The Shock Therapy Process of Transition

The shock therapy transition process was first implemented in Eastern Europe in Poland, on January 1, 1990. The countries that followed with the shock therapy stabilization and liberalization program were Czechoslovakia (which started on January 1, 1991), Bulgaria (February 1, 1991), Russia (February 2, 1992), Albania (July 1992), Estonia (September 1992), and Latvia (June 5, 1993). Jeffrey Sachs was an adviser to the Polish government, and both he and Anders Åslund advised the Russian government and guided its shock therapy reform process in 1992–1993. Åslund was, in fact, an economic adviser to the Russian government from November 1991 to January 1994. Both Sachs and Åslund shared the belief that the transition economies were in such a terrible mess that a radical and comprehensive program was required to introduce any kind of rational order. The supporters of the shock therapy process argued that the elements of the process would ensure growth at full employment with low inflation and stability. Consequently, as Lipton and Sachs (1992, p. 249) argued, “we would rather stress how little evidence there is in favor of the pessimistic view.” In summary, the shock therapy process was a neoclassical process of transition advocating the immediate implementation of the necessary reforms to establish a free market economy. This chapter mostly lays out the intellectual arguments made by shock therapy supporters in favor of the shock therapy reform process and wherever possible real world evidence is provided in supporting or contradicting the shock therapy process, while mentioning whether the supporters simply chose to ignore the evidence.