapy in Post-Communist Regimes

• An unpleasant process of transition from an authoritarian socialist system to a democratic capitalist system was followed by most of the old communist countries with the fall of communism
• As part of the ‘Shock-Therapy’ in Post-Communist Regimes, a transition in Russia, Central Asia and East Europe which was attracted by the World Bank and the IMF came into the picture as ‘shock therapy

Features of Shock Therapy

• Total shift to a capitalist economy
• As opposed to public ownership, private ownership emerged as the dominant factor
• The immediate effect of Shock-Therapy in Post-Communist Regimes led to the privatisation of state assets and corporate ownership patterns were brought into the picture
• Private firms and capitalism in agriculture replaced collective firms
• Freeze out any alternate or ‘third way’, other than state-controlled socialism or capitalism
• A complete switch to free trade
• Foreign direct investment (FDI) and free trade regime were to be the main engines of change
• The free trade regime and foreign direct investment (FDI) were to be the main engines of change
• De-regulation, along with openness to foreign investment and currency convertibility emerged as dominant elements of Shock-Therapy in Post-Communist Regimes
• Existing trade alliances among the Soviet bloc countries were dismantled
• Direct link to the west established and links between two participating nations have disrupted as an important part of the ‘Shock-Therapy’ in Post-Communist Regimes

Advantages And Disadvantages of Shock Therapy

There are some advantages of shock therapy:

• A more effective means of resolving economic inequalities
• Clearly stating consumer expectations

There are some disadvantages too:

• Creating a sufficient and rapid income disparity
• Unemployment is increasing.
• Overwhelming economic conditions

Consequences of Shock Therapy

Economic Consequences

• In Russia, the large state-controlled industries were put up for sale to the private individuals and companies at throwaway prices (also termed as the Largest Garage Sale in History)
• Due to market-controlled restructuring of the markets, instead of government policies led to the virtual disappearance of entire industries
• The value of the Russian currency (Ruble) declined drastically
• Very high rates of inflation and the end of collective farm systems led to the problem of food security in Russia
• The demise of the old trading structure and the real GDP of Russia in 1999 was below what it was in 1989

Social Consequences

•  The system of Social Welfare was destroyed
• Large section of the society was pushed to poverty with the withdrawal of government subsidies
• Middle classes suffered the loss of income, and the intellectuals migrated outside
• The emergence of the Mafia started controlling many economic activities in most of these countries
• Social and economic disparities between rich and poor emerged

Political Consequences

• The building of Democratic Institutions was not given adequate attention
• Constitutions were drafted in hurry, rendering faulty political systems in some instances
• A judicial culture and independence of the judiciary were yet to be established in most of these countries

However, most of these economies, especially Russia, started reviving in 2000.  The revival of these stagnated countries was seen as an immediate cause of exporting natural resources like oil, natural gas and minerals. Azerbaijan, Kazakhstan, Russia, Turkmenistan and Uzbekistan are major oil and gas producers. Oil pipelines that cross their territories for which they get rent, helped other countries to gain sustained momentum. Some amount of manufacturing has restarted.

Conclusion

The collapse of Communism triggered the transition phase. It was necessary to undertake a comprehensive transition to a capitalist economy, which included eradicating any structures that had developed during the Soviet era. Shock Therapy also entailed a significant shift in these economies’ external orientation.

Russia’s and east European countries’ economies were devastated by shock therapy. The ruble, the Russian currency, has lost a lot of value. Because of the high rate of inflation, people lost all of their money. People lost their food security as the community farms dissolved.

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